SEC Filing | 8x8, Inc.

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1997

REGISTRATION NO. 333-15627
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5 TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
8X8, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3674 77-0142404
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
Incorporation or
Organization)

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2445 MISSION COLLEGE BOULEVARD
SANTA CLARA, CA 95054
(408) 727-1885
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JOE PARKINSON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
8X8, INC.
2445 MISSION COLLEGE BOULEVARD
SANTA CLARA, CA 95054
(408) 727-1885
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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Copies to:

LARRY W. SONSINI, ESQ. BROOKS STOUGH, ESQ.
JOHN T. SHERIDAN, ESQ. BRIAN K. BEARD, ESQ.
JEFFREY A. HERBST, ESQ. WILLIAM A. HOLMES, ESQ.
BRETT D. BYERS, ESQ. GUNDERSON DETTMER
CAINE T. MOSS, ESQ. STOUGH VILLENEUVE
WILSON SONSINI GOODRICH FRANKLIN & HACHIGIAN, LLP
& ROSATI, P.C. 155 CONSTITUTION DRIVE
650 PAGE MILL ROAD MENLO PARK, CALIFORNIA 94025
PALO ALTO, CALIFORNIA 94304-1050 (415) 321-2400
(415) 493-9300

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective

If this Form is filed to register additional securities for an offering
pursuant to rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE(3)
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Common Stock, par value
$0.001........................ 2,875,000 shares $10.00 $28,750,000 $8,712.12
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(1) Includes up to 375,000 shares of Common Stock which may be purchased by the
Underwriters to cover overallotments, if any.

(2) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the
registration fee.

(3) Fee previously paid in connection with original filing on November 6, 1996.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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2

8X8, INC.

CROSS-REFERENCE SHEET

SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM S-1

1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk Factors...... Prospectus Summary; Risk Factors; Selected
Consolidated Financial Data
4. Use of Proceeds........................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price........... Front Cover Page of Prospectus;
Underwriting
6. Dilution.................................. Risk Factors; Dilution
7. Selling Security Holders.................. Not Applicable
8. Plan of Distribution...................... Outside and Inside Front Cover Pages of
Prospectus; Underwriting
9. Description of Securities to be
Registered................................ Front Cover Page of Prospectus; Prospectus
Summary; Capitalization; Description of
Capital Stock
10. Interests of Named Experts and Counsel.... Legal Matters
11. Information with Respect to the
Registrant................................ Front Cover Page of Prospectus; Prospectus
Summary; Risk Factors; Use of Proceeds;
Dividend Policy; Capitalization; Dilution;
Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal Stockholders;
Description of Capital Stock; Shares
Eligible for Future Sale; Legal Matters;
Experts; Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to the registration or qualification under the securities
laws of any such State.

SUBJECT TO COMPLETION, DATED FEBRUARY , 1997

2,500,000 SHARES

LOGO

COMMON STOCK

All of the 2,500,000 shares of Common Stock offered hereby are being sold
by 8x8, Inc. ("8x8" or the "Company"). Prior to this offering (the "Offering"),
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between $8.00
and $10.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company's
Common Stock has been approved for quotation on the Nasdaq National Market under
the symbol "EGHT."

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)

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Per Share........................................ $ $ $
Total(3)......................................... $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.

(2) Before deducting expenses payable by the Company estimated at $1,300,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $ , the Underwriting Discounts and
Commissions will total $ and the Proceeds to Company
will total $ . See "Underwriting."

The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1997.

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MONTGOMERY SECURITIES DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

, 1997

LOGO

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The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent accountants and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
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This Prospectus includes trademarks and trade names of the Company and
other corporations.
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As used in this Prospectus, "8x8" and the "Company" refer to 8x8, Inc. and
its subsidiaries, unless the context otherwise indicates. Except as otherwise
indicated, the information presented in this Prospectus assumes that (i) the
Underwriters' over-allotment option is not exercised, (ii) all outstanding
shares of the Company's Preferred Stock are converted into Common Stock upon the
closing of this Offering and (iii) the Company has filed an Amended and Restated
Certificate of Incorporation immediately after the closing of this Offering to
eliminate the Company's currently existing classes of Preferred Stock and
authorize undesignated Preferred Stock. See "Capitalization," "Description of
Capital Stock" and "Underwriting."
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including "Risk Factors" and
Consolidated Financial Statements and Notes thereto, appearing elsewhere in this
Prospectus. The discussion in this Prospectus contains forward-looking
statements. The outcome of the events described in such forward-looking
statements is subject to risks and uncertainties. The Company's actual results
may differ materially from those discussed in such forward-looking statements.
Factors that may cause or contribute to such differences include those discussed
in sections entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as those
discussed elsewhere in this Prospectus.

THE COMPANY

8x8, Inc. ("8x8" or the "Company") designs, develops and markets highly
integrated, proprietary video compression semiconductors and associated software
to original equipment manufacturers ("OEMs") of corporate video conferencing
systems. To address new opportunities, the Company intends to leverage its
strengths in semiconductor design and related software by introducing video
conferencing systems for the consumer market. The first product in the Company's
planned family of VideoCommunicators is the VC100 (or "ViaTV"), which has
recently been announced for sale. The VC100 connects to a television set and a
standard touch-tone telephone adding video to an otherwise normal telephone
call, without the need for a personal computer ("PC"). Although initial versions
of the VC100 are being shipped on a limited basis, the Company must satisfy
additional technical and other milestones before offering the VC100 on a broad
basis. Technical milestones include receiving necessary domestic and
international regulatory approvals and completing reliability testing.

The Company's video compression semiconductors combine, on a single chip, a
reduced instruction set computer ("RISC") microprocessor, a digital signal
processor ("DSP"), specialized video processing circuitry, static random access
memory ("RAM") and proprietary software to perform the real time compression and
decompression ("codec") of video and audio information and establish and
maintain network connections in a manner consistent with international standards
for video telephony. These semiconductors are designed to provide video
conferencing over a broad range of network types including POTS, integrated
services digital networks ("ISDN"), local area networks ("LAN") and asymmetric
digital subscriber lines ("ADSL"). Customers for the Company's video compression
semiconductors include PictureTel, Siemens, Sony, VideoServer, VCON and Vtel.

The Company's VideoCommunicators will be based on its proprietary
semiconductor, software and systems technology. The VC100 is based primarily
upon the Company's existing technology and is designed to be compliant with the
H.324 international standard for video telephony over POTS and to be compatible
with PC and non-PC based systems that adhere to the H.324 standard. The VC100 is
designed to communicate with full duplex audio and video rates of up to 12
frames per second. In addition, the Company is currently demonstrating a
prototype of its second VideoCommunicator, the VC200, a non-PC based POTS video
phone with a built-in liquid crystal display. The Company intends to sell its
VideoCommunicators through a direct marketing effort utilizing a combination of
advertising, toll-free telemarketing and direct mail supported by co-marketing
arrangements with third parties and resale through the retail channel. See
"Business -- Products" and "Business -- Licensing and Development Arrangements"
for a discussion of the development status of the VC100, the VC200 and the
successor products to the Company's video compression semiconductors and certain
related licensing and development arrangements (including an arrangement
pursuant to which Kyushu Matsushita Electric Co., Ltd. ("KME") has licensed
substantially all of the Company's technology underlying the Company's
VideoCommunicators). Although the Company has received certain revenues from
these licensing and development arrangements in the past, there can be no
assurance that the Company will receive any revenues from these arrangements in
the future. In addition, KME and other licensees or purchasers of the Company's
technology, video compression semiconductors, software or board designs may use
such technology or components to manufacture and sell products that compete
directly with the Company's VideoCommunicators.

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6

The proliferation of video conferencing products is dependent on several
factors including network bandwidth, advanced compression technologies and the
acceptance of video telephony standards. Increases in available bandwidth
improve the data carrying capacity of networks, while improvements in
compression technologies utilize a given bandwidth more efficiently. Finally,
video telephony standards are key to widespread adoption as they are designed to
permit the interoperability between systems offered by different vendors.

As a result of recent technological advances and the adoption of the H.324
standard for video telephony over standard analog telephone lines (commonly
known as plain old telephone service, or "POTS"), consumer video phones are
being developed by a number of suppliers. These products are being introduced in
a variety of product configurations and physical forms (i.e., "form factors"),
including those based on telephones and televisions and those based on the PC.
An increasing number of PCs are being shipped with pre-installed H.324 compliant
software. Significant sales of such H.324 products, if achieved, should increase
the usefulness and demand for additional H.324 compliant video phones by
providing potential video phone purchasers with other parties to call.

During fiscal years 1992 through 1995, the Company's revenues were derived
primarily from the sale of math co-processors. However, the Company's revenues
from math co-processors subsequently declined and revenues from the Company's
sale of video compression semiconductors increased, comprising the majority of
the Company's total revenues during the first three quarters of fiscal 1997.
During these periods, the Company also derived revenues from certain licensing
transactions. Nonetheless, there can be no assurance that the Company will
receive revenues from the licensing of its technology in the future. See
"Business -- Licensing and Development Arrangements." Because the Company's
video compression semiconductor business has not provided, and is not expected
to provide, sufficient revenues to profitably operate the Company, the Company
believes that its future profitability will be largely dependent on the success
of its VideoCommunicator business. As a result, the Company believes that its
historical operating results will not be comparable to, and should not be relied
upon as an indication of, future operating results.

The Company was incorporated in February 1987 in California under the name
Integrated Information Technology, Inc. In April 1996, the Company changed its
name to 8x8, Inc. and in December 1996 reincorporated in Delaware. The Company's
executive offices are located at 2445 Mission College Boulevard, Santa Clara, CA
95054, and its telephone number is (408) 727-1885.

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THE OFFERING

Common Stock offered by the Company............. 2,500,000 shares
Common Stock to be outstanding after the 13,204,078 shares(1)
Offering......................................
Use of Proceeds................................. For general corporate purposes including working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.......... EGHT

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
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1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -----------

CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenues....................... $36,001 $31,082 $34,401 $19,929 $28,774 $19,205 $14,657
Gross profit......................... 23,509 16,945 14,932 8,025 12,106 8,261 3,929
Income (loss) from operations........ 7,527 (1,473) 243 (6,527) (4,149) (3,593) (11,015)
Net income (loss).................... 4,960 (841) (348) (5,881) (3,217) (3,280) (10,769)
Pro forma net loss per share......... $ (.27) $ (.28) $ (.91)
Shares used in pro forma per share
calculations....................... 11,722 11,654 11,877

DECEMBER 31, 1996
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ACTUAL AS ADJUSTED(2)
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CONSOLIDATED BALANCE SHEET DATA:
Working capital..................................................................... $ 5,725 $ 25,350
Total assets........................................................................ 14,987 34,612
Total liabilities................................................................... 6,612 6,612
Stockholders' equity................................................................ 8,375 28,000

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(1) Excludes, as of December 31, 1996, (i) an aggregate of 1,783,100 shares of
Common Stock issuable on the exercise of outstanding options granted under
the Company's 1992 Stock Option Plan and 1996 Stock Plan and (ii) an
aggregate of 1,623,287 shares of Common Stock reserved for issuance under
the Company's 1992 Stock Option Plan, 1996 Stock Plan, 1996 Director Option
Plan and 1996 Employee Stock Purchase Plan. See "Management -- Compensation
Plans" and Note 6 of Notes to Consolidated Financial Statements.

(2) Adjusted to reflect the sale of 2,500,000 shares of Common Stock by the
Company at an assumed public offering price of $9.00 per share after
deducting estimated underwriting discounts and commissions and estimated
offering expenses. See "Use of Proceeds" and "Capitalization."

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8

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and under "Business," as well as
other statements contained in this Prospectus regarding matters that are not
historical facts are forward-looking statements (as such term is defined in the
rules promulgated pursuant to the Securities Act of 1933, as amended (the
"Securities Act")). Because the outcome of the events described in such
forward-looking statements is subject to risks and uncertainties, actual results
may differ materially from those expressed in or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed herein under "Risk Factors."
The Company undertakes no obligation to release publicly the result of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

RISK FACTORS

An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to the other information in this Prospectus,
the following risk factors should be considered carefully by potential
purchasers in evaluating an investment in the Common Stock offered hereby.

HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY; DEFERRED COMPENSATION
EXPENSE

After a modest operating profit in fiscal 1994, the Company recorded
operating losses of $6.5 million and $4.1 million in the years ended March 31,
1995 and 1996, respectively. Revenues fluctuated from $34.4 million in fiscal
1994 to $19.9 million in fiscal 1995 to $28.8 million in fiscal 1996. The
Company recorded an operating loss of $3.6 million for the nine months ended
December 31, 1995, which increased to $11.0 million for the nine months ended
December 31, 1996. Revenues declined from $19.2 million for the nine months
ended December 31, 1995 to $14.7 million for the nine months ended December 31,
1996. In view of the Company's operating losses, there can be no assurance that
the Company will either become profitable or sustain profitability on an annual
or quarterly basis. Losses will likely continue unless the Company's initial
VideoCommunicators, particularly the VC100, are successfully introduced and
achieve widespread consumer market acceptance, of which there can be no
assurance.

The Company has recorded deferred compensation expense of $7.5 million
relating to certain stock option grants which were made during the period June
through September 1996. The Company recognized $4.0 million of the deferred
compensation expense during the nine months ended December 31, 1996, and will
recognize the remainder over the related vesting period of the options (which is
generally 48 months). The future compensation charges are subject to reduction
for any employee who terminates employment prior to the expiration of such
employee's option vesting period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 6 of Notes to
Consolidated Financial Statements.

DEPENDENCE ON FUTURE VIDEOCOMMUNICATOR REVENUES

The Company believes that its business and future profitability will be
largely dependent on the development and successful introduction and marketing
of its first VideoCommunicator, the VC100, which was announced for sale in
January 1997. The Company's video compression semiconductor and related software
business has not provided, and is not expected to provide, sufficient revenues
to profitably operate the Company. The Company has in the past experienced
delays in the development of new products and the enhancement of existing
products, and such delays may occur in the development and production of the
VC100. Although initial versions of the VC100 are being shipped on a limited
basis, the Company must satisfy additional technical and other milestones before
offering the VC100 on a broad basis. These milestones include debugging the
current VC100 design; receiving necessary domestic and international regulatory
approvals; completing reliability testing; procuring adequate semiconductor
foundry and electronic subcontract manufacturing services and capacity;
establishing volume production of the VC100 on a cost effective basis and at
acceptable quality levels; implementing the marketing, sales, distribution and
customer support strategy for the VC100 product; and establishing direct
marketing capabilities and distribution relationships with third parties. If the
VC100 product does not achieve sufficient market acceptance, it would have a
material adverse

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effect on the Company's business and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- 8x8 Strategy."

POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS

The Company's future operating results are expected to fluctuate as the
Company proceeds with the development, introduction and marketing of its family
of non-PC based VideoCommunicators. Moreover, because the Company's video
compression semiconductor and related software business has not provided, and is
not expected to provide, sufficient revenues to profitably operate the Company,
the Company believes that its future profitability will be largely dependent on
the success of its VideoCommunicator business. As a result, the Company believes
that its historical operating results will not be comparable to, and should not
be relied upon as an indication of, future operating results. In addition, the
Company's operating results have fluctuated significantly and may continue to
fluctuate in the future, on an annual and a quarterly basis, as a result of a
number of factors, many of which are outside the Company's control, including
changes in market demand, the timing of customer orders, competitive market
conditions, lengthy sales cycles, new product introductions by the Company or
its competitors, market acceptance of new or existing products, the cost and
availability of components, the mix of the Company's customer base and sales
channels, the mix of products sold, the level of international sales, continued
compliance with industry standards and general economic conditions. The
Company's gross margin is affected by a number of factors, including product
mix, product pricing, the allocation between international and domestic sales,
the percentage of direct sales and sales to distributors, and manufacturing and
component costs. The Company may also be required to reduce prices in response
to competitive pressure or other factors or increase spending to pursue new
market opportunities. Any decline in average selling prices of a particular
product which is not offset by a reduction in production costs or by sales of
other products with higher gross margins would decrease the Company's overall
gross margin and adversely affect the Company's operating results. In
particular, in the event that the Company encounters significant price
competition in the markets for its products, the Company could be at a
significant disadvantage compared to its competitors, many of which have
substantially greater resources, and therefore may be better able to withstand
an extended period of downward pricing pressure. Moreover, the Company believes
that the introduction of its family of VideoCommunicators may adversely impact
its gross margins due in part to higher unit costs associated with initial
production of its first products, including the VC100, as well as substantially
different cost and pricing structures related to the manufacture and sale of
consumer products.

Variations in timing of sales may cause significant fluctuations in future
operating results. In addition, because a significant portion of the Company's
business may be derived from orders placed by a limited number of large
customers, the timing of such orders can also cause significant fluctuations in
the Company's operating results. Anticipated orders from customers may fail to
materialize, and delivery schedules may be deferred or canceled for a number of
reasons, including changes in specific customer requirements. If sales do not
meet the Company's expectations in any given quarter, the adverse impact of the
shortfall on the Company's operating results may be magnified by the Company's
inability to adjust spending to compensate for the shortfall. Announcements by
the Company or its competitors of new products and technologies could cause
customers to defer purchases of the Company's existing products, which would
also have a material adverse effect on the Company's business and operating
results.

The Company's strategic shift towards the production and marketing of
VideoCommunicators, such as the VC100, may result in substantially different
patterns in operating results. For example, the Company's operating results may
be subject to increased seasonality with sales higher during the Company's third
fiscal quarter, corresponding to the Christmas shopping season. The Company
intends to spend substantial additional amounts on advertising, toll-free
marketing and customer support. There can be no assurance as to the amount of
such spending or that revenues adequate to justify such spending will result. As
a result of its shift to selling VideoCommunicators, the Company may experience
different inventory, product return, price protection and warranty cost
patterns.

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10

significant reduction in the market price for the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

COMPETITION

The Company competes with independent manufacturers of video compression
semiconductors and, as a result of the recent introduction of the VC100, its
initial VideoCommunicator, now competes with manufacturers of video conferencing
products targeted at the consumer market. The markets for the Company's products
are characterized by intense competition, declining average selling prices and
rapid technological change. The competitive factors in the market for the
Company's VideoCommunicators include audio and video quality, phone line
connectivity at high transmission rates, ability to connect and maintain stable
connections, ease of use, price, access to enabling technologies, product
design, time-to-market, adherence to industry standards, interoperability,
strength of distribution channels, customer support, reliability and brand name.
The Company expects intense competition for its VideoCommunicators from the
following segments:

Large consumer electronics manufacturers. The Company will face intense
competition from many well known, established suppliers of consumer
electronics products, which may include Lucent Technologies, Matsushita
Electric Industrial Co., Ltd. ("Matsushita"), Philips, Samsung and Sony.
Many of these potential competitors sell television and telephone products
into which they may integrate video conferencing systems, thereby
eliminating a consumer's need to purchase a separate video conferencing
system, such as the VC100.

Licensees and purchasers of the Company's VideoCommunicator technology and
components. A number of companies have licensed portions of the Company's
technology (including an affiliate of Matsushita, KME, which has licensed
substantially all of the Company's technology underlying the Company's
VideoCommunicators) and, therefore, may be able to use this technology to
manufacture and sell products that compete directly with the Company's
VideoCommunicators. The Company may in the future enter into similar
license agreements with respect to substantial portions of its technology.
See "Business -- Licensing and Development Arrangements." In addition,
other companies may choose to manufacture and sell products competitive
with the Company's VideoCommunicators by incorporating video compression
semiconductors purchased from the Company into products that are based on
the Company's video phone reference board designs or other video phone
designs.

Purchasers of other companies' video compression semiconductors and
reference designs. Companies may choose to manufacture and sell products
based upon video compression semiconductors manufactured by suppliers other
than the Company or upon reference designs based upon such semiconductors.
Certain of these other suppliers of video compression semiconductors,
including Analog Devices, Lucent Technologies and Texas Instruments, have
significantly greater resources than the Company. In order to increase the
sale of their video compression semiconductors, these manufacturers may
provide marketing, financial and other support to the purchasers of these
products. One company has publicly announced that it is developing a video
conferencing product based upon Lucent Technologies' video compression
semiconductors and that it will be making available for sale to third
parties a video phone reference design incorporating Lucent Technologies'
semiconductors. In addition, another company has publicly announced that it
is developing a similar product based on semiconductors from Analog
Devices.

Personal computer system and software manufacturers. Potential customers
for the Company's VideoCommunicators may elect instead to buy PCs equipped
with video conferencing capabilities, which are currently available. As a
result, the Company may face competition from Intel; PC system
manufacturers such as Apple, Compaq, IBM and Sony; PC software suppliers
such as Microsoft and Netscape; and PC add-on component suppliers.

Existing manufacturers of video conferencing equipment. Manufacturers of
more expensive corporate video conferencing systems may enter the market
for lower cost consumer video conferencing products. Potential competitors
include Compression Labs, C-Phone, PictureTel, Sony and Vtel.

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11

Emerging suppliers of "Internet appliances." Potential customers for the
Company's VideoCommunicators may elect instead to buy standalone internet
access terminals which may provide some or all of the functionality of the
Company's products. Consumer products for television-based Internet access
have recently been announced or introduced by companies such as Philips and
Sony.

Certain companies have introduced products, or have publicly announced that
they plan to introduce products, that are directly competitive with the
Company's VideoCommunicators. The Company expects that additional competitors
will make similar announcements.

The principal competitive factors in the market for video compression
semiconductors include product definition, product design, system integration,
chip size, functionality, time-to-market, adherence to industry standards, price
and reliability. The Company has a number of direct competitors in this market
including Analog Devices, Lucent Technologies and Texas Instruments. Certain of
the Company's competitors for video compression semiconductors maintain their
own semiconductor foundries and may therefore benefit from certain capacity,
cost and technical advantages.

Many of the Company's current and potential competitors have longer
operating histories, are substantially larger, and have greater financial,
manufacturing, marketing, technical and other resources. A number also have
greater name recognition and a larger installed base of products than the
Company. Competition in the Company's markets may result in significant price
reductions. As a result of their greater resources, many current and potential
competitors may be better able than the Company to initiate and withstand
significant price competition or downturns in the economy. There can be no
assurance that the Company will be able to continue to compete effectively, and
any failure to do so would have a material adverse effect on the Company's
business and operating results.

UNCERTAINTY OF MARKET ACCEPTANCE; LIMITS OF EXISTING TECHNOLOGY

Previous efforts to sell consumer video phones have been unsuccessful and
there can be no assurance that the market for such products will develop. The
Company has no reliable data to suggest that there will be significant customer
demand for such products, including the Company's VideoCommunicators. For such
products to achieve widespread consumer acceptance, the installed base must
reach a critical mass. Failure of the market for consumer video telephony to
develop or achieve critical mass would have a material adverse effect on the
Company's business and operating results.

In addition, the data carrying capacity of standard analog phone lines is
limited. Currently, modems used for the transmission of data over standard
analog phone lines are limited to data transfer rates of up to 33.6 kilobits per
second ("Kbps"). Using such modems, the Company's VC100 may initially be capable
of delivering video data at rates only up to 12 frames per second. This compares
to 30 frames per second provided by television, 24 frames per second provided by
movies and 24 or more frames per second provided by ISDN video teleconferencing.
At rates less than approximately 24 frames per second, the human eye can detect
degradation of video quality. Further, POTS infrastructure varies widely in
configuration and integrity, which can result in decreased rates of transmission
and difficulties in establishing and maintaining connections. Actual or
perceived technical difficulties related to the H.324 standard on POTS could
have a material adverse effect on the Company's business and results of
operations. See "Business -- Sales and Marketing."

DEPENDENCE ON H.324 STANDARD FOR VIDEO TELEPHONY

The H.324 standard has only recently received industry endorsement as an
international protocol for video telephony using POTS. The Company believes that
adherence to this standard is an important factor in the development of this
marketplace and, if the H.324 standard is not widely implemented in the
industry, different vendors' products will not be compatible, which may deter or
delay growth in the market and reduce the demand for consumer video telephony
products. However, the emergence of industry standards may also lower barriers
to entry and result in increased competition. There can be no assurance that the
H.324 standard will not change or be supplanted by other standards, which could
render the Company's H.324 compliant products uncompetitive. There can be no
assurance that, even with the H.324 standard in place, a market for video
telephony products compatible with H.324 will develop. Further, the
implementation of the H.324

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12

standard by different manufacturers may vary. Such variation could degrade the
quality and limit the interoperability of POTS based systems, which may inhibit
widespread acceptance of consumer video telephony products.

NO HISTORY OF DIRECT CONSUMER MARKETING

In recent years, the Company has been a provider of video compression
semiconductors to OEMs of video conferencing systems. Accordingly, the Company
has had no prior experience in marketing commercial quantities of consumer
products such as the VC100. In order to achieve significant market penetration
and brand awareness for the VC100, the Company must expand its sales and
marketing efforts and develop direct consumer marketing capabilities. There can
be no assurance that the Company will be successful in these areas or that the
Company will be able to achieve significant market penetration with its VC100.
See "Business -- Sales and Marketing."

POTENTIAL REDUCTION IN LICENSING REVENUES

The Company has in the past received substantial revenues from licensing of
technology. Licensing revenues were $8.1 million and $2.3 million in the year
ended March 31, 1996 and the nine months ended December 31, 1996, respectively.
There can be no assurance that the Company will receive revenues from licensing
of its technology in the future.

PRODUCT CONCENTRATION; POTENTIAL LOSS OF SEMICONDUCTOR SALES; DEPENDENCE ON
VIDEO CONFERENCING INDUSTRY

In the years ended March 31, 1994, 1995 and 1996 and the nine month period
ended December 31, 1996, sales of video compression semiconductors, related
software and reference design boards accounted for approximately 12%, 42%, 63%
and 83%, respectively, of the Company's total revenues. Pending a successful
introduction of its VideoCommunicators, sales of video compression
semiconductors will continue to account for a substantial majority of total
revenues. Moreover, successful introduction of VideoCommunicators may adversely
affect sales of semiconductors to the Company's existing customers that
currently, or may in the future, sell products that compete with the Company's
VideoCommunicators.

Sales of the Company's existing compression semiconductors and planned
VideoCommunicators are also dependent on the video conferencing industry. Thus,
regardless of the success or failure of its VideoCommunicators, the Company will
continue to be substantially dependent on the video conferencing industry. Any
reduction in the demand for the Company's video compression semiconductors
(particularly prior to significant VideoCommunicator revenues) or any general
decline in the market for video conferencing products could have a material
adverse effect on the Company's business, and operating results. See
"Business -- Sales and Marketing" and "Business -- Competition."

DEPENDENCE ON KEY CUSTOMERS

Historically, a significant portion of the Company's sales has been to
relatively few customers, although the composition of these customers has
varied. Product revenues from the Company's ten largest customers, in the years
ended March 31, 1994, 1995 and 1996 and the nine months ended December 31, 1996
accounted for approximately 55%, 44%, 39% and 56%, respectively, of its total
revenues. During these periods, excluding one company paying certain
non-recurring licensing fees during the year ended March 31, 1996, the Company
had only three customers that accounted for 10% or more of total revenues: IBM
(during the year ended March 31, 1994), Compression Labs (during the year ended
March 31, 1995) and ASCII (during the nine months ended December 31, 1996).
Sales of video compression semiconductors to relatively few customers may
continue to account for a significant portion of its total revenues.
Substantially all the Company's sales have been made, and are expected to be
made, on a purchase order basis. None of the Company's customers has entered
into a long-term agreement requiring it to purchase the Company's products. The
loss of, or any reduction in orders from, significant customers could have a
material adverse effect on the Company's business and operating results. See
"Business -- Sales and Marketing."

10
13

RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT INTRODUCTION

The Company is currently a developer and supplier of video compression
semiconductors which it has sold since 1991. The Company was previously involved
in several other businesses which have since been discontinued. Prior product
lines that were discontinued include math co-processors and Motions Picture
Expert Group ("MPEG") semiconductors, discontinued in June 1995 and September
1996, respectively. Prior development efforts that were discontinued include
Intel compatible x86 microprocessors and graphics semiconductors, discontinued
in June 1995 and during the quarter ended September 30, 1994, respectively. The
Company discontinued its products and efforts in these areas in part because of
rapid changes in the personal computer marketplace and severe price competition
for certain of these components. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

The Company plans to introduce additional VideoCommunicators and video
compression semiconductors. There can be no assurance that these or any future
products will be successfully developed or introduced to the market. The Company
has in the past experienced delays in the development of new products and the
enhancement of existing products, and such delays may occur in the future. If
the Company is unable, due to resource constraints or technological or other
reasons, to develop and introduce new or enhanced products in a timely manner,
or if such new or enhanced products do not achieve sufficient market acceptance,
it would have a material adverse effect on the Company's business and operating
results. See "Business -- Research and Development."

MANAGEMENT OF GROWTH

The development, introduction and marketing of the Company's
VideoCommunicators will continue to place a significant strain on the Company's
limited personnel, management and other resources. The Company's ability to
manage any future growth effectively will require it to attract, train, motivate
and manage new employees successfully, to effectively integrate new employees
into its operations and to continue to improve its operational, financial and
management systems. In particular, the Company intends to hire additional
research and development personnel and to develop direct consumer marketing
capabilities by increasing the size of its domestic and international sales and
marketing staff. The Company's failure to manage its growth effectively could
have a material adverse effect on the Company's business and operating results.
See "Business -- 8x8 Strategy."

DEPENDENCE ON PROPRIETARY TECHNOLOGY; RELIANCE ON THIRD PARTY LICENSES

11
14

addition, the laws of some foreign countries do not protect the Company's
proprietary rights as fully as do the laws of the United States. Thus, effective
intellectual property protection may be unavailable or limited in certain
foreign countries. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad will be
adequate or that competitors will not independently develop technologies that
are similar or superior to the Company's technology, duplicate the Company's
technology or design around any patent of the Company. Moreover, litigation may
be necessary in the future to enforce the Company's intellectual property
rights, to determine the validity and scope of the proprietary rights of others,
or to defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of management time and resources and
could have a material adverse effect on the Company's business and operating
results.

There has been substantial litigation in the semiconductor, electronics and
related industries regarding intellectual property rights, and there can be no
assurance that third parties will not claim infringement by the Company of their
intellectual property rights. In addition, as is common in its industry, the
Company has from time to time received notification from other companies of
intellectual property rights held by those companies upon which the Company's
products may infringe. For example, the Company recently received an allegation
of infringement from Elk Industries, Inc. If the Company were found to be
infringing on the intellectual property rights of any third party, the Company
could be subject to liabilities for such infringement, which could be material,
and could be required to seek licenses from other companies or to refrain from
using, manufacturing or selling certain products or using certain processes.
Although holders of patents and other intellectual property rights often offer
licenses to their patents or other intellectual property rights, no assurance
can be given that licenses would be offered to the Company, that the terms of
any offered license would be acceptable to the Company or that failure to obtain
a license would not have a material adverse effect on the Company's business and
operating results.

The Company relies upon certain software licensed from third parties. There
can be no assurance that the software licensed by the Company will continue to
provide competitive features and functionality or that licenses for software
currently utilized by the Company or other software which the Company may seek
to license in the future will be available to the Company on commercially
reasonable terms or at all. The loss of, or inability to maintain, existing
licenses could result in shipment delays or reductions until equivalent software
or suitable alternative products could be developed, identified, licensed and
integrated, and the inability to license key new software that may be developed,
on commercially reasonable terms, would have a material adverse effect on the
Company's business and operating results.

LACK OF EXPERIENCE IN MANUFACTURING CONSUMER VIDEO TELEPHONY PRODUCTS

The Company is a fabless semiconductor manufacturer and has not
manufactured commercial quantities of any consumer video telephony products. To
achieve future profitability, the Company must be able to reliably manufacture
the VC100 and its other VideoCommunicators directly or through third party
subcontract manufacturers, in commercial quantities, on a cost effective basis
and in a timely manner, of which there can be no assurance. In view of the
Company's lack of manufacturing experience, there can be no assurance that
unforeseen technical or other difficulties will not arise which could interfere
with the manufacture thereof or prevent, or create delays in, marketing these
products. Any delay in the manufacture of the VideoCommunicators, quality
control problems, or inability to produce such products in commercial quantities
or on a cost effective basis could have a material adverse effect on the
Company's business and operating results.

DEPENDENCE ON THIRD PARTY MANUFACTURERS; COMPONENT AVAILABILITY

The Company uses independent foundries to fabricate, assemble and test its
video compression semiconductors. The Company does not have long-term purchase
agreements with its semiconductor foundries, and purchases semiconductor wafers
pursuant to purchase orders. Therefore these foundries are generally not
obligated to supply products to the Company for any specific period, in any
specific quantity or at any specific price. The Company secures assembly and
test services on a purchase order basis as well.

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15

The Company plans to outsource the manufacture of its VideoCommunicators to
subcontract manufacturers. The Company is currently negotiating arrangements
with certain large subcontract manufacturing companies to produce its
VideoCommunicators. There can be no assurance that these negotiations will be
successful. The Company anticipates that its subcontract manufacturers will
procure components from their suppliers and perform assembly and testing of the
Company's VideoCommunicators on a turnkey basis. There can be no assurance that
these or additional contract manufacturers will be able to reliably manufacture
the Company's products in volumes, on a cost effective basis or in a timely
manner.

The Company's reliance on independent semiconductor foundries and
subcontract manufacturers involves a number of risks, including the lack of
direct control over the manufacturing process, the absence or unavailability of
adequate capacity, the unavailability of, or interruption in access to, certain
process technologies (particularly in the case of semiconductors) and reduced
control over delivery schedules, quality control, manufacturing yields and
costs. In the event that the Company's foundries and subcontract manufacturers
are unable or unwilling to continue to manufacture the Company's products in
required volumes, on a cost effective basis, in a timely manner or at all, the
Company will have to secure additional foundry or manufacturing capacity.
Available semiconductor foundry and manufacturing capacity at times has been
limited. Even if such additional capacity is available at commercially
acceptable terms, the qualification process could be lengthy and could create
delays in product shipments.

Certain components necessary for the manufacture of the Company's products
are obtained from a single supplier or a limited group of suppliers. These
include a digital camera, modem chips, certain application specific integrated
circuits ("ASICs") and other semiconductor components. The Company does not
maintain any long-term agreements with any of its suppliers of components.
Because the purchase of certain key components may involve long lead times, in
the event of unanticipated increases in demand for the Company's products, the
Company could be unable to manufacture certain products in a quantity sufficient
to meet end user demand. A shortage of any key component could have a material
adverse effect on the Company's business and operating results.

These risks and the related difficulties that the Company may experience
due to its reliance on independent semiconductor foundries, subcontract
manufacturers and component suppliers could have a material adverse effect on
the Company's business and operating results.

COMPLIANCE WITH REGULATIONS AND INDUSTRY STANDARDS

The Company must comply with certain rules and regulations of the Federal
Communications Commission ("FCC") regarding electromagnetic radiation and
standards established by Underwriters Laboratories, Inc., as well as similar
regulations and standards applicable in other countries. The Company's
VideoCommunicators must comply with these regulations and standards as a
prerequisite to commercial sales. As these regulations and standards evolve, the
Company may be required to modify its existing products or develop and support
new versions of its products. The failure of the Company's products to comply,
or delays in compliance, with the various existing and evolving government
regulations and industry standards could delay volume production of
VideoCommunicators, which would have a material adverse effect on the Company's
business and operating results.

INTERNATIONAL OPERATIONS

Sales to customers outside of the United States represented 29%, 40%, 49%
and 57% of the total revenues in the years ended March 31, 1994, 1995 and 1996
and the nine months ended December 31, 1996, respectively, and international
sales are likely to continue to represent a substantial portion of its total
revenues for the foreseeable future. In addition, substantially all of the
Company's current products are, and substantially all of the Company's future
products will be, manufactured, assembled and tested by independent third
parties in foreign countries. International sales and manufacturing are subject
to a number of risks, including changes in foreign government regulations and
telecommunications standards, export license requirements, tariffs and taxes,
other trade barriers, fluctuations in currency exchange rates, difficulty in
collecting accounts receivable and difficulty in staffing and managing foreign
operations. While international

13
16

sales are typically denominated in U.S. dollars, fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive to customers in a particular country, leading to a reduction in sales
or profitability in that country. Payment cycles for international customers may
be longer than those for customers in the United States. The Company is also
subject to geopolitical risks, such as political, social and economic
instability, potential hostilities and changes in diplomatic and trade
relationships, in connection with its international operations. See
"Business -- Sales and Marketing" and "Business -- Manufacturing."

NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS

While the Company expects that the proceeds from this Offering, its
existing cash balances and the amounts, if any, generated from operations will
be sufficient to meet its cash requirements for at least the next 12 months, the
Company is operating in a rapidly changing industry. There can be no assurance
that the Company will not seek to exploit business opportunities that will
require it to raise additional capital from equity or debt sources to finance
its growth and capital requirements. In particular, the development and
marketing of new products could require a significant commitment of resources,
which could in turn require the Company to obtain additional financing earlier
than otherwise expected. There can be no assurance that the Company will be able
to raise such capital on acceptable terms, if at all. If the Company is unable
to obtain such additional capital, the Company may be required to reduce the
scope of its planned product development and introduction, which could have a
material adverse effect on the Company's business and operating results. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

DEPENDENCE ON KEY PERSONNEL

The Company is highly dependent on the continued service of, and on its
ability to attract and retain, qualified technical, marketing, sales and
managerial personnel. The competition for such personnel is intense,
particularly in Silicon Valley, where the Company's principal office is located,
and the loss of any of such persons, as well as the failure to recruit
additional key technical and sales personnel in a timely manner, would have a
material adverse effect on the Company's business and operating results. There
can be no assurance that the Company will be able to continue to attract and
retain the qualified personnel necessary for the development of its business.
The Company currently does not have employment contracts with any of its
employees and does not maintain key person life insurance policies on any of its
employees. See "Business -- Employees" and "Management."

ANTI-TAKEOVER PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW

Certain provisions of the Company's Certificate of Incorporation and
Bylaws, as in effect upon the closing of this Offering, may have the effect of
making it more difficult for a third party to acquire, or discouraging a third
party from attempting to acquire, control of the Company. Such provisions could
limit the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. Certain of these provisions eliminate the
right of the stockholders to act by written consent without a meeting, eliminate
cumulative voting by stockholders in the election of directors and specify
procedures for director nominations by stockholders and submission of other
proposals for consideration at stockholder meetings. In addition, the Company's
Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The Company has no present plans to issue
shares of Preferred Stock. Certain provisions of Delaware law applicable to the
Company could also delay or make more difficult a merger, tender offer or proxy
contest involving the Company, including Section 203 of the Delaware General
Corporation Law, which prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
unless certain conditions are met. Additionally, the issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, may discourage bids for the Common
Stock at a premium over the market price of the Common Stock and may adversely
affect

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the market price of, and the voting and other rights of the holders of, the
Common Stock. Such provisions could have the effect of delaying, deferring or
preventing a change in control of the Company, including without limitation,
discouraging a proxy contest or making more difficult the acquisition of a
substantial block of the Company's Common Stock. These provisions could also
limit the price that investors might be willing to pay in the future for shares
of the Company's Common Stock. See "Description of Capital Stock -- Preferred
Stock," "Description of Capital Stock -- Anti-Takeover of Provisions of
Certificate of Incorporation and Bylaws" and "Description of Capital
Stock -- Effect of Delaware Antitakeover Statute."

NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE

Prior to this Offering, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
or be sustained after this Offering. The initial public offering price will be
determined through negotiations between the Company and the representatives of
the Underwriters based on several factors and may not be indicative of the
market price of the Common Stock after this Offering. See "Underwriting." The
market price of the shares of Common Stock is likely to be highly volatile and
may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results, announcements of technical
innovations, new products or new contracts by the Company, its competitors or
their customers, governmental regulatory action, developments with respect to
patents or proprietary rights, general market conditions, changes in financial
estimates by securities analysts and other factors, certain of which could be
unrelated to, or outside the control of, the Company. The stock market has from
time to time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stocks of technology
companies and that have often been unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Common Stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has been initiated against the issuing company. There can be no
assurance that such litigation will not occur in the future with respect to the
Company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse effect
on the Company's business and operating results. Any settlement or adverse
determination in such litigation would also subject the Company to significant
liability, which would have a material adverse effect on the Company's business
and financial condition.

DILUTION

Purchasers of the Common Stock offered hereby will suffer immediate and
substantial dilution in the net tangible book value of the Common Stock from the
initial public offering price. To the extent outstanding options to purchase the
Company's Common Stock are exercised, there will be further dilution. See
"Dilution."

SHARES ELIGIBLE FOR FUTURE SALE

Sale of substantial amounts of shares in the public market or the prospect
of such sales could adversely affect the market price of the Company's Common
Stock. Upon completion of this Offering, the Company will have outstanding
13,204,078 shares of Common Stock. Of the shares outstanding prior to this
Offering, with the exception of 146,550 shares which will be immediately
eligible for sale under Rule 144 promulgated pursuant to the Securities Act, all
shares of Common Stock held by current stockholders are subject to lock-up
agreements under which the holders of such shares have agreed not to sell or
otherwise dispose of any of their shares for a period of 180 days after the date
of this Prospectus without the prior written consent of Montgomery Securities.
After the 180-day period, 9,505,767 shares held by current stockholders will be
eligible for sale under Rule 144 or Rule 701. The remaining 1,051,761 shares
held by existing stockholders will become eligible for sale from time to time in
the future under Rule 144 or Rule 701. In addition, the Company intends to file
a registration statement under the Securities Act, upon the effectiveness of
this Offering or shortly thereafter, covering the sale of shares of Common Stock
reserved for issuance under its Key Personnel Plan, 1992 Stock Option Plan, 1996
Stock Plan, 1996 Employee Stock Purchase Plan and 1996 Director Option Plan. As
of December 31, 1996, there were outstanding options to purchase a total of
1,783,100 shares of the Company's Common Stock, all of which are subject to
180-day lock-up agreements. A total of 338,894

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18

shares issuable upon exercise of such options, as of December 31, 1996, will be
eligible for sale into the public market 180 days after the date of this
Prospectus. See "Management -- Compensation Plans," "Shares Eligible for Future
Sale" and "Underwriting." Certain existing stockholders holding approximately
3,726,373 shares of Common Stock, are also entitled to registration rights with
respect to their shares of Common Stock. See "Description of Capital
Stock -- Registration Rights."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $9.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses, are estimated to be $19.6 million
($22.8 million if the Underwriters' over-allotment option is exercised in full).

Of the net proceeds of the Offering, the Company expects that through the
end of calendar 1997 it will use approximately $6 to $9 million for product
development, $7 to $10 million for marketing and $500,000 for capital equipment,
with the balance being used for working capital and other purposes. A portion of
the net proceeds may also be used for investments in or acquisitions of
complementary businesses, products or technologies, although no such
transactions are currently under negotiation. Pending such uses, the Company
plans to invest the net proceeds in short-term, interest-bearing, investment
grade securities.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock.
The Company currently does not anticipate paying any cash dividends on its
capital stock in the foreseeable future.

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CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 31, 1996, (i) on an actual basis, (ii) on a pro forma basis to reflect
the automatic conversion of all outstanding shares of Preferred Stock into
Common Stock upon the closing of this Offering and the filing of Amended and
Restated Certificate of Incorporation immediately after the closing of the
Offering to eliminate the Company's currently existing classes of Preferred
Stock and authorize undesignated Preferred Stock; and (iii) as adjusted to
reflect the receipt by the Company of the net proceeds from the sale of the
2,500,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $9.00 per share, after deducting the estimated underwriting
discounts and commissions and estimated offering expenses.

DECEMBER 31, 1996
----------------------------------
AS
ACTUAL PRO FORMA ADJUSTED
------- --------- --------
(IN THOUSANDS)

Long-term debt, including current portion.................... $ -- $ -- $ --
Stockholders' equity:
Preferred Stock, par value $0.001 per share; actual:
5,411,820 shares authorized, 3,726,373 shares issued and
outstanding; pro forma and as adjusted: 5,000,000 shares
authorized, no shares issued or outstanding............. 4 -- --
Common Stock, par value $0.001 per share; actual:
40,000,000 shares authorized, 6,977,705 shares issued
and outstanding; pro forma: 40,000,000 shares
authorized, 10,704,078 shares issued and outstanding; as
adjusted: 40,000,000 shares authorized, 13,204,078
shares issued and outstanding (1)....................... 7 11 13
Additional paid in capital................................. 23,507 23,507 43,130
Notes receivable from stockholders......................... (1,078) (1,078) (1,078)
Deferred compensation...................................... (3,507) (3,507) (3,507)
Accumulated deficit........................................ (10,558) (10,558) (10,558)
------- ------- -------
Total stockholders' equity.............................. 8,375 8,375 28,000
------- ------- -------
Total capitalization.................................. $ 8,375 $ 8,375 $ 28,000
======= ======= =======

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

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DILUTION

The pro forma net tangible book value of the Company at December 31, 1996,
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock upon the closing of this Offering, was approximately $8.4
million, or $0.78 per share of Common Stock. "Pro forma net tangible book value"
per share represents the amount of total tangible assets of the Company less
total liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the sale by the Company of 2,500,000 shares of Common
Stock offered hereby (and after deducting the estimated underwriting discounts
and commissions and estimated offering expenses) at an assumed initial public
offering price of $9.00 per share, the pro forma net tangible book value of the
Company at December 31, 1996 would have been $28.0 million, or $2.12 per share.
This represents an immediate increase in pro forma net tangible book value of
$1.34 per share to existing stockholders and an immediate dilution of $6.88 per
share to new investors purchasing in this Offering. The following table
illustrates this per share dilution:

Assumed initial public offering price................................ $9.00
Pro forma net tangible book value before this Offering............. $0.78
Increase per share attributable to new investors................... 1.34
-----
Pro forma net tangible book value per share after this Offering...... 2.12
------
Dilution per share to new investors.................................. $6.88
======

The following table summarizes, on a pro forma basis as of December 31,
1996 the differences between the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by the Company's existing stockholders and the new investors in this Offering
with respect to the 2,500,000 shares of Common Stock to be sold by the Company.
The calculations in this table with respect to shares of Common Stock to be
purchased by new investors in this Offering reflect an assumed initial public
offering price of $9.00 per share:

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------

Existing stockholders................ 10,704,078 81.1% $16,069,000 41.7% $ 1.50
New investors........................ 2,500,000 18.9 22,500,000 58.3 9.00
---------- ----- ----------- -----
Total...................... 13,204,078 100.0% $38,569,000 100.0% $ 2.92
========== ===== =========== =====

The foregoing computations exclude as of December 31, 1996, (i) an
aggregate of 1,783,100 shares of Common Stock issuable on the exercise of
outstanding options granted under the Company's 1992 Stock Option Plan and 1996
Stock Plan and (ii) an aggregate of 1,623,287 shares of Common Stock reserved
for issuance under the Company's 1992 Stock Option Plan, 1996 Stock Plan, 1996
Director Option Plan and 1996 Employee Stock Purchase Plan. See
"Management -- Compensation Plans."

18
21

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statement of operations data presented below for
each of the years ended March 31, 1994, 1995 and 1996 and for the nine months
ended December 31, 1995 and 1996, and the selected consolidated balance sheet
data as of March 31, 1995 and 1996 and December 31, 1996, are derived from, and
are qualified by reference to, the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. The selected consolidated
statement of operations data for the years ended March 31, 1992 and 1993 and the
selected consolidated balance sheet data as of March 31, 1992, 1993 and 1994 are
derived from the audited historical financial statements of the Company, which
are not included herein. The selected consolidated statement of operations data
for each of the nine month periods ended December 31, 1995 and 1996 and the
selected consolidated balance sheet data as of December 31, 1996 have been
derived from unaudited financial statements of the Company and include all
adjustments, consisting only of normal recurring adjustments, which management
considers necessary for a fair presentation of the financial data for such
periods and as of such date. The Company's future operating results are expected
to fluctuate as the Company proceeds with the development, introduction and
marketing of its family of VideoCommunicators. Moreover, because the Company's
video compression semiconductor and related software business has not provided,
and is not expected to provide, sufficient revenues to profitably operate the
Company, the Company believes that its future profitability will be largely
dependent on the success of its VideoCommunicator business. As a result, the
Company believes that its historical operating results will not be comparable
to, and should not be relied upon as an indication of, future operating results.
The data set forth below are qualified in their entirety by, and should be read
in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.

NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------------------------- ------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

Total revenues............................... $36,001 $31,082 $34,401 $19,929 $28,774 $19,205 $ 14,657
Cost of revenues............................. 12,492 14,137 19,469 11,904 16,668 10,944 10,728
------- ------- ------- ------- ------- ------- -------
Gross profit................................. 23,509 16,945 14,932 8,025 12,106 8,261 3,929
Operating expenses:
Research and development.................. 6,797 7,005 6,540 8,107 7,714 5,630 7,902
Selling, general and administrative....... 9,185 11,413 8,149 6,445 7,938 5,621 6,983
Restructuring costs....................... -- -- -- -- 603 603 59
------- ------- ------- ------- ------- ------- -------
Total operating expenses............. 15,982 18,418 14,689 14,552 16,255 11,854 14,944
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations................ 7,527 (1,473) 243 (6,527) (4,149) (3,593) (11,015)
Other income, net............................ 264 282 189 611 952 313 392
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for income
taxes..................................... 7,791 (1,191) 432 (5,916) (3,197) (3,280) (10,623)
Provision (benefit) for income taxes......... 2,831 (350) 780 (35) 20 -- 146
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................ $ 4,960 $ (841) $ (348) $(5,881) $(3,217) $(3,280) $(10,769)
======= ======= ======= ======= ======= ======= =======
Pro forma loss per share(1).................. $ (0.27) $ (0.28) $ (0.91)
======= ======= =======
Shares used in pro forma per share
calculations(1)........................... 11,722 11,654 11,877
======= ======= =======

MARCH 31,
----------------------------------------------- DECEMBER 31,
1992 1993 1994 1995 1996 1996
------- ------- ------- ------- ------- ----------------
(IN THOUSANDS)

CONSOLIDATED BALANCE SHEET DATA:
Working capital.............................. $10,976 $10,355 $10,683 $11,983 $ 9,333 $ 5,725
Total assets................................. 24,265 24,586 21,908 20,644 23,067 14,987
Total liabilities............................ 10,764 11,920 9,579 6,661 11,693 6,612
Total stockholders' equity................... 13,501 12,666 12,329 13,983 11,374 8,375

- ---------------
(1) See Note 1 of the Notes to the Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used to
compute per share amounts.

19
22

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company was incorporated in February 1987 in California and
reincorporated in Delaware in December 1996. The Company initially developed and
sold math co-processors compatible with systems based on Intel's
microprocessors. During the years ended March 31, 1992 through 1995, the
Company's revenues were derived primarily from the sale of math co-processors.
As Intel's microprocessors eliminated the need for a separate math co-processor,
the Company's revenues from math co-processors declined.

In 1990, the Company began development of semiconductors and related
software for the video conferencing and digital video playback markets. In
fiscal 1994, 1995, 1996 and the nine months ended December 31, 1996, sales of
the Company's video compression semiconductors, related software and reference
design boards accounted for 12%, 42%, 63% and 83%, respectively, of total
revenues.

Since June 1995, the Company has been executing a new business strategy
designed to discontinue efforts unrelated to video conferencing. As part of this
strategy, the Company discontinued its efforts to develop Intel compatible x86
microprocessors in June 1995, reduced its workforce in May 1996 and sold its
remaining MPEG inventory in September 1996. To address new opportunities, the
Company intends to leverage its strengths in semiconductor design and related
software by introducing video conferencing systems for the consumer market. The
first product in the Company's planned family of VideoCommunicators is the
VC100, which has recently been announced for sale and is based primarily on the
Company's existing technology. The VC100 connects to a television set and a
standard touch-tone telephone adding video to an otherwise normal telephone
call, without the need for a PC. Although initial versions of the VC100 are
being shipped on a limited basis, the Company must satisfy additional technical
and other milestones before offering the VC100 on a broad basis. In addition,
the Company is currently demonstrating a prototype of its second
VideoCommunicator, the VC200, a non-PC based POTS video telephone with a
built-in liquid crystal display. See "Business -- Products" and
"Business -- Licensing and Development Arrangements" for a discussion of the
development status of the VC100, the VC200 and the successor products to the
Company's video compression semiconductors and certain related licensing and
development arrangements (including an arrangement pursuant to which KME has
licensed substantially all of the Company's technology underlying the Company's
VideoCommunicators currently under development). Although the Company has
received certain revenues from these licensing and development arrangements in
the past, there can be no assurance that the Company will receive any revenues
from these arrangements in the future. In addition, KME and other licensees or
purchasers of the Company's technology, video compression semiconductors,
software or board designs may use such technology or components to manufacture
and sell products that compete directly with the Company's VideoCommunicators.

The Company's future operating results are expected to fluctuate as the
Company proceeds with the development, introduction and marketing of its
VideoCommunicators. Moreover, because the Company's video compression
semiconductor and related software business has not provided, and is not
expected to provide, sufficient revenues to profitably operate the Company, the
Company believes that its future profitability will be largely dependent on the
success of its VideoCommunicator business. As a result, the Company believes
that its historical operating results will not be comparable to, and should not
be relied upon as an indication of, future operating results. The successful
development, introduction and marketing of the Company's VideoCommunicators are
subject to a number of substantial risks and contingent on the achievement of
numerous significant milestones, many of which are beyond the control of the
Company. See "Risk Factors."

Historically, the Company has sold its video compression semiconductors and
related software to video conferencing OEMs and distributors. The Company
intends to sell its VideoCommunicators through a direct marketing effort
utilizing a combination of advertising, toll-free telemarketing and direct mail
supported by co-marketing arrangements with third parties and resale through the
retail channel.

20
23

The Company believes that the introduction of its family of
VideoCommunicators may adversely impact its gross margins due in part to higher
unit costs associated with initial production of its first products, including
the VC100, as well as substantially different cost and pricing structures
related to the manufacture and sale of consumer products.

RESULTS OF OPERATIONS

The following table sets forth certain items from the Company's
consolidated statement of operations as a percentage of total revenues for the
periods indicated. The data set forth below should be read in conjunction with
the Consolidated Financial Statements and Notes thereto.

NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------- ---------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----

Total revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................................... 56.6 59.7 57.9 57.0 73.2
----- ----- ----- ----- -----
Gross margin....................................... 43.4 40.3 42.1 43.0 26.8
Operating expenses:
Research and development......................... 19.0 40.7 26.8 29.3 53.9
Selling, general and administrative.............. 23.7 32.3 27.6 29.3 47.6
Restructuring costs.............................. -- -- 2.1 3.1 0.1
----- ----- ----- ----- -----
Total operating expenses................. 42.7 73.0 56.5 61.7 101.6
----- ----- ----- ----- -----
Income (loss) from operations...................... 0.7 (32.7) (14.4) (18.7) (74.8)
Other income, net.................................. 0.5 3.1 3.3 1.6 2.7
----- ----- ----- ----- -----
Income (loss) before provision for income taxes.... 1.2 (29.6) (11.1) (17.1) (72.1)
Provision (benefit) for income taxes............... 2.3 (0.2) 0.1 0.0 1.0
----- ----- ----- ----- -----
Net (loss)......................................... (1.1)% (29.4)% (11.2)% (17.1)% (71.1)%
===== ===== ===== ===== =====

FISCAL YEARS ENDED MARCH 31, 1994, 1995 AND 1996

Total Revenues. Total revenues consist of product sales and the licensing
of technology. Total revenues were $34.4 million, $19.9 million and $28.8
million in fiscal 1994, 1995 and 1996, respectively. Total revenues fluctuated
primarily due to the declining sales of math co-processors and increasing sales
of the Company's video compression semiconductors. Math co-processor total
revenues declined from $27.5 million in fiscal 1994 to $10.9 million in fiscal
1995 and to $2.5 million in fiscal 1996, while total revenues from video
compression semiconductors increased from $4.1 million in fiscal 1994 to $8.3
million in fiscal 1995 and to $18.2 million in fiscal 1996. During fiscal 1996,
the Company derived revenues of approximately $3.8 million from the sale of its
MPEG semiconductors. In September 1996, the Company sold the last of its MPEG
inventory. Accordingly, the Company does not expect to derive any future
revenues from the sale of MPEG products. In fiscal 1996, total revenues included
$8.1 million of technology licensing revenue, of which $6.8 million was derived
from one customer. During fiscal 1994 and 1995, the Company generated no
technology licensing revenues. See "Business -- Licensing and Development
Arrangements."

Gross Profit. The cost of revenues consists of costs associated with wafer
fabrication, assembly and testing performed by third-party vendors and direct
and indirect costs associated with purchasing, scheduling and quality assurance.
The Company's gross profit was $14.9 million, $8.0 million and $12.1 million, or
43%, 40% and 42% of total revenues, in fiscal 1994, 1995, and 1996,
respectively. The gross profit for fiscal 1996 was favorably impacted by
technology licensing revenues and adversely impacted by negative margin from
sales of MPEG products. The Company sold its remaining MPEG inventory in
September 1996.

Research and Development. Research and development expenses consist
primarily of personnel, mask and equipment costs necessary for the Company to
conduct its development efforts. Research and development costs, including
software development costs, are expensed as incurred. Research and development
expenses were $6.5 million, $8.1 million and $7.7 million, or 19%, 41% and 27%
of total revenues, in fiscal

21
24

1994, 1995 and 1996, respectively. A significant portion of research and
development expenses during these periods was attributable to the development of
products that were subsequently discontinued, including an Intel compatible x86
microprocessor and graphics and MPEG semiconductors. During fiscal 1997,
research and development expenses are expected to be concentrated on video
compression semiconductors and VideoCommunicators.

Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of personnel and related overhead costs for sales,
marketing, finance, human resources and general management. Such costs also
include advertising, sales commissions, trade shows and other marketing and
promotional expenses. Selling, general and administrative expenses were $8.1
million, $6.4 million and $7.9 million, or 24%, 32% and 28% of total revenues,
in fiscal 1994, 1995 and 1996, respectively. In fiscal 1995, selling, general
and administrative expenses decreased by $1.7 million primarily due to decreases
in advertising and sales commissions associated with the Company's math
co-processor business. Selling, general and administrative expenses increased by
$1.5 million in fiscal 1996 primarily due to higher compensation expenses and,
to a lesser extent, higher legal and bad debt expenses.

Restructuring Costs. During fiscal 1996, the Company recorded
restructuring charges related to concentrating its research and development
activities on video conferencing products and eliminating certain unrelated
product development efforts. The restructuring costs related primarily to a
write off of equipment associated with the eliminated development efforts.

Other Income, Net. In fiscal 1994, 1995 and 1996, other income was
$189,000, $611,000 and $952,000, respectively. In fiscal 1994 and 1995, other
income consisted primarily of interest income. Interest income increased in
fiscal 1995 due to the increase in cash balances resulting from an equity
financing that occurred in April 1994. During fiscal 1996, the Company acquired
equity positions in four privately held companies. In fiscal 1996, the Company
realized $727,000 of income by selling the stock of one of these entities. The
Company's investment in each of these entities represents less than 15% of the
outstanding voting stock of these entities and accordingly, the Company has
accounted for these investments on a cost basis. At September 30, 1996, the book
value of the remaining investments totaled $400,000.

Income Taxes. In fiscal 1995 and 1996, the Company was not profitable and
incurred no material income tax expense. Income tax expense in fiscal 1994 on
pre-tax income of $432,000 was $780,000 due to a valuation reserve primarily
relating to the Company's state deferred tax assets.

The Internal Revenue Service (the "IRS") is currently conducting an
examination of the Company's federal income tax return for the fiscal year ended
March 31, 1992. In August 1995, the IRS asserted a deficiency against the
Company for the taxable year 1992 of approximately $1.4 million for accumulated
earnings taxes, together with a penalty of approximately $273,000 plus accrued
interest. The IRS alleged that as of March 31, 1992, the Company had accumulated
earnings beyond the reasonable needs of the Company's business. The Company has
not made any payments under this assessment. On October 30, 1995, in accordance
with IRS procedures, the Company formally protested this assessment. The Company
has not received an official response from the IRS to this protest. The outcome
of this matter cannot be predicted. In the event that the IRS prevails, the
Company will have to make cash payments for the amount of the deficiency,
penalty and accrued interest. However, any adverse outcome of this assessment is
not likely to impact the Company's tax position on this matter for any other
fiscal year. In addition, the IRS has requested information related to the
Company's federal tax returns for the year ended March 31, 1995. The IRS has
disclosed to the Company that the purpose of this request was to gain
information regarding the economic circumstances underlying the Company's loss
for the year ended March 31, 1995.

NINE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1996

Total Revenues. The Company's total revenues decreased from $19.2 million
in the first nine months of fiscal 1996 to $14.7 million in the first nine
months of fiscal 1997, principally as a result of declining math co-processor
and MPEG revenues. Math co-processor total revenues in the first nine months of
fiscal 1996 and 1997 were $2.1 million and $204,000, respectively. Total product
revenues from the sale of video compression semiconductors, related software and
reference design boards were $12.1 million and $12.2 million for the first nine
months of fiscal 1996 and 1997, respectively. The Company entered into
technology licensing agreements

22
25

generating $5.0 million and $2.3 million in licensing revenues during the first
nine months of fiscal 1996 and 1997, respectively. See "Business -- Technology
and Licensing Arrangements." Total product revenues for first nine months of
fiscal 1996 and 1997 included $3.4 million and $1.9 million, respectively, from
MPEG sales, which were discontinued in September 1996. Total product revenues
for the nine months ended December 31, 1996 also included a fee of $471,000
received from a customer for cancellation of an order.

Gross Profit. The Company's gross profit was $8.3 million and $3.9 million
in the first nine months of fiscal 1996 and 1997, respectively. This significant
decline in gross profit relates primarily to a $4.0 million charge for
inventories in the first nine months of fiscal 1997 related to the Company's
exit from the MPEG market. In September 1996, the Company sold its remaining
MPEG inventory.

Research and Development. Research and development expenses were $5.6
million and $7.9 million in the first nine months of fiscal 1996 and 1997,
respectively. Such expenses increased partially due to compensation expense
recognized on certain stock option grants. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Accounting for
Stock-Based Compensation" and Note 6 of Notes to Consolidated Financial
Statements. The research and development efforts in the nine months ended
December 31, 1996 were primarily focused on video conferencing products. The
Company's development of new products and the enhancement of existing products
is essential to its success. Accordingly, the Company anticipates that research
and development expenses will continue to increase in the foreseeable future.

Selling, General and Administrative. Selling, general and administrative
expenses were $5.6 million and $7.0 million in the first nine months of fiscal
1996 and 1997, respectively. Such expenses increased primarily due to
compensation expense recognized on certain stock option grants. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting for Stock-Based Compensation" and Note 6 of Notes to
Consolidated Financial Statements. The Company's selling, general and
administrative expenses will increase in future periods as it expands its sales
and marketing efforts in conjunction with the introduction and marketing of its
family of VideoCommunicators. Additionally, the Company's general and
administrative expenses will increase in future periods as the Company expands
its administrative staff and assumes additional responsibilities associated with
being a public company.

Restructuring costs. During fiscal 1997, the Company recorded an
additional charge for restructuring its operations by reducing its workforce. As
of December 31, 1996, the Company's restructuring actions were fully completed
and there were no outstanding restructuring cost accruals.

Income Taxes. The provision for income taxes for the nine months ended
December 31, 1996 primarily represents certain foreign withholding taxes.

At December 31, 1996, the Company had approximately $7.5 million of federal
net operating loss carryforwards and approximately $1.3 million of research and
development tax credit carryforwards available to offset future taxable income;
such carryforwards expire beginning in the year 2010. Under the ownership
changes limitations provided by the Internal Revenue Code of 1986, as amended,
the amount of, and benefit from, the net operating losses and credit
carryforwards may be impaired or limited in certain circumstances. At December
31, 1996, the Company's net operating loss carryforwards were not subject to any
such limitations.

At December 31, 1996, the Company had gross deferred tax assets of
approximately $7.3 million. The weight of available evidence indicates that it
is more likely than not that the Company will not be able to realize its
deferred tax assets and thus a full valuation reserve has been recorded at
December 31, 1996.

23
26

QUARTERLY RESULTS

The following tables set forth consolidated statements of operations data
for the seven quarters in the period ended December 31, 1996, both in dollar
amounts and as percentages of total revenues. The data set forth has been
derived from unaudited consolidated financial statements of the Company and has
been prepared on the same basis as the audited financial statements, and in the
opinion of management, includes all normal recurring adjustments that the
Company considers necessary for a fair presentation of the results of the
interim periods and should be read in conjunction with the Consolidated
Financial Statements and Notes thereto. The operating results for any quarter
are not necessarily indicative of results for future quarters. Further, because
of the Company's planned reliance on its VideoCommunicators, the Company's
historical operating results will not be comparable to, and should not be relied
upon as an indication of, future operating results.

QUARTER ENDED
-----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1996 1996 1996 1996
-------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)

Total revenues................... $ 4,881 $ 7,241 $7,083 $ 9,569 $ 5,703 $ 4,372 $ 4,582
Cost of revenues................. 4,184 3,741 3,019 5,724 7,503 1,942 1,283
------- ------ ------ ------ ------- ------ -------
Gross profit (loss).............. 697 3,500 4,064 3,845 (1,800) 2,430 3,299
------- ------ ------ ------ ------- ------ -------
Operating expenses:
Research and development....... 2,296 1,701 1,633 2,084 2,421 2,340 3,141
Selling, general and
administrative.............. 1,803 1,575 2,243 2,317 3,247 1,733 2,003
Restructuring costs............ 603 -- -- -- 59 -- --
------- ------ ------ ------ ------- ------ -------
Total operating
expenses............. 4,702 3,276 3,876 4,401 5,727 4,073 5,144
------- ------ ------ ------ ------- ------ -------
Income (loss) from operations.... (4,005) 224 188 (556) (7,527) (1,643) (1,845)
Other income (expense), net...... 152 (72) 233 639 53 74 265
------- ------ ------ ------ ------- ------ -------
Income (loss) before income
taxes.......................... (3,853) 152 421 83 (7,474) (1,569) 1,580
Provision for income taxes....... -- -- -- (20) (100) (46) --
------- ------ ------ ------ ------- ------ -------
Net income (loss)................ $ (3,853) $ 152 $ 421 $ 63 $ (7,574) $ (1,615) $ (1,580)
======= ====== ====== ====== ======= ====== =======

AS A PERCENTAGE OF TOTAL REVENUES
-----------------------------------------------------------------------------
QUARTER ENDED
-----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1996 1996 1996 1996
-------- --------- -------- --------- -------- --------- --------

Total revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................... 85.7 51.7 42.6 59.8 131.6 44.4 28.0
----- ----- ----- ----- ----- ----- -----
Gross margin....................... 14.3 48.3 57.4 40.2 (31.6) 55.6 72.0
----- ----- ----- ----- ----- ----- -----
Operating expenses
Research and development......... 47.0 23.5 23.0 21.8 42.5 53.5 68.6
Selling, general and
administrative................ 36.9 21.7 31.7 24.2 56.9 39.7 43.7
Restructuring costs.............. 12.4 -- -- -- 1.0 -- --
----- ----- ----- ----- ----- ----- -----
Total operating
expenses............... 96.3 45.2 54.7 46.0 100.4 93.2 112.3
----- ----- ----- ----- ----- ----- -----
Income (loss) from operations...... (82.0) 3.1 2.7 (5.8) (132.0) (37.6) (40.3)
Other income (expense), net........ 3.1 (1.0) 3.3 6.7 0.9 1.7 5.8
----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes............................ (78.9) 2.1 6.0 0.9 (131.1) (35.9) (34.5)
Provision for income taxes......... -- -- -- (0.2) (1.7) (1.0) --
----- ----- ----- ----- ----- ----- -----
Net income (loss).................. (78.9)% 2.1% 6.0% 0.7% (132.8)% (36.9)% (34.5)%
===== ===== ===== ===== ===== ===== =====

24
27

The Company's technology licensing activities have contributed to
fluctuations in the Company's quarterly revenues. Technology licensing revenues
for each of the seven quarters in the period ended December 31, 1996, were $0.0,
$2.2 million, $2.8 million, $3.1 million, $1.0 million, $725,000 and $500,000
respectively. In addition, revenues have fluctuated as the Company has
introduced new or enhanced versions of its video compression semiconductors and
as earlier products approached the end of their life cycle. In the quarter ended
March 31, 1996, the Company realized both significant technology licensing
revenues and "end of life" revenues related to the Company's prior generation of
video compression semiconductors. In contrast, the quarter ended June 30, 1996
reflects licensing revenues of only $1.0 million and insignificant revenues
related to these discontinued products.

In general, favorable gross margin fluctuations in the quarters ended
September 30, 1995 and December 31, 1995 reflect the impact of technology
license revenues, which have no material associated costs. However, in the
quarter ended June 30, 1996 the unfavorable gross margin fluctuation was due
primarily to a $4.0 million charge for inventories related to the Company's MPEG
inventory. In September 1996, the Company sold its remaining MPEG inventory.
Margins improved in the quarter ended December 31, 1996 due primarily to
discontinuation of MPEG sales and a fee of $471,000 received from a customer for
cancellation of an order.

Operating expenses have fluctuated as the Company discontinued its efforts
to develop an Intel compatible x86 microprocessor in the quarter ended June 30,
1995, reduced its workforce in the quarter ended June 30, 1996 and has focused
its efforts on developing its video compression semiconductors and its
VideoCommunicators. Operating expenses for the quarters ended June 30, 1996,
September 30, 1996 and December 31, 1996 were also impacted by compensation
charges taken by the Company for certain stock options repriced and granted in
fiscal 1997. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Accounting for Stock-Based Compensation" and Note 6
of Notes to Consolidated Financial Statements.

The Company's operating results have fluctuated significantly and may
continue to fluctuate in the future, on an annual and a quarterly basis, as a
result of a number of factors, many of which are outside the Company's control,
including changes in market demand, the timing of customer orders, competitive
market conditions, lengthy sales cycles, new product introductions by the
Company or its competitors, market acceptance of new or existing products, the
cost and availability of components, the mix of the Company's customer base and
sales channels, the mix of products sold, the level of international sales,
continued compliance with industry standards and general economic conditions.

Variations in timing of sales can cause significant fluctuations in future
operating results. In addition, because a significant portion of the Company's
business may be derived from orders placed by a limited number of large
customers, the timing of such orders can also cause significant fluctuations in
the Company's operating results. Anticipated orders from customers may fail to
materialize, and delivery schedules may be deferred or canceled for a number of
reasons, including changes in specific customer requirements. If sales do not
meet the Company's expectations in any given quarter, the adverse impact of the
shortfall on the Company's operating results may be magnified by the Company's
inability to adjust spending to compensate for the shortfall. Announcements by
the Company or its competitors of new products and technologies could cause
customers to defer purchases of the Company's existing products, which would
also have a material adverse effect on the Company's business and operating
results.

The Company's strategic shift towards the introduction and marketing of
VideoCommunicators such as the VC100 may result in substantially different
patterns in operating results. For example, the Company's operating results may
be subject to more heightened seasonality with sales higher during the Company's
third fiscal quarter, corresponding to the Christmas shopping season. The
Company intends to spend substantial additional amounts on advertising,
toll-free marketing and customer support. There can be no assurance as to the
amount of such spending or that revenues adequate to justify such spending will
result. As a result of its shift to selling VideoCommunicators, the Company may
experience different inventory, product return, price protection and warranty
cost patterns.

25
28

As a result of these and other factors, it is likely that in some future
period the Company's operating results will be below the expectations of
securities analysts or investors, which would likely result in a significant
reduction in the market price for the Common Stock. See "Risk
Factors -- Potential Fluctuations in Future Operations Results."

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company accounts for its employee stock option plans in accordance with
the provisions of Accounting Principles Board Opinion No. 25. In October 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation," which established a fair value based method of accounting for
employee stock option plans. In accordance with requirements of FAS 123, the
Company will make certain additional disclosures in its annual financial
statements for fiscal 1997.

The Company has recorded a deferred compensation expense of $7.5 million
relating to certain stock option grants which were made during the period June
through September 1996. The Company recognized $4.0 million of the deferred
compensation expense during the nine months ended December 31, 1996, and will
recognize the remainder over the related vesting period of the options (which is
generally 48 months). The future compensation charges are subject to reduction
for any employee who terminates employment prior to the expiration of such
employee's option vesting period. See Note 6 of Notes to Consolidated Financial
Statements.

LIQUIDITY AND CAPITAL RESOURCES

Since fiscal 1993, the Company has satisfied its liquidity needs
principally from proceeds generated from two issuances of its equity securities
and cash generated from operations in fiscal 1993 and prior years. At March 31,
1993, the Company had cash, cash equivalents and short term investments of $9.4
million, which increased to $10.3 million at December 31, 1996. The Company
currently has no bank borrowing arrangements.

The Company's operating activities generated cash of $279,000 in fiscal
1994. The cash used for operations was $4.1 million, $625,000 and $2.9 million
in fiscal 1995, 1996 and the nine months ended December 31, 1996, respectively.
Cash used in operations in fiscal 1995 reflects a net loss of $5.9 million that
was partially offset by cash generated by changes in working capital. Cash used
in operations in fiscal 1996 reflects a net loss of $3.2 million that was
substantially offset by changes in working capital. Cash used in operations in
the nine months ended December 31, 1996 reflects a net loss of $10.8 million
that was partially offset by reductions in inventory and accounts receivable and
a non-cash deferred compensation charge of $4.0 million.

During fiscal 1994, 1995, 1996 and the nine months ended December 31, 1996,
the Company's capital expenditures were $451,000, $1.5 million, $1.0 million and
$590,000, respectively. These capital expenditures related primarily to the
acquisition of machinery, equipment and software. At December 31, 1996 the
Company did not have any material capital commitments outstanding.

During fiscal 1994, 1995, 1996 and the nine months ended December 31, 1996,
the Company's cash flows from financing activities generated cash of $11,000,
$7.5 million, $608,000 and $3.8 million from the sale of the Company's equity
securities.

The Company expects that the anticipated net proceeds of this Offering, its
existing cash resources, and the amounts, if any, generated from operations,
will be sufficient to meet the Company's cash requirements for at least the next
12 months. However, the Company is operating in a rapidly changing industry.
There can be no assurance that the Company will not seek to exploit business
opportunities that will require it to raise additional capital from equity or
debt sources to finance its growth and capital requirements. There can be no
assurance that the Company will be able to raise such capital on acceptable
terms, if at all. See "Risk Factors -- Need for Additional Capital to Finance
Growth and Capital Requirements."

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BUSINESS

8x8, Inc. designs, develops and markets highly integrated, proprietary
video compression semiconductors and associated software to original equipment
manufacturers ("OEMs") of corporate video conferencing systems. To address new
opportunities, the Company is leveraging its strengths in semiconductor design
and related software by introducing video conferencing systems for the consumer
market. The first product in the Company's planned family of VideoCommunicators
is the VC100, which has recently been announced for sale. The VC100 connects to
a television set and a standard touch-tone telephone adding video to an
otherwise normal telephone call, without the need for a PC. Although initial
versions of the VC100 are being shipped on a limited basis, the Company must
satisfy additional technical and other milestones before offering the VC100 on a
broad basis. Technical milestones include receiving necessary domestic and
international regulatory approvals and completing reliability testing.

The Company's video compression semiconductors combine, on a single chip, a
reduced instruction set computer ("RISC") microprocessor, a digital signal
processor ("DSP"), specialized video processing circuitry, static random access
memory ("RAM") and proprietary software to perform the real time compression and
decompression ("codec")of video and audio information and establish and maintain
network connections in a manner consistent with international standards for
video telephony. These semiconductors are designed to provide video conferencing
over a broad range of network types including standard analog telephone lines
(commonly known as plain old telephone service or "POTS"), integrated services
digital networks ("ISDN"), local area networks ("LAN") and asymmetric digital
subscriber lines ("ADSL"). Customers for the Company's video compression
semiconductors include PictureTel, Siemens, Sony, VideoServer, VCON and Vtel.

The Company's VideoCommunicators will be based on its proprietary
semiconductor, software and systems technology. The VC100 is based primarily
upon the Company's existing technology and is designed to be compliant with the
H.324 international standard for video telephony over POTS and to be compatible
with PC and non-PC based systems that adhere to the H.324 standard. The VC100 is
designed to communicate with full duplex audio and video rates of up to 12
frames per second. In addition, the Company is currently demonstrating a
prototype of its second VideoCommunicator, the VC200, a non-PC based POTS video
phone with a built-in liquid crystal display ("LCD"). The Company intends to
sell its VideoCommunicators through a direct marketing effort utilizing a
combination of advertising, toll-free telemarketing and direct mail supported by
co-marketing arrangements with third parties and resale through the retail
channel. See "Business -- Products" and "Business -- Licensing and Development
Arrangements" for a discussion of the development status of the VC100, the VC200
and the successor products to the Company's video compression semiconductors and
certain related licensing and development arrangements (including an arrangement
pursuant to which KME has licensed substantially all of the Company's technology
underlying the Company's VideoCommunicators). Although the Company has received
certain revenues from these licensing and development arrangements in the past,
there can be no assurance that the Company will receive any revenues from these
arrangements in the future. In addition, KME and other licensees or purchasers
of the Company's technology, video compression semiconductors, software or board
designs may use such technology or components to manufacture and sell products
that compete directly with the Company's VideoCommunicators.

INDUSTRY BACKGROUND

Since the first video conferencing products were introduced in the late
1970's, users have faced a tradeoff between the cost and availability of network
bandwidth and the quality of video images which can be

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transmitted over the network. High capacity connections, such as T1/E1 (1.5/2.0
megabits per second ("Mbps")) and ISDN (128 kilobits per second ("Kbps")),
provide greater bandwidth but are significantly more costly and less available
than ubiquitous analog POTS lines (currently up to 33.6 Kbps). The challenge
faced by developers of video conferencing systems has been to provide the best
possible image quality through the efficient compression of video and audio data
for transmission over available network bandwidth. The proliferation of video
communications equipment has been influenced by the adoption of international
video telephony standards which, if complied with, will permit interoperability
between systems offered by different vendors.

To date, nearly all video conferencing products have been targeted at
corporate users with access to high bandwidth connections such as T1/E1 and
ISDN. However, the vast majority of consumers continue to have limited access to
bandwidth beyond that provided by standard analog POTS lines. The Company
believes that significant demand exists for inexpensive video phone products
that would allow users to transmit video images with audio over normal telephone
lines. Several factors are contributing to the viability of consumer video
phones, including:

- Improved Bandwidth. A number of technologies have been deployed or are
under development which aim to increase the bandwidth available from
existing copper telephone lines. These include faster POTS modems
(currently up to 33.6 Kbps) and residential ISDN and ADSL service.

- Advanced Compression Techniques. The quality of transmitted video images
is a function of network bandwidth and the sophistication of the hardware
and software used to compress and decompress the data. Because video
images contain a large amount of information, video conferencing systems
must compress the video and audio data to fit the available network
bandwidth while attempting to maintain the quality and synchronization of
audio and video. For example, a normal television signal contains 90 Mbps
of information, which must be compressed by a factor of approximately
2,700 to 1 to permit transmission over POTS at 33.6 Kbps. By using
sophisticated compression algorithms and advanced DSP semiconductors,
video conferencing system manufacturers can achieve improved video
quality.

- Adoption of Industry-Wide Standards. Increased usage of video
conferencing in the corporate market has been facilitated by the adoption
of the H.320 standard, which defined the video telephony protocols used
by systems connected over ISDN. The adoption of H.320 enabled
interoperability between systems from different vendors, encouraged new
market entrants, and contributed to significantly lower system pricing
and an increased installed base. The Company believes that the H.320
standard expanded the market for business video conferencing systems over
ISDN. Similarly, the H.324 standard for video telephony over POTS may
result in expanded home use of video phones. Other standards, such as
H.323, are being developed for communications over packet-based networks,
such as LANs.

As a result of the above technological advances and the adoption of the
H.324 standard, low cost consumer POTS video phones are being developed by a
number of suppliers. These products may be introduced in a variety of product
configurations and physical forms (i.e., "form factors"), including those based
on telephones and using a television for display, such as the VC100, or using an
LCD for display, such as the VC200, and those based on the PC. An increasing
number of PCs are being shipped with pre-installed H.324 compliant software.
Significant sales of such H.324 products, if achieved, should increase the
usefulness of and demand for additional H.324 compliant video phones by
providing potential video phone purchasers with other parties to call.

8X8 STRATEGY

The Company's strategy is to leverage its expertise in video compression
semiconductors, software and system design and its understanding of video
telephony standards to develop a family of cost effective VideoCommunicators for
the consumer video conferencing market. Key elements of the Company's strategy
include:

Leverage Proprietary Technology. The Company provides highly integrated
video compression semiconductors and related software to manufacturers of video
conferencing systems. The Company plans to leverage its proprietary
semiconductor and software expertise to develop its non-PC based VideoCommuni-

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cators to address the consumer market. In addition, the Company intends to
develop future generations of highly integrated semiconductor and software
products for use in video conferencing systems developed both by the Company and
its OEM customers. The Company's ongoing development efforts are targeted at
reducing overall system costs continuously improving video and audio quality at
varying bandwidths and ensuring compliance with emerging video telephony
standards to encourage proliferation of its products.

Broaden and Enhance VideoCommunicator Family. The Company intends to
develop a variety of consumer video conferencing products. The VC100, the
Company's initial VideoCommunicator, was announced for sale in January 1997. The
VC100 is targeted at the consumer market and is based upon the Company's
proprietary semiconductor and software technology. The VC100 connects to a
television and standard touch-tone telephone and adds video to an otherwise
normal telephone call, without the need for a PC. The Company is demonstrating a
prototype of its second VideoCommunicator, the VC200, which is a POTS video
telephone with a built-in LCD display. The Company plans to extend its
VideoCommunicator product line in the future by developing products in new form
factors and products that are designed to comply with emerging video telephony
standards. The Company further intends to differentiate its products in the
future by adding features which may include picture quality enhancements,
Internet browsing and caller identification ("caller ID").

Utilize Direct Marketing Model for VideoCommunicators. The Company plans
to sell its VideoCommunicators through a direct marketing channel, utilizing a
combination of advertising, toll-free telemarketing and direct mail supported by
co-marketing arrangements with third parties and resale through the retail
channel. The direct marketing approach generally allows more rapid establishment
of brand recognition and introduction of new products, and enables competitive
pricing and better management of working capital. The Company intends to
continue to sell its video compression semiconductor and software products to
OEMs and distributors through its existing sales and marketing force.

Drive Price/Performance Improvements. Price/performance improvements in
end-user systems are important to expanding the consumer video conferencing
market. By enhancing its proprietary semiconductor and software technologies,
the Company intends to improve the price/performance of its consumer video
phones by integrating a number of essential system functions onto future
versions of its video compression semiconductors. The Company also intends to
utilize off-the-shelf components when appropriate and to work closely with its
key suppliers to achieve cost and performance advantages.

PRODUCTS

The Company develops, markets and sells a variety of video compression
semiconductors and related software and reference boards. The Company is
currently developing a family of non-PC based VideoCommunicators, which
incorporate the Company's proprietary semiconductor, software and systems
technologies. The Company from time to time enters into licensing and
development arrangements with other corporations which are designed to promote
the design, development, manufacture and sale of the Company's products. Such
arrangements may enable these corporations to use this technology to produce
products that compete directly with the Company's VideoCommunicator products.
See "Business -- Licensing and Development Arrangements" and "Risk
Factors -- Competition."

VideoCommunicator Systems

The Company's initial VideoCommunicator, the VC100, connects to a
television and standard touch-tone telephone and adds video to an otherwise
normal telephone call, without the need for a PC. In January 1997, the Company
announced the VC100 for sale. The VC100, targeted at consumer markets, is based
primarily upon the Company's existing technology and is designed to be compliant
with the H.324 international standard for video telephony over POTS and to be
compatible with PC and non-PC based systems that adhere to the H.324 standard.
The VC100 is designed to communicate with full duplex audio and video rates of
up to 12 frames per second. The VC100, which is based on the Company's Low
bit-rate Videophone Processor ("LVP") semiconductor and proprietary software,
includes an integrated digital camera and a V.34 modem and displays video in
either full or quarter screen format, as well as simultaneous remote and
self-view mode.

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The VC100 is controlled through the touch-tone keypad of the user's telephone
and menu driven instructions that appear on the television screen.

The Company is demonstrating a prototype of its second VideoCommunicator,
the VC200, which is a non-PC based POTS video phone with a built-in LCD display.
The Company plans to extend its VideoCommunicator product line in the future by
developing products in new form factors and products that are designed to comply
with emerging video telephony standards. The Company further intends to
differentiate its products by adding features which may include picture quality
enhancements, simultaneous remote and self-view display, Internet browsing,
caller ID and movie playback. See "Business -- Research and Development."

Moreover, because the Company's video compression semiconductor and related
software business has not provided, and is not expected to provide, sufficient
revenues to profitably operate the Company, the Company believes that its future
profitability will be largely dependent on the success of its VideoCommunicator
business. Although initial versions of the VC100 are being shipped on a limited
basis, the Company must satisfy additional technical and other milestones before
offering the VC100 on a broad basis. Technical milestones include receiving
necessary domestic and international regulatory approvals and completing
reliability testing. The Company recently began demonstrating a prototype of its
VC200, with numerous technical and other milestones remaining before commercial
introduction is possible. See "Risk Factors -- Dependence on Future
VideoCommunicator Revenues."

Video Compression Semiconductors

The Company's video compression semiconductors are based on the Company's
proprietary architecture, which is protected in part by various patents and
trade secret protections. See "Business -- Intellectual Property." This
architecture combines, on a single chip, a custom RISC microprocessor, a high
performance DSP core, specialized video processing circuitry, static RAM memory
and proprietary software, which together perform the core processing functions
required by video conferencing and other digital video applications.

The table below describes the Company's video compression semiconductors
and their applications:

- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION APPLICATIONS
- ----------------------------------------------------------------------------------------------------------
Video Communications H.320 compression semiconductor - PC ISDN video conferencing add-in boards
Processor("VCP") for ISDN video conferencing - ISDN group video conferencing systems
systems
- ----------------------------------------------------------------------------------------------------------
Low bit-rate H.324 compression semiconductor - Consumer video telephones for POTS
Videophone for POTS video conferencing - PC video phone add-in boards for POTS
Processor("LVP") systems
- ----------------------------------------------------------------------------------------------------------
Multimedia Encoding Compression semiconductor for - Cameras with embedded compression
Processor("MEP") video capture and encoding - Video capture PC add-in boards
systems
- ----------------------------------------------------------------------------------------------------------
Video to PCI Interface chip which connects the - PC (POTS or ISDN) video conferencing boards
Interface VCP/LVP/MEP devices to the PCI
Chip("VPIC") bus
- ----------------------------------------------------------------------------------------------------------

VCP -- Video Communications Processor. The Company's VCP is an integrated
video compression semiconductor, which allows OEMs to develop video conferencing
systems based on the H.320 standard for ISDN video conferencing. In recent
quarters, the VCP accounted for the majority of the Company's semiconductor
product sales. The Company's proprietary RISC and DSP technology allows a single
VCP semiconductor to output up to 24 frames per second of H.320 based video over
an ISDN line. The VCP includes video processing circuitry that compresses and
decompresses video images. Systems designed using multiple VCPs are capable of
providing higher frame rates, thus providing for video quality approaching that
of a television. The VCP can reside on PC add-in cards or non-PC based corporate
conference room systems.

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LVP -- Low bit-rate Videophone Processor. The LVP semiconductor is
designed to support H.324 based video phones using standard POTS phone lines.
Systems based on the LVP benefit from the same RISC and DSP technology found in
the Company's VCP product, and are designed to deliver video at up to 12 frames
per second over a standard POTS telephone line. The LVP can be designed into
systems in a variety of form factors, including non-PC based systems that
utilize a telephone and either television or a LCD display. The LVP can also be
designed into PC video phone add-in boards. The LVP is the core compression
semiconductor inside the Company's VC100 and VC200 products.

MEP -- Multimedia Encoding Processor. The MEP is designed for multimedia
compression applications which require high processing power to compress high
bandwidth digital video, such as cameras with embedded compression, PC add-in
boards for video capture and editing and CD-ROM title development.

VPIC -- Video to PCI Interface Chip. The VPIC is a companion semiconductor
to the Company's video compression semiconductors. The VPIC provides a direct
interface between the Company's compression semiconductors and the high speed
PCI expansion bus found in PCs. By providing a direct path into the PC's graphic
display memory, the VPIC allows PC board designers to improve the performance
and quality of their designs based on the Company's compression semiconductors.

The Company is currently designing a future generation of its video
compression semiconductors and related software. To date, the Company has
focused its semiconductor research and development efforts principally on
development of the successor to the VCP compression semiconductor and the
related software. See "Business -- Research and Development."

Application Software

The Company's semiconductors are sold with its proprietary application
specific software, which addresses the unique system requirements of various
international video telephony standards. This software, which is a combination
of microcode assembly and C firmware, enables the Company's proprietary
semiconductor architecture to implement multiple compression standards such as
H.320, H.323, H.324 and MPEG. In many cases, by enhancing its application
software, the Company can improve the quality of transmitted video images,
address emerging standards and add user features to its existing video
compression semiconductors. The Company supplies an Application Programmers
Interface ("API") with its software to allow limited customization through an
external microprocessor or host controller. The Company also sells non-exclusive
licenses for the source code for its software to customers who wish to modify
the software by adding their own features and controls. Development kits are
also licensed to customers allowing them to write, compile and develop software
for the Company's proprietary semiconductor architecture.

Reference Boards and Designs

The Company provides a range of printed circuit boards and designs as
reference boards or reference designs to its customers which serve as examples
for targeted applications. Each reference board and reference design is provided
with schematics, complete documentation, video processor software and
board-level software diagnostics. This allows the customer to leverage the
Company's systems design expertise. These reference boards and reference designs
enable customers to more quickly introduce new products and improve the
Company's technical support capabilities. Examples of the Company's reference
board designs include the DVC5, which is designed for H.320 systems, and the
DVC8, which is designed for H.324 systems. Each of the Company's reference
boards and reference designs specifies the use of one of the Company's video
compression semiconductors on the board or within the design, as the case may
be.

TECHNOLOGY

The Company has developed the following video conferencing technologies:

Semiconductor Architecture

The Company's video compression semiconductors share a common architectural
foundation. This architecture has been specifically tailored to video
conferencing applications which must simultaneously compress and transmit video
and audio data from one side of a video call while receiving and decompressing

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video and audio data from the remote side. This architecture integrates two core
processors running in parallel: a 33 million instructions per second ("MIPS")
32-bit RISC microprocessor and a 128-bit Single Instruction Multiple Data
("SIMD") DSP. The Company's video compression semiconductors currently in
production are manufactured using 0.5 micron, 3-layer metal complementary metal
oxide semiconductor ("CMOS") process technology. Follow-on versions are being
designed using 0.35 micron process technology.

The Company's RISC processor core uses a proprietary instruction set
specifically designed for video conferencing applications. The RISC core
controls the overall chip operation and manages the input/output interface
through a variety of specialized ports which connect the chip directly to
external host, audio and network subsystems. This core is programmable in the C
programming language and allows customers to add their own features and
functionality to the device software provided by the Company.

The second processor is a proprietary DSP core. This DSP core is a 2 BOPS
(billion operations per second) SIMD processor which implements the
computationally intensive video and audio processing routines. Variable length
32 and 64 bit microcode instructions of the DSP core provide the flexibility to
improve algorithm performance, enhance video and audio quality and maintain
compliance with changing digital video standards. Unlike many competing
semiconductors which use hardwired building blocks to implement each step in the
compression/decompression (codec) process, the Company's DSP core uses microcode
software routines to implement the fundamental processing steps which form the
basis of H.320, H.323 and H.324 standards-based video conferencing systems, thus
allowing upgrades through changes in software only.

In addition to the RISC and DSP cores, all of the Company's video
compression semiconductors share a common set of video processing capabilities
which are fundamental to enhancing video quality. Digital video inputs directly
into the chip and passes through a series of digital filters designed to resize,
re-color and remove noise from the images in preparation for compression. These
semiconductors also incorporate proprietary interlacing and resizing filters at
the output stage.

Application Software Development

The Company's proprietary application specific software, sold with the
Company's semiconductor products, addresses the unique system requirements of
the various international video telephony standards. This software is a
combination of microcode assembly (for the DSP core) and compiled C code (for
the RISC core). By refining its software, the Company can enhance picture
quality, address new standards and add significant user features. In addition,
several of the Company's customers have licensed source code to which they add
proprietary features, custom interfaces and, in some cases, algorithm
improvements. See "Business -- Licensing and Development Arrangements."

Algorithm Expertise

The Company has devoted significant resources to develop video and audio
codec algorithms to meet international video telephony standards. While the
H.32x standards clearly specify the syntax requirements of a standards-compliant
decoder, and thus what constitutes a valid H.32x bitstream, they do not specify
the methods by which an H.32x encoder achieves this result. The flexibility of
the Company's video compression semiconductor architecture allows the Company to
apply its core algorithm expertise to develop products for a variety of video
conferencing applications. The Company's algorithm expertise enables the
following:

- Video Coding Efficiency and Video Quality. By improving its proprietary
motion search algorithms and optional coding modes which are tuned to the
capabilities of the Company's semiconductor architecture, the Company is
able to enhance video quality for H.32x video conferencing applications.

- Integrated Control of Real-Time Systems. Video conferencing systems are
inherently complex due to the convergence of video, audio and control
information. The Company's proprietary semiconductor architecture and
interrupt-driven control firmware manage these varying data streams in
concert thereby reducing the complexity of the external system design.

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- Proprietary Rate Buffer Control. The real-time management of video and
audio buffer occupancy has a significant effect on the performance of
video conferencing systems, especially at low bit-rates. The Company has
developed a suite of proprietary adaptive rate-buffer control algorithms
which dynamically controls the occupancy rate of these buffers and allows
for efficient use of available network bandwidth.

SALES AND MARKETING

The Company markets its semiconductors through its own direct sales force
as well as through distributors. The Company's direct sales force supports
domestic and international sales and operates from the Company's headquarters in
Santa Clara, California and a European office in London. As of December 31,
1996, the Company employed 22 persons in sales and marketing. These persons
provide direct account support for OEM and distributor customers of the
Company's semiconductors. The Company's sales and marketing personnel typically
provide support to such OEM customers through sales literature, periodic
training, customer symposia, pre-sales support and joint sales calls. As of
December 31, 1996, the Company marketed its video compression semiconductors
through one distributor in the United States and seven distributors in Europe
and the Pacific Rim. For the year ended March 31, 1996 and the nine months ended
December 31, 1996, sales by the Company to distributors accounted for
approximately 18% and 28% of total revenues, respectively, with one distributor,
ASCII Corporation, accounting for 7% and 13% of total revenues, respectively.
See "Business -- Licensing and Development Arrangements" for a discussion of
certain licensing and development arrangements (including an arrangement
pursuant to which KME has licensed substantially all of the Company's technology
underlying the Company's VideoCommunicators). Although the Company has received
certain revenues from these licensing and development arrangements in the past,
there can be no assurance that the Company will receive any revenues from these
arrangements in the future. In addition, KME and other licensees or purchasers
of the Company's technology, video compression semiconductors, software or board
designs may use such technology or components to manufacture and sell products
that compete directly with the Company's VideoCommunicators.

The Company utilizes several marketing programs to support the sale and
distribution of its products, including participation in industry trade shows
and conferences. The Company also publishes technical articles, distributes
sales and product literature and has an active public relations plan to
encourage coverage of the Company's products and technology by editors of trade
journals.

The Company plans to sell its VideoCommunicators through a direct marketing
effort, utilizing a combination of advertising, toll-free telemarketing and
direct mail supported by co-marketing arrangements with third parties and resale
through the retail channel. The direct marketing approach generally allows more
rapid establishment of brand recognition and introduction of new products and
enables competitive pricing and better management of working capital. The
Company intends to continue to sell its video compression semiconductor and
software products to OEMs and distributors through its existing sales and
marketing force.

In recent years, the Company has been a provider of video compression
semiconductors to OEMs of video conferencing systems. As such, the Company has
not marketed commercial quantities of consumer products such as its
VideoCommunicators. In order to achieve significant market penetration and brand
awareness for its VideoCommunicators, the Company must expand its sales and
marketing efforts and develop direct consumer marketing capabilities. There can
be no assurance that the Company will be able to expand its sales and marketing
efforts or develop direct consumer marketing capabilities or that the Company
will be able to achieve significant market penetration with its
VideoCommunicators. Failure of the Company to successfully expand its sales and
marketing efforts, or to develop direct consumer marketing capabilities or to
generate significant sales of the VC100 would have a material adverse effect on
the Company's business and operating results. See "Risk Factors -- Potential
Fluctuations in Future Operating Results," "Risk Factors -- Uncertainty of
Market Acceptance; Limits of Existing Technology," "Risk Factors -- No History
of Direct Consumer Marketing" and "Risk Factors -- Management of Growth."

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MARKETS AND CUSTOMERS

The Company provides highly integrated, proprietary semiconductors and
associated software sold primarily to OEMs of corporate video conferencing
systems. The Company sells its VCP semiconductors and related software and
reference designs primarily to OEMs designing ISDN office video conferencing
systems that use the H.320 standard, including PictureTel, Siemens, Sony,
VideoServer, VCON and Vtel. The Company has sold limited quantities of its LVP
semiconductors and related software and reference board designs to OEMs
designing POTS video conferencing systems for the consumer market using the
H.324 standard, including Sony and KME, an affiliate of Matsushita. To address
new opportunities, the Company is expanding its product lines by developing a
family of non-PC based VideoCommunicators for the consumer market. In January
1997, the Company announced for sale the VC100 which is targeted at the consumer
market. See "Business -- Products" and "Business -- Licensing and Development
Arrangements" for a discussion of the status of the VC100, the VC200 and the
successor products to the Company's video compression semiconductors and certain
related licensing and development arrangements (including an arrangement
pursuant to which KME has licensed substantially all of the Company's technology
underlying the Company's ViaTV Phones). Although the Company has received
certain revenues from these licensing and development arrangements in the past,
there can be no assurance that the Company will receive any revenues from these
arrangements in the future. In addition, KME and other licensees or purchasers
of the Company's technology, video compression semiconductors, software or board
designs may use such technology or components to manufacture and sell products
that compete directly with the Company's VideoCommunicators.

Historically, a significant portion of the Company's sales has been to
relatively few customers, although the composition of these customers has
varied. Product revenues from the Company's ten largest customers in the years
ended March 31, 1994, 1995 and 1996 and the nine months ended December 31, 1996
accounted for approximately 55%, 44%, 39% and 56%, respectively, of its total
revenues. During these periods, excluding one company paying certain
non-recurring licensing fees in fiscal 1996, the Company had only three
customers that accounted for 10% or more of total revenues: IBM (during the year
ended March 31, 1994), Compression Labs (during the year ended March 31, 1995)
and ASCII (during the nine months ended December 31, 1996). Moreover, the
Company has recently been, and will continue in the foreseeable future to be,
substantially dependent on the video conferencing industry. The loss of, or any
reduction in orders from, a significant customer, or any reduction in demand for
the Company's video compression semiconductors (particularly prior to
significant VideoCommunicator revenues) or any general decline in the market for
video conferencing products, could have a material adverse effect on the
Company's business and operating results. See "Risk Factors -- Product
Concentration; Potential Loss of Semiconductor Sales; Dependence on Video
Conferencing Industry" and "Risk Factors -- Dependence on Key Customers."

MANUFACTURING

The Company has not yet manufactured commercial quantities of any consumer
system product such as the VC100. The Company plans to outsource the manufacture
of its VideoCommunicators to subcontract manufacturers. The Company anticipates
that these subcontract manufacturers will procure components from their
suppliers and perform assembly and testing of the Company's VideoCommunicators
on a turnkey basis. There can be no assurance that the Company will be able to
reliably manufacture the VC100 or its other VideoCommunicators in volumes, on a
cost effective basis or in a timely manner. See "Risk Factors -- Lack of
Experience in Manufacturing Consumer Video Telephony Products."

The Company's reliance on subcontract foundries and system subcontract
manufacturers, its manufacture of semiconductors, its purchase of components
from third parties and its reliance on foreign subcontract

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37

manufacturers involve a number of risks. There can be no assurance that certain
risks associated with these practices and activities will not have a material
adverse effect on the Company's business and operating results. See "Risk
Factors -- Dependence on Third Party Manufacturers; Component Availability" and
"Risk Factors -- International Operations."

RESEARCH AND DEVELOPMENT

As of December 31, 1996, the Company had 42 employees engaged in research
and development. Research and development expenses in the years ended March 31,
1994, 1995 and 1996 and the nine months ended December 31, 1996 were $6.5
million, $8.1 million, $7.7 million and $7.9 million, respectively. The
Company's development of new products and the enhancement of existing products
is essential to its success. Accordingly, the Company anticipates that research
and developments expenses will continue to increase in the foreseeable future.
However, such expenses may fluctuate from quarter to quarter depending on a wide
range of factors, including the status of and prospects for various development
projects.

The Company's current and future research and development efforts relating
primarily to video compression semiconductors have and will continue to focus on
the Company's next generation of these products. Areas of emphasis will include
an enhanced version of its video compression semiconductor architecture intended
to provide higher performance, enhanced functionality and further integration of
certain essential system functions. This integration is designed to permit
improved system price/performance. Future software developments may focus on
emerging video telephony standards, picture quality enhancements and additional
features supporting both the Company's systems products and its OEM customer
products.

Research and development efforts relating to the VC100, the Company's
initial VideoCommunicator, will focus on picture quality enhancements, Internet
browsing and caller ID. To expand its family of VideoCommunicators, the
Company's research and development efforts will focus on developing products in
new form factors and products that are designed to comply with emerging video
telephony standards.

Although the Company is a developer of video compression semiconductors and
systems, the Company was previously involved in several other businesses which
have since been discontinued. Prior product lines that were discontinued include
math co-processors and MPEG semiconductors, discontinued in June 1995 and
September 1996, respectively. Prior development efforts that were discontinued
include Intel compatible x86 microprocessors and graphics semiconductors,
discontinued in June 1995 and during the quarter ended September 30, 1994,
respectively. The Company has discontinued its products and efforts in these
areas in part because of rapid changes in the personal computer marketplace and
severe price reduction for certain of these components.

The video compression semiconductor and video conferencing markets are
characterized by rapid changes in customer requirements, frequent introductions
of new and enhanced products, and continuing and rapid technological
advancement. To compete successfully, the Company must continue to design,
develop, manufacture and sell new and enhanced products that provide
increasingly higher levels of performance and reliability, take advantage of
technological advancements and changes and respond to new customer requirements
in a timely manner. The Company's success in designing, developing,
manufacturing and selling such products will depend on a variety of factors. In
addition, the development of the Company's VideoCommunicators is at an early
stage and, as a result, the Company must achieve numerous significant milestones
and overcome substantial risks in order to successfully introduce its
VideoCommunicators. There can be no assurance that VideoCommunicators can be
successfully developed, introduced to the market or achieve market acceptance.
The Company has in the past experienced delays in the development of new
products and the enhancement of existing products, and such delays may occur in
the future. If the Company is unable, due to resource constraints or
technological or other reasons, to develop and introduce new or enhanced
products in a timely manner, or if such new or enhanced products do not achieve
sufficient market acceptance, it would have a material adverse effect on the
Company's business and operating results. See "Risk Factors -- Dependence on
Future VideoCommunicator Revenues" and "Risk Factors -- Rapid Technological
Change; Dependence on New Product Introduction."

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LICENSING AND DEVELOPMENT ARRANGEMENTS

The Company from time to time enters into licensing and development
arrangements with other corporations that are designed to promote the design,
development, manufacture and sale of the Company's products. Such arrangements
may enable these corporations to use the Company's technology to produce
products that compete directly with the Company's ViaTV Phones. See "Risk
Factors -- Competition." The most significant license is with KME. This
agreement provides to KME, for a license fee previously paid in full to the
Company, all of the source code and object code of the H.324 software for 8x8's
LVP semiconductor product and related development software, as well as certain
board schematics (the "H.324 Technology"), and grants KME a nonexclusive,
nonassignable worldwide license to make, use or sell products with the H.324
Technology. Under this arrangement, KME also has a nonassignable option, upon
payment of additional consideration, to obtain the Company's LVP and VCP
semiconductor technology for use only on systems assembled by KME or its
affiliates, which would include any entity controlled directly or indirectly by
Matsushita. As a result, KME has a license to substantially all of the
technology underlying the Company's VideoCommunicators. In addition, KME must
pay to the Company a royalty for any LVP or VCP semiconductor it manufactures or
any product wherein KME uses any part of the LVP or VCP semiconductor
technology. Both parties agree to license to the other party, at no charge, any
enhancements to the H.324 Technology or the LVP or VCP semiconductor made by
either party, until such time as KME decides to discontinue sharing of
enhancements.

In addition to the above technology and licensing arrangements intended to
promote the Company's products, in the past the Company has entered into certain
other technology licensing arrangements in connection with the discontinuation
of certain products or development efforts. See "Business -- Research and
Development."

In the year ended March 31, 1996 and the nine months ended December 31,
1996, total technology licensing revenues (all of which were non-recurring) were
$8.1 million and $2.3 million, respectively. During the years ended March 31,
1994 and 1995, the Company generated no technology licensing revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Although a number of the Company's current technology licensing
arrangements (including the license arrangement with KME described above) may
result in future payments to the Company, the Company has no way to determine
the amount of such payments, if any, as their receipt by the Company is
dependent upon many factors (such as successful product development and
introduction by the licensee) largely outside of the Company's control.

In connection with the Company's receipt of 75% of the common stock of
VidUs, Inc., the Company provided VidUs, Inc. with a royalty free license to
certain technology. See "Certain Transactions."

COMPETITION

The Company competes with independent manufacturers of video compression
semiconductors and, with the introduction of the VC100, its initial
VideoCommunicator, now competes with manufacturers of video conferencing
products targeted at the consumer market. The markets for the Company's products
are characterized by intense competition, declining average selling prices and
rapid technological change. The competitive factors in the market for the
Company's VideoCommunicators include audio and video quality, phone line
connectivity at high transmission rates, ability to connect and maintain stable
connections, ease of use, price, access to enabling technologies, product
design, time-to-market, adherence to industry standards, interoperability,
strength of distribution channels, customer support, reliability and brand name.
The Company expects intense competition for its VideoCommunicators from the
following segments:

Large consumer electronics manufacturers. The Company will face intense
competition from many well known, established suppliers of consumer
electronics products, which may include Lucent Technologies, Matsushita,
Philips, Samsung and Sony. Many of these potential competitors sell
television and telephone products into which they may integrate video
conferencing systems, thereby eliminating a consumer's need to purchase a
separate video conferencing system, such as the VC100.

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39

Licensees and Purchasers of the Company's VideoCommunicator Technology and
Components. A number of companies have licensed portions of the Company's
technology (including an affiliate of Matsushita, KME, which has licensed
substantially all of the Company's technology underlying the Company's
VideoCommunicators and, therefore, may be able to use this technology to
manufacture and sell products that compete directly with the Company's
VideoCommunicators. See "Business -- Licensing and Development
Arrangements." In addition, other companies may choose to manufacture and
sell products competitive with the Company's VideoCommunicators by
incorporating video compression semiconductors purchased from the Company
into products that are based on the Company's video phone reference board
designs or other video phone designs.

Purchasers of Other Companies' Video Compression Semiconductors and
Reference Designs. Companies may choose to manufacture and sell products
based upon video compression semiconductors manufactured by suppliers other
than the Company or upon reference designs based upon such semiconductors.
Certain of these other suppliers of video compression semiconductors,
including Analog Devices, Lucent Technologies and Texas Instruments, have
significantly greater resources than the Company. In order to increase the
sale of their video compression semiconductors, these manufacturers may
provide marketing, financial and other support to the purchasers of these
products. One company has publicly announced that it is developing a video
conferencing product based upon Lucent Technologies' video compression
semiconductors and that it will be making available for sale to third
parties a video phone reference design incorporating Lucent Technologies'
semiconductors. In addition, another company has publicly announced that it
is developing a similar product based on semiconductors from Analog
Devices.

The principal competitive factors in the market for video compression
semiconductors include product definition, product design, system integration,
chip size, functionality, time-to-market, adherence to industry standards, price
and reliability. The Company has a number of direct competitors in this market,
including Analog Devices, Lucent Technologies and Texas Instruments. Certain of
the Company's competitors for video compression semiconductors maintain their
own semiconductor foundries and may therefore benefit from certain capacity,
cost and technical advantages.

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40

continue to compete effectively, and any failure to do so would have a material
adverse effect on the Company's business and operating results.

INTELLECTUAL PROPERTY

The Company relies in part on trademark, copyright and trade secret law to
protect its intellectual property in the United States and abroad. The Company
seeks to protect its software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection. There can
be no assurance that the steps taken by the Company will prevent
misappropriation of its technology. The Company also relies in part on patent
law to protect its intellectual property in the United States and abroad. The
Company currently holds three United States patents, including patents relating
to video compression and memory architecture technology, and has 11 United
States patent applications pending. The Company has a number of foreign patent
applications pending. There can be no assurance that any patent, trademark or
copyright owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future patent
applications will be issued with the scope of the claims sought by the Company,
if at all. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States. Thus,
effective intellectual property protection may be unavailable or limited in
certain foreign countries. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad will be
adequate or that competition will not independently develop technologies that
are similar or superior to the Company's technology, duplicate the Company's
technology or design around any patent of the Company. Moreover, litigation may
be necessary in the future to enforce the Company's intellectual property
rights, to determine the validity and scope of the proprietary rights of others,
or to defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of management time and resources and
could have a material adverse effect on the Company's business and operating
results.

EMPLOYEES

As of December 31, 1996, the Company employed a total of 91 people,
including 17 in manufacturing operations, 42 in research and development, 22 in
sales and marketing and 10 in general and administrative capacities. The Company
also employs a number of temporary employees and consultants on a contract
basis.

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41

None of the Company's employees is represented by a labor union with respect to
his or her employment by the Company. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.

The Company's future success will depend, in part, upon its ability to
attract and retain qualified personnel. Competition for qualified personnel in
the electronics and communications industries is intense, and there can be no
assurance that the Company will be successful in retaining its key employees or
that it will be able to attract skilled personnel as the Company grows. See
"Risk Factors -- Management of Growth" and "Risk Factors -- Dependence on Key
Personnel."

FACILITIES

The Company's principal operations are located in an approximately 61,767
square foot facility in Santa Clara, California. A portion of this facility has
been subleased. This lease expires in December 1997, and the Company has an
option to extend the lease for a period of up to five years. The Company also
leases 2,267 square feet in London, England. This lease expires in January 1999
and the Company has no option to extend the lease. The Company's existing
facilities are adequate to meet its current needs.

LEGAL PROCEEDINGS

The IRS is currently conducting an examination of the Company's federal
income tax return for the fiscal year ended March 31, 1992. In August 1995, the
IRS asserted a deficiency against the Company for the taxable year 1992 of
approximately $1.4 million for accumulated earnings taxes, together with a
penalty of approximately $273,000 plus accrued interest. The IRS alleged that as
of March 31, 1992, the Company had accumulated earnings beyond the reasonable
needs of the Company's business. The Company has not made any payments under
this assessment. On October 30, 1995, in accordance with IRS procedures, the
Company formally protested this assessment. The Company has not received an
official response from the IRS to this protest. The outcome of this matter
cannot be predicted. In the event that the IRS prevails, the Company will have
to make cash payments for the amount of the deficiency, penalty and accrued
interest. However, any adverse outcome of this assessment is not likely to
impact the Company's tax position on this matter for any other fiscal year. In
addition, the IRS has requested information related to the Company's federal tax
returns for the year ended March 31, 1995. The IRS has disclosed to the Company
that the purpose of this request was to gain information regarding the economic
circumstances underlying the Company's loss for the year ended March 31, 1995.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding the executive
officers and directors of the Company as of the date of this Prospectus:

NAME AGE POSITION
- ---------------------------- ---- -----------------------------------------------------------

Joe Parkinson(1)............ 51 Chief Executive Officer and Chairman of the Board
Y.W. Sing................... 42 Vice Chairman of the Board
Keith R. Barraclough........ 31 President and Chief Operating Officer and Director
Paul Voois.................. 30 Executive Vice President and Director
Sandra L. Abbott............ 49 Chief Financial Officer and Vice President, Finance
David Harper................ 50 Vice President, European Operations
Bryan R. Martin............. 29 Chief Technical Officer and Vice President, Engineering
Chris McNiffe............... 35 Vice President, Marketing and Sales
Michael Noonen.............. 33 Vice President, Business Development
Samuel Wang................. 47 Vice President, Process Technology and Director
Bernd Girod................. 38 Director
Richard M. Chang(1)......... 56 Director
Sada Chidambaram(2)......... 51 Director
Akifumi Goto(1)............. 53 Director
Thomas L. Humphrey(2)....... 58 Director
William Tai(2).............. 34 Director

- ---------------
(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

Joe Parkinson has served as Chief Executive Officer and Chairman of the
Board of the Company since June 1995. From October 1994 to June 1995, Mr.
Parkinson served as a consultant to Micron Technology, Inc. ("Micron"), a
manufacturer of semiconductor memory products, personal computers and circuit
board assemblies. From October 1985 to October 1994, he served as Chairman of
the Board and Chief Executive Officer of Micron, and from July 1980 to October
1985 he served as President of Micron. Mr. Parkinson is a director of Ultratech
Stepper, Inc. Mr. Parkinson received a B.A. from Columbia College, a J.D. from
Tulane University and a L.L.M. in Taxation from New York University.

Dr. Y.W. Sing co-founded the Company in February 1987 and served as Vice
President of Engineering until December 1989. From December 1989 to July 1995,
he served as the Company's Executive Vice President, and in July 1995 became the
Company's Vice Chairman of the Board. For six years prior to 1987, Dr. Sing
worked for Weitek Corporation, a semiconductor manufacturer, where he served as
senior technical manager. From 1979 to 1981, Dr. Sing was a member of the
technical staff at the Hewlett-Packard Company. Dr. Sing holds a B.S. from
National Taiwan University and a M.S. and Ph.D. in Electrical Engineering from
the University of California at Berkeley.

Keith R. Barraclough was promoted to President and Chief Operating Officer
and became a director of the Company in January 1997. From April 1996 to the
present, he has also served as a director of VidUs, Inc. ("VidUs"), a subsidiary
of the Company engaged in the design of integrated camera and video compression
solutions. Mr. Barraclough served as Director of Videophone Development of the
Company from September 1995 to January 1997, and as Strategic Marketing Manager
from January 1995 to September 1995. From April 1993 to January 1995, Mr.
Barraclough served as Manager of Semiconductor Development at Media Vision
Technology, Inc., a manufacturer of multimedia products. From 1988 to April
1993, Mr. Barraclough held a position as engineer at IBM. Mr. Barraclough
received a B.S. in Electrical Engineering from University College, London and a
M.S. in Electrical Engineering from Imperial College, London.

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Dr. Paul Voois was promoted to Executive Vice President and became a
director of the Company in January 1997. From April 1996 to the present, he has
also served as a director of VidUs. Dr. Voois served as Manager of Multimedia
Codec Development of the Company from April 1996 to January 1997, as Technical
Lead of the Company's H.324 Development Group from November 1995 to April 1996,
and as a member of the technical staff of the Company from September 1994 to
November 1995. From January 1990 to December 1993, Dr. Voois was a research
assistant in Electrical Engineering at Stanford University. Dr. Voois received a
B.S. in Electrical Engineering from Penn State University, and a M.S. and a
Ph.D. in Electrical Engineering from Stanford University.

Sandra L. Abbott joined the Company as Controller in April 1991, and was
promoted to Chief Financial Officer and Vice President, Finance in June 1995.
From February 1990 to March 1991, Ms. Abbott served as Controller for InfoChip
Systems, Inc, a semiconductor manufacturer. Prior to 1990, Ms. Abbott held
Controller positions at MRP, Inc. (a subsidiary of U.S. West), Free-Flow
Packaging, Inc. and Weitek Corporation. Ms. Abbott received a B.A. from
University California, Riverside and a M.B.A. from Santa Clara University.

David Harper joined the Company in May 1990 and was promoted to Vice
President, European Operations in March 1991. From 1988 to 1990, Mr. Harper was
Chief Executive Officer of Dialog Semiconductor, a European ASIC manufacturer.
Prior to 1988, Mr. Harper held various sales management positions at GEC Plessey
Semiconductor, LSI Logic Corp. and General Electric Company. Mr. Harper received
a B.S. in Electrical Engineering from the University of Manchester Institute of
Science and Technology.

Bryan R. Martin was promoted to Chief Technical Officer and Vice President,
Engineering of the Company in August 1995. Mr. Martin served as Video Project
Manager of the Company from April 1995 to August 1995, and as an integrated
circuit designer for the Company from April 1990 to August 1995. Mr. Martin
received a B.S. and a M.S. in Electrical Engineering from Stanford University.

Chris McNiffe has served as Vice President, Marketing and Sales for the
Company since July 1995. From June 1992 to July 1995, Mr. McNiffe held various
sales and marketing management positions at the Company. From July 1986 to June
1992, Mr. McNiffe held a position as sales manager at NCR Corporation, a
computer products and services provider. From 1982 to 1986, Mr. McNiffe was a
design engineer at RCA Corporation. Mr. McNiffe received a B.S. in Electrical
Engineering from Rutgers University.

Michael Noonen has served as Vice President, Business Development for the
Company since May 1996. From April 1996 to the present, he has also served as
Chief Executive Officer of VidUs. From July 1992 to April 1995, Mr. Noonen held
various sales management positions at the Company. From August 1990 to July
1992, Mr. Noonen served as an Area Sales Manager for NCR Corporation, a computer
products and services provider. Prior to 1992, Mr. Noonen was a field
application engineer for Seattle Silicon Corporation, a software developer. Mr.
Noonen received a B.S. in Electrical Engineering from Colorado State University.

Dr. Samuel Wang has served as Vice President, Process Technology and a
director of the Company since October 1995. From 1984 to October 1995, Mr. Wang
served as Executive Vice President and a director of ICT Inc., a manufacturer of
programmable logic devices. From 1981 to 1983 Mr. Wang was a Senior Engineering
Manager at National Semiconductor Corporation, and from 1978 to 1980 he was a
staff engineer at Intel Corporation. Mr. Wang received a B.S. in Physics from
the National Tsing Hua University, Taiwan, and a M.S. and Ph.D. in Solid State
Electronics from Princeton University.

Dr. Bernd Girod has served as a director of the Company since November
1996. Dr. Girod has been a Chaired Professor of Electrical
Engineering/Telecommunications at the University of Enlangen-Nuremberg in
Germany since October 1993. In May 1993, he co-founded Vivo Software, Inc., a
developer of video compression software, and has served as Chief Scientist since
then. From June 1990 to September 1993, Dr. Girod was Professor of Computer
Graphics and Technical Director of the Academy of Media Arts in Cologne,
Germany, jointly appointed with the Computer Science Section of Cologne
University. From January 1988 to May 1990, he was employed at the Massachusetts
Institute of Technology, first as a Visiting Scientist and then as an Assistant
Professor with the Media Laboratory. Dr. Girod received a M.S. in

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44

Electrical Engineering from the Georgia Institute of Technology and a Doctoral
degree from the University of Hannover, Germany.

Dr. Richard M. Chang has been a director of the Company since February
1987. He has served in various marketing and manufacturing management positions
at Hewlett-Packard Company, an electronics component and system manufacturer,
since 1970. Dr. Chang received a B.S. in Physics from the California Institute
of Technology and a Ph.D. in Applied Physics from Stanford University.

Sada Chidambaram has been a director of the Company since December 1995. He
has also been a director of ASCII Corporation ("ASCII") and has served as
President of ASCII of America, Inc., a subsidiary of ASCII, since February 1988.
ASCII, based in Tokyo, Japan, publishes software and computer magazines and
manufactures and distributes specialized semiconductors and solutions. Mr.
Chidambaram also serves on the Board of Directors of several privately held
companies. Mr. Chidambaram received a B.S. in Chemistry from Loyola University
and a M.S. in Chemical Engineering from the Tokyo Institute of Technology.

Akifumi Goto has been a director of the Company since September 1996. He
has served as President and Chief Executive Officer of Sanyo Semiconductor
Corporation ("Sanyo"), a semiconductor manufacturer, since February 1993. From
February 1983 to January 1993, Mr. Goto served as Executive Vice President of
Sanyo. Mr. Goto received a B.S. in Electrical Engineering from Tamagawa
University and a M.B.A. from Santa Clara University.

Dr. Thomas L. Humphrey has been a director of the Company since November
1995. He has served as a Director, Corporate Business Development of National
Semiconductor Corporation, a semiconductor manufacturer, since January 1992.
From January 1991 to January 1992, Dr. Humphrey was an independent consultant.
Dr. Humphrey received a B.S. from University of California, Los Angeles and a
M.S. and Ph.D. in Electrical Engineering from Stanford University.

William Tai has been a director of the Company since April 1994. Mr. Tai
has served as a General Partner of the Walden Group of Venture Capital Funds, a
venture capital firm, since September 1991. From August 1987 to September 1991,
Mr. Tai served as Vice President of Alex. Brown & Sons Incorporated. Mr. Tai is
also a director of Network Peripherals, Inc. and Award Software International,
Inc. Mr. Tai received a B.S. in Electrical Engineering from the University of
Illinois and a M.B.A. from Harvard Business School.

BOARD COMMITTEES

The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee makes recommendations to the Board concerning the
compensation for the Company's officers and directors and the administration of
the Company's 1992 Stock Option Plan, Key Personnel Plan, 1996 Stock Plan, 1996
Director Option Plan and 1996 Employee Stock Purchase Plan. The Audit Committee
reviews the Company's financial controls, evaluates the scope of the annual
audit, reviews audit results, consults with management and the Company's
independent auditors prior to the presentation of financial statements to
stockholders and, as appropriate, initiates inquiries into aspects of the
Company's financial affairs.

DIRECTOR COMPENSATION

Directors receive no cash remuneration for serving on the Board of
Directors but are reimbursed for reasonable expenses incurred by them in
attending Board and Committee meetings upon approval of such reimbursement by
the Board of Directors. Directors are eligible to receive stock options under
the Company's 1992 Stock Option Plan, Key Personnel Plan and 1996 Stock Plan.
Effective upon the closing of this Offering, the Company has adopted the 1996
Director Option Plan and, in the future, non-employee directors will be eligible
to receive stock options under this plan. See "Management -- Compensation
Plans."

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors currently consists of
Messrs. Parkinson, Chang and Goto. No member of the Compensation Committee or
executive officer of the Company has a relationship that would constitute an
interlocking relationship with executive officers or directors of another
entity.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Amended and Restated Certificate of Incorporation limits the
liability of directors to the fullest extent permitted by the Delaware General
Corporation Law (the "Delaware Law"). Under the Delaware Law, a director's
liability to a company or its stockholders may not be limited with respect to
(i) any breach of his duty of loyalty to the company or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) unlawful payments or dividends or unlawful stock
repurchases or redemptions or (iv) transactions from which the director derived
an improper personal benefit.

The Company's Bylaws provide that the Company shall indemnify its officers
and directors and may indemnify its employees and other agents to the fullest
extent permitted under the Delaware Law. The Company has also entered into
agreements to indemnify its directors and executive officers. The Company's
Bylaws also permit it to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions,
regardless of whether the Delaware Law would permit indemnification.

There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company where indemnification will be required
or permitted. The Company is not aware of any pending or threatened litigation
or proceeding that might result in a claim for such indemnification.

EXECUTIVE COMPENSATION

The following table sets forth in summary form information concerning the
compensation awarded to, earned by, or paid for services rendered to the Company
in all capacities during the fiscal year ended March 31, 1996 by (i) the
Company's Chief Executive Officer, (ii) the Company's next four most highly
compensated executive officers whose salary and bonus for such fiscal year
exceeded $100,000 and who served as executive officers of the Company at March
31, 1996 and (iii) one additional individual for whom disclosure would have been
provided pursuant to (ii) above but for the fact that the individual was not
serving as an executive officer of the Company on March 31, 1996 (collectively,
the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) ($)(1) OPTIONS(#) SATION($)
- ------------------------------------ --------- -------- ------------ ------------ ---------

Joe Parkinson, Chairman and Chief
Executive Officer................. 115,384(2) 4,580 -- 600,000(3) --
Y. W. Sing, Vice Chairman........... 163,590 4,700 55,046(4) 115,000 --
Sandra L. Abbott, Chief Financial
Officer........................... 114,647 4,700 -- 65,000 --
David Harper, Vice President,
European Operations............... 97,491 47,115 22,992(5) 25,000 49,389(6)
Chris McNiffe, Vice President,
Marketing and Sales............... 150,157 4,700 -- 100,000 --
Michael Noonen, Vice President,
Business Development.............. 107,750 105,800 -- -- --

- ---------------
(1) Excludes perquisites and other personal benefits which for each Named
Executive Officer did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus for such officer.

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(2) Represents compensation for a partial year, as Mr. Parkinson joined the
Company in June 1995. Mr. Parkinson's annualized salary during this period
was $150,000.

(3) Options representing 100,000 of these securities were canceled in June 1996.

(4) Represents one time payout of accrued paid time off.

(5) Represents the incremental cost to the Company of the use of a Company car.

(6) Represents contributions by the Company to a plan which provides for
payments to Mr. Harper during his retirement.

Option Grants and Holdings

The following table provides information with respect to stock option
grants to each of the Named Executive Officers during the fiscal year ended
March 31, 1996:

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL
REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
-------------------------------------------------------------- STOCK
NUMBER OF PERCENT OF PRICE APPRECIATION
SECURITIES TOTAL FOR
UNDERLYING OPTIONS GRANTED OPTION TERM(1)
OPTIONS TO EMPLOYEES IN EXERCISE OR EXPIRATION ------------------
NAME GRANTED(#) FISCAL YEAR BASE PRICE ($/SH.) DATE 5%($) 10%($)
- -------------------------- ---------- --------------- ------------------ ---------- ------- --------

Joe Parkinson............. 500,000(2) 16.8% $.50(3) 06/15/05 $69,070 $152,628
Joe Parkinson............. 100,000(4) 3.4% $.50(3) 11/20/05 $13,814 $ 30,526
Y.W. Sing................. 115,000(5) 3.9% $.50(3) 01/01/05 $15,886 $ 35,104
Sandra L. Abbott.......... 65,000(6) 2.1% $.50(3) 07/10/05 $ 8,979 $ 19,842
David Harper.............. 25,000(6) 0.8% $.50(3) 07/10/05 $ 3,453 $ 7,631
Chris McNiffe............. 100,000(6) 3.4% $.50(3) 07/10/05 $13,814 $ 30,526

- ---------------
(1) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
are dependent on the future financial performance of the Company, overall
market conditions and the option holders' continued employment through the
vesting period.

(2) The options were granted under the Key Personnel Plan and vest at a rate of
1/3 of the shares at the end of one year and 1/24 of the remaining shares at
the end of each month thereafter, subject to continued service as an
employee, consultant or director. The term of each option is ten years. The
exercise price of each option granted is equal to the fair market value of
the Common Stock of the Company on the date of grant. See
"Management -- Compensation Plans."

(3) The options were originally priced at $2.50 per share and were cancelled and
reissued at $0.50 in June 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Transactions."

(4) The options were granted under the Key Personnel Plan and vest upon the
effectiveness of the Company's initial public offering. The term of each
option is ten years. The exercise price of each option granted is equal to
the fair market value of the Common Stock of the Company on the date of
grant. See "Management -- Compensation Plans." The options were canceled in
June 1996.

(5) The options were granted under the Key Personnel Plan and vest at a rate of
1/24 of the shares at the end of each month, subject to continued service as
an employee, consultant or director. The term of each option is ten years.
The exercise price of each option granted is equal to the fair market value
of the Common Stock of the Company on the date of grant. See
"Management -- Compensation Plans."

(6) The options were granted under the Key Personnel Plan and vest at a rate of
1/48 of the shares at the end of each month, subject to continued service as
an employee, consultant or director. The term of each option

44
47

is ten years. The exercise price of each option granted is equal to the fair
market value of the Common Stock of the Company on the date of grant. See
"Management -- Compensation Plans."

In June 1996, the Company granted options to purchase shares of the
Company's Common Stock at an exercise price of $0.50 per share to the following
executive officers: (i) Joe Parkinson received two grants of stock options to
purchase 250,000 shares each, for an aggregate of 500,000 shares; and (ii) Y.W.
Sing, Sandra L. Abbott, David Harper, Bryan R. Martin, Chris McNiffe, Michael
Noonen and Samuel Wang each received options to purchase 57,400 shares. In
January 1997, each of Keith Barraclough and Paul Voois was granted options to
purchase 170,000 shares of the Company's Common Stock at an exercise price of
$6.80 per share.

One of the above-mentioned options received by Mr. Parkinson to purchase
250,000 shares of the Company's Common Stock shall vest on June 24, 2000;
provided, however, that vesting shall be accelerated in the event of an initial
public offering or a change of control (defined as the acquisition by an entity
or individual and any related parties of at least 35% of the Company's fully
diluted Common Stock) as follows: (i) 100,000 and 150,000 of Mr. Parkinson's
shares shall vest on March 31, 1997 and June 24, 2000, respectively, in the
event of an initial public offering or change of control occurring between
December 31, 1996 and March 31, 1997, which results in a price per share of the
Company's Common Stock of at least $11.00; and (ii) 60,000 and 190,000 of Mr.
Parkinson's shares shall vest on March 31, 1997 and June 24, 2000, respectively,
in the event of an initial public offering or change of control occurring
between December 31, 1996 and March 31, 1997, which results in a price per share
of the Company's Common Stock of at least $6.00 and under $11.00.

The following table provides information with respect to the value of stock
options held as of March 31, 1996 by each of the Named Executive Officers. There
were no stock option exercises by such individuals during the year ended March
31, 1996.

FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END(#)(1) AT FISCAL YEAR END($)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ ----------- ------------- ----------- -------------

Joe Parkinson(2).......................... 0 600,000(4) $ 0.00 $ 0.00
Y.W. Sing (2)............................. 165,416 69,584 $ 0.00 $ 0.00
Sandra L. Abbott(2)....................... 10,833 54,167 $ 0.00 $ 0.00
David Harper(3)........................... 34,667 5,333 $ 52,000.50 $7,999.50
David Harper(2)........................... 4,167 20,833 $ 0.00 $ 0.00
Chris McNiffe(2).......................... 29,626 89,374 $ 0.00 $ 0.00
Michael Noonen(2)......................... 12,500 5,500 $ 0.00 $ 0.00

- ---------------
(1) In June 1996, these options to purchase Common Stock were cancelled and
reissued at $.50 per share. The new options became immediately exercisable
subject to right of repurchase in favor of the Company, which expires
ratably through June 24, 2000.

(2) Calculated by determining the difference between the fair market value of
the Common Stock as of March 28, 1996 ($2.50) and the exercise price of the
underlying options as of March 28, 1996 ($2.50).

(3) Calculated by determining the difference between the fair market value of
the Common Stock as of March 28, 1996 ($2.50) and the exercise price of the
underlying options as of March 28, 1996 ($1.00).

(4) Options representing 100,000 of these securities were canceled in June 1996.

45
48

COMPENSATION PLANS

1992 Stock Option Plan

The Company's 1992 Stock Option Plan (the "1992 Plan") was adopted in
January 1992. The 1992 Plan provides for the grant to employees of the Company
(including officers and employee directors) of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and for the grant of nonstatutory stock options to employees and
consultants of the Company. The 1992 Plan is administered by the Board of
Directors or a Committee of the Board of Directors (the "Administrator"), which
selects the optionees, determines the number of shares to be subject to each
option and determines the exercise price of each option. The 1992 Plan
authorizes the issuance of up to 2,000,000 shares of Common Stock. As of
December 31, 1996, 242,978 shares had been issued under the 1992 Plan, options
for 1,625,950 shares were outstanding and 131,072 shares remained available for
future grants. The exercise price of all incentive stock options granted under
the 1992 Plan must be at least equal to the fair market value per share of the
Common Stock on the date of grant. The exercise price of all nonstatutory stock
options granted under the 1992 Plan is determined by the Administrator. With
respect to any participant who owns stock possessing more than 10% of the voting
power of all classes of stock of the Company, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market value
on the grant date and the maximum term of the option must not exceed five years.
The term of all other options granted under the 1992 Plan may not exceed ten
years.

In the event of a merger of the Company with or into another corporation,
the 1992 Plan requires that each outstanding option be assumed or an equivalent
option substituted by such successor corporation or a parent or subsidiary of
such successor corporation. If the successor corporation refuses to assume or
substitute for the options, the optionee will have the right to exercise the
option as to all or a portion of the stock subject thereto, including shares
which would not otherwise be exercisable. Unless terminated sooner, the 1992
Plan will terminate ten years from its effective date. The Board has authority
to amend or terminate the 1992 Plan, provided no such action would impair the
rights of the holder of any outstanding options without the written consent of
such holder.

Key Personnel Plan

The Company's Key Personnel Plan (the "Key Personnel Plan") was adopted in
July 1995. The Key Personnel Plan provides for the grant to employees of the
Company (including officers and employee directors) of incentive stock options
within the meaning of Section 422 of the Code, and for the grant of nonstatutory
stock options to employees and consultants of the Company. The Key Personnel
Plan is administered by the Board of Directors or a Committee of the Board of
Directors (the "Administrator"), which selects the optionees, determines the
number of shares to be subject to each option and determines the exercise price
of each option. The Key Personnel Plan authorizes the issuance of up to
2,199,925 shares of Common Stock. As of December 31, 1996, 2,199,925 shares had
been issued under the Key Personnel Plan and no shares remained available for
future grants. The exercise price of all incentive stock options granted under
the Key Personnel Plan must be at least equal to the fair market value of the
Common Stock on the date of grant. The exercise price of all nonstatutory stock
options granted under the Key Personnel Plan is determined by the Administrator.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of stock of the Company, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market value
on the grant date and the maximum term of the option must not exceed five years.
The term of all other options granted under the Key Personnel Plan may not
exceed ten years.

In the event of a merger of the Company with or into another corporation,
the Key Personnel Plan requires that each outstanding option be assumed or an
equivalent option substituted by such successor corporation or a parent or
subsidiary of such successor corporation. If the successor corporation refuses
to assume or substitute for the options, the optionee will have the right to
exercise the option as to all or a portion of the stock subject thereto,
including shares which would not otherwise be exercisable.

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49

1996 Stock Plan

The Company's 1996 Stock Plan (the "1996 Plan") was adopted in June 1996.
The 1996 Plan provides for the grant to employees of the Company (including
officers and employee directors) of incentive stock options within the meaning
of Section 422 of the Code, and for the grant of nonstatutory stock options and
stock purchase rights ("Rights") to employees and consultants of the Company.
The 1996 Plan is administered by the Board of Directors or a Committee of the
Board of Directors (the "Administrator"), which selects the optionees,
determines the number of shares to be subject to each option or Right and
determines the exercise price of each option or Right. The 1996 Plan authorizes
the issuance of up to 1,000,000 shares of Common Stock, to be increased annually
on the first day of each of the Company's fiscal years during the term of the
plan in an amount equal to 5% of the Company's Common Stock issued and
outstanding at the close of business on the last day of the immediately
preceding fiscal year (the "Annual Replenishment"), with only the initial
1,000,000 shares and subsequent annual increases in an amount equal to the
lesser of (i) 1,000,000 shares, or (ii) the number of shares subject to the
Annual Replenishment to be available for issuance as "incentive stock options"
qualified under Section 422 of the Code. As of December 31, 1996, 635 shares had
been issued under the 1996 Plan, options for 157,150 shares were outstanding and
842,215 shares remained available for future grants. The exercise price of all
incentive stock options granted under the 1996 Plan must be at least equal to
the fair market value of the Common Stock on the date of grant. The exercise
price of all nonstatutory stock options granted under the 1996 Plan shall be
determined by the Administrator. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of stock of the
Company, the exercise price of any incentive stock option granted must equal at
least 110% of the fair market value on the grant date and the maximum term of an
incentive stock option must not exceed five years. The term of all other options
granted under the 1996 Plan may not exceed ten years.

In the event of a merger of the Company with or into another corporation,
or the sale of all or substantially all of the assets of the Company, the 1996
Plan requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation or a parent or subsidiary of such
successor corporation. If the successor corporation refuses to assume or
substitute for the options, the optionee will have the right to exercise the
option or Right as to all or a portion of the stock subject thereto, including
shares which would not otherwise be exercisable. Unless terminated sooner, the
1996 Plan will terminate ten years from its effective date. The Board has
authority to amend or terminate the 1996 Plan, provided no such action would
impair the rights of the holder of any outstanding options without the written
consent of such holder.

1996 Director Option Plan

The Company's 1996 Director Option Plan (the "Director Plan") was adopted
in June 1996 and will become effective upon the closing of this Offering. A
total of 150,000 shares of Common Stock has been reserved for issuance under the
Director Plan. The Director Plan provides for the grant of nonstatutory stock
options to all nonemployee directors of the Company ("Outside Directors"). The
grants may be made at the discretion of the Board of Directors or a Committee
appointed by the Board of Directors. In addition, grants will be made pursuant
to an automatic, nondiscretionary grant mechanism. The Director Plan provides
that each Outside Director shall be granted a nonstatutory stock option to
purchase 16,000 shares of Common Stock on the date upon which such person first
becomes an Outside Director or, if later, on the effective date of the Director
Plan (the "First Option"). Thereafter, each Outside Director shall be
automatically granted an option to purchase 4,000 shares of Common Stock on the
date such Outside Director is reelected to the Board of Directors by the
Company's stockholders at the Company's annual meeting of stockholders or
otherwise (a "Subsequent Option"), if on such date, such Outside Director shall
have served on the Company's Board of Directors for at least six (6) months. The
Director Plan provides that each option shall become exercisable in installments
over a period of four (4) years from the date of grant. The exercise price per
share of all options granted under the Director Plan shall be equal to the fair
market value of a share of the Company's Common Stock on the date of grant.
Options granted to Outside Directors under the Director Plan have a ten year
term, or shorter upon termination of an Outside Director's status as a director.
In the event of the merger or sale of substantially all of the assets of the
Company, all outstanding options shall be assumed or substituted by the
successor corporation, or if they are not assumed or substituted for, they shall
become fully vested and

47
50

exercisable. If the options are assumed or substituted for, they shall also
become fully exercisable if the director is terminated other than upon voluntary
termination. If not terminated earlier, the Director Plan will have a term of
ten years.

1996 Employee Stock Purchase Plan

The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted in June 1996 and will become effective upon the closing of this
Offering. A total of 500,000 shares of Common Stock has been reserved for
issuance under the Purchase Plan, to be increased annually on the first day of
each of the Company's fiscal years during the term of the Purchase Plan in an
amount equal to (i) 500,000 shares minus (ii) the number of shares available for
issuance under the Purchase Plan as of such date, all of which share numbers are
subject to adjustment upon changes in capitalization of the Company. The
Purchase Plan, which is intended to qualify under Section 423 of the Code, will
be implemented by an offering commencing on the date of the closing of this
Offering and ending on the last business day in the period ending October 31,
1998. Each twenty-four month offering period will consist of four purchase
periods of approximately six months duration. Employees are eligible to
participate if they are regularly employed by the Company for at least twenty
hours per week and more than five months in any calendar year.

The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 10% of an employee's base
compensation, including commissions but exclusive of bonuses and overtime, at a
price equal to 85% of the fair market value of the Common Stock at the beginning
of each offering period or the end of a six month purchase period, whichever is
lower. In the event of a merger of the Company with or into another corporation,
or the sale of all or substantially all of the assets of the Company, the
Purchase Plan provides that a new exercise date shall be set for each option
under the plan, which exercise date shall occur before the date of the merger or
asset sale. In the event that the fair market value of the Company's Common
Stock at the end of any six month purchase period is lower than the fair market
value of the Company's Common Stock at the beginning of the offering period,
Purchase Plan participants will be automatically withdrawn from such offering
period and re-enrolled in the new offering period commencing immediately
thereafter. Unless terminated sooner, the Purchase Plan will terminate ten years
after its effective date. The Board of Directors has authority to amend or
terminate the Purchase Plan provided no such action may adversely affect the
rights of any participant.

Change of Control

In the event of an individual or corporate entity and any related parties
cumulatively acquiring at least 35% of the Company's fully diluted stock (a
"Change of Control"), all stock options or stock subject to repurchase by the
Company held by officers under any stock option plan (except for an option, held
by Joe Parkinson, to purchase 250,000 shares of Common Stock, which option shall
vest under certain other change of control circumstances, see "Certain
Transactions") shall vest immediately without regard to the term of the option.
In addition, in the event of a Change of Control, each officer shall be entitled
to one (1) year severance pay and continuing medical benefits for life after
leaving the Company, provided that such medical benefits shall cease should such
officer accept employment with a competing company.

Profit Sharing Plan

In July 1995, the Company's Board of Directors approved a profit sharing
plan which provides for additional compensation to all employees of the Company
based on the Company's quarterly income before income taxes. The profit sharing
plan is effective beginning in the year ended March 31, 1996 and provides for
payments of up to 15% of the Company's quarterly income before income taxes.
Additionally, the plan provides for payment of certain discretionary bonuses
based on criteria established by management.

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51

CERTAIN TRANSACTIONS

In September 1996, the Company sold an aggregate of 363,640 shares of
Series D Preferred Stock to Sanyo Semiconductor Corporation ("Sanyo"), a
manufacturer of semiconductors, at a price of $5.50 per share. Akifumi Goto,
President of Sanyo, became a director of the Company in connection with this
transaction.

In July 1996, certain officers and directors of the Company exercised their
stock options under the Company's Key Personnel Plan pursuant to a restricted
stock purchase agreement. The officers and directors exercised an aggregate of
2,156,800 shares of Common Stock at a purchase price of $0.50 per share by
payment of partial recourse promissory notes. The following officers and
directors exercised shares of Common Stock under the Company's Key Personnel
Plan: 122,400 shares exercised by Sandra Abbott; 122,400 shares exercised by
David Harper; 160,400 shares exercised by Bryan Martin; 176,400 shares exercised
by Chris McNiffe; 125,400 shares exercised by Michael Noonen; 1,000,000 shares
exercised by Joe Parkinson; 292,400 shares exercised by Y.W. Sing; and 157,400
shares exercised by Samuel Wang.

In April 1994, the Company sold an aggregate of 681,820 shares of Series C
Preferred Stock to National Semiconductor Corporation ("NSC"), a semiconductor
manufacturer, at a price of $11.00 per share. In connection with NSC's
investment, Thomas Humphrey, Director, Corporate Business Development of NSC,
became a director of the Company.

In April 1994, the Company entered into various joint development and
supply agreements with NSC, which were terminated by mutual agreement between
the parties in June 1996. As part of this termination, the Company licensed, on
a non-exclusive, royalty free basis, its Intel compatible x86 microprocessor
technology to NSC. During the year ended March 31, 1995, the company recognized
contract revenue and related costs under these agreements of $294,000 and
$229,000, respectively and purchased $868,000 in inventory from NSC.

During the years ended March 31, 1995 and 1996 and the nine month period
ended December 31, 1996, the Company's product revenues included $897,000,
$2,037,000 and $1,853,000 in sales to ASCII Corporation ("ASCII"), or
approximately 4.5%, 7.1% and 12.6% of the Company's revenues, respectively.
ASCII acts as a distributor for the Company in Japan and is party to certain
distributor and sales agreements with the Company. Sada Chidambaram, a director
of the Company, is a director of ASCII and the President of ASCII of America,
Inc., a subsidiary of ASCII.

During the years ended March 31, 1994 and 1995, the Company sold $3,258,000
and $795,000, respectively, of product to Mitsui Comtek, one of its
stockholders. Mitsui Comtek is also the guarantor of the Company's office
facilities.

In March 1996, 8x8 entered into an investment agreement (the "Agreement")
with VidUs, Inc. ("VidUs"), a company whose officers include Michael Noonen and
Sandra L. Abbott. VidUs is currently developing technology by which a camera
transfers data to a Universal Serial Bus port using the Company's MEP
semiconductor and reference design video compression capabilities (the
"CompressionCam Concept"). Pursuant to the Agreement, the Company and Mr. Noonen
own approximately 75% and 12%, respectively, of the common stock of VidUs. Also
in connection with the Agreement, the Company will own all patents related to
the CompressionCam Concept, but has provided VidUs with a royalty free,
nonexclusive, nonassignable license to make, have made, use and sell products
which incorporate the CompressionCam Concept.

Y.W. Sing, Vice Chairman of the Board and a director of the Company, served
as Chief Executive Officer and beneficial owner of two entities (collectively,
the "Entities") until March 1994. During the year ended March 31, 1994, the
Entities provided various marketing, sales and research and development services
to the Company. In compensation for these services the Entities received, in the
aggregate, $940,000 from the Company. In March 1994, the Company purchased all
assets and assumed all liabilities of the Entities for nominal consideration,
and expensed $50,000 previously paid for an option to acquire all of the capital
stock of one of the Entities.

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In June 1996, certain officers and directors had their options to buy
Common Stock repriced to $.50 per share through the cancellation of then
existing options and the issuance of new options. The following summarizes the
number of shares repriced, the exercise price per share before such repricing
and persons associated with the repriced shares: Joe Parkinson had 500,000
shares repriced from $2.50 per share; Y.W. Sing had 235,000 shares repriced from
$2.50 per share; Sandra L. Abbott had 65,000 shares repriced from $2.50 per
share; David Harper had 25,000 shares repriced from $2.50 per share, and 40,000
shares repriced from $1.00 per share; Bryan R. Martin had 103,000 shares
repriced from $2.50 per share; Chris McNiffe had 119,000 shares repriced from
$2.50 per share; Michael Noonen had 68,000 shares repriced from $2.50 per share;
Samuel Wang had 100,000 shares repriced from $2.50 per share; and William Tai
had 25,000 shares repriced from $2.50 per share.

In June 1996, the Company granted an option to purchase 250,000 shares of
its Common Stock at an exercise price of $0.50 per share to Joe Parkinson, the
Chairman and Chief Executive Officer of the Company. This option shall vest on
June 24, 2000; provided, however, that vesting shall be accelerated in the event
of an initial public offering or a change of control (defined as the acquisition
by an entity or individual and any related parties of at least 35% of the
Company's fully diluted Common Stock) as follows: (i) 100,000 and 150,000 of Mr.
Parkinson's shares shall vest on March 31, 1997 and June 24, 2000, respectively,
in the event of an initial public offering or change of control occurring
between December 31, 1996 and March 31, 1997, which results in a price per share
of the Company's Common Stock of at least $11.00; and (ii) 60,000 and 190,000 of
Mr. Parkinson's shares shall vest on March 31, 1997 and June 24, 2000,
respectively, in the event of an initial public offering or change of control
occurring between December 31, 1996 and March 31, 1997, which results in a price
per share of the Company's Common Stock of at least $6.00 and under $11.00.

In July 1996, the officers of the Company entered into partial recourse
promissory notes in connection with the purchase of the Company's Common Stock
(at a price of $.50 per share) through the exercise of stock options granted
under the Key Personnel Plan. The following summarizes the amount of the
promissory note entered into by each officer and the persons associated with
them: Joe Parkinson, $500,000; Y.W. Sing, $146,200; Sandra L. Abbott, $61,200;
David Harper, $61,200; Bryan R. Martin, $80,200; Chris McNiffe, $88,200; Michael
Noonen, $62,700; and Samuel Wang, $78,700. Each of these promissory notes have
an interest rate of 6.4% per year, and are secured by the shares of the
Company's Common Stock held by such respective officers. Principal and interest
on these promissory notes are due and payable in June 2001.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been otherwise
obtained from unaffiliated third parties. All future transactions, including
loans (if any), between the Company and its officers, directors and principal
stockholders and their affiliates will be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors of the Board of Directors, and will be on terms no less favorable to
the Company than could have been obtained from unaffiliated third parties.

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53

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of December 31, 1996, and
as adjusted to reflect the sale of the shares of Common Stock offered hereby and
the automatic conversion of all outstanding shares of Preferred Stock into
Common Stock upon the closing of this Offering, by (i) each person (or group of
affiliated persons) who is known by the Company to own beneficially 5% or more
of the Company's Common Stock, (ii) each of the Company's directors, (iii) each
of the Named Executive Officers and (iv) all directors and officers as a group.
Except as indicated in the footnotes to the table, the persons named in the
table have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them, subject to community property laws
where applicable, and the address of each listed stockholder is c/o 8x8, Inc.,
2445 Mission College Boulevard, Santa Clara, CA 95054.

PERCENTAGE OF TOTAL
SHARES(1)(2)
-------------------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------------------------------ ------------------ -------- --------

Y.W. Sing(3)(4)................................. 1,036,400 9.7% 7.8%
Joe Parkinson(3)(5)............................. 1,000,000 9.3 7.6
National Semiconductor Corporation(6)........... 681,820 6.4 5.2
2900 Semiconductor Drive
Santa Clara, CA 95051
Thomas L. Humphrey(3)(6)........................ 681,820 6.4 5.2
Deby Investments, Ltd.(7)....................... 600,000 5.6 4.5
General Electronics Building FSSTL 96
Sheung Shui, N.T. Hong Kong
Richard M. Chang(3)............................. 453,334 4.2 3.4
Akifumi Goto(3)(8).............................. 363,640 3.4 2.8
Sada Chidambaram(3)(9).......................... 300,000 2.8 2.3
David Harper(10)................................ 222,400 2.1 1.7
Chris McNiffe(11)............................... 176,400 1.6 1.3
Bryan Martin(12)................................ 172,900 1.6 1.3
Samuel Wang(3)(13).............................. 157,400 1.5 1.2
Sandra L. Abbott(14)............................ 153,400 1.4 1.2
Michael Noonen(15).............................. 125,400 1.2 *
William Tai(3)(16).............................. 37,500 * *
Keith Barraclough(3)(17)........................ 18,072 * *
Paul Voois(3)(18)............................... 15,041 * *
Bernd Girod(3).................................. -- -- --
All directors and executive officers as a group
(16 persons) (19)............................. 4,888,707 45.5 36.9

- ---------------
* Less than 1%

(1)Percentage of ownership is based on (i) 10,704,078 shares of Common Stock
outstanding as of December 31, 1996, plus any shares issuable pursuant to
options held, as of December 31, 1996, by the person or class in question
which may be exercised within 60 days of December 31, 1996, and (ii)
13,204,078 shares of Common Stock outstanding after completion of this
Offering, plus any shares issuable pursuant to options held by the person or
class in question which may be exercised within 60 days of December 31,
1996.

(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) The named person is a director of the Company.

(4) Includes 61,684 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.

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54

(5) Includes 718,750 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.

(6) Includes 681,820 shares beneficially held by National Semiconductor
Corporation. Dr. Humphrey is Director, corporate Business Development of
National Semiconductor Corporation.
(7) The beneficial owner of the shares held by Deby Investments, Ltd. is Samuel
Fang.
(8) Includes 363,640 shares beneficially held by Sanyo Semiconductor
Corporation. Mr. Goto is the President and Chief Executive Officer of Sanyo
Semiconductor Corporation.
(9) Includes 300,000 shares owned by ASCII Corporation. Mr. Chidambaram is a
director of ASCII and the President of ASCII of America, Inc., a subsidiary
of ASCII Corporation. Mr. Chidambaram disclaims beneficial ownership of
shares held by ASCII.

(10) Includes 66,371 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.

(11) Includes 117,141 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.

(12) Includes 117,767 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.

(13) Includes 121,058 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.

(14) Includes 92,204 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.

(15) Includes 95,266 shares that are subject to a right or repurchase in favor
of the Company which expires ratably through June 24, 2000.

(16) Includes (i) 12,500 shares issuable pursuant to stock options which may be
exercised within 60 days of December 31, 1996, and (ii) 25,000 shares
issuable upon exercise of stock options to purchase the following number of
shares from the persons indicated: Y.W. Sing, 7,000 shares; Chi-Shin Wang,
7,000 shares; Samuel Fang, 7,000 shares; and Richard Chang, 4,000 shares.

(17) Includes 18,072 shares issuable pursuant to stock options which may be
exercised within 60 days of December 31, 1996.

(18) Includes 15,041 shares issuable pursuant to stock options which may be
exercised within 60 days of December 31, 1996.

(19) Includes (i) 1,390,241 shares that are subject to a right of repurchase in
favor of the Company which expires ratably through June 24, 2000, and (ii)
45,613 shares issuable pursuant to stock options which may be exercised
within 60 days of December 31, 1996.

52
55

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, par value $0.001 per
share and 5,000,000 shares of Preferred Stock, par value $0.001 per share.

COMMON STOCK

As of December 31, 1996, as adjusted for the conversion of all outstanding
shares of Preferred Stock into Common Stock upon the closing of this Offering,
there were 10,704,078 shares of Common Stock outstanding held of record by
approximately 185 stockholders. As of December 31, 1996, there were options to
purchase 1,783,100 shares of Common Stock outstanding. The holders of Common
Stock are entitled to one vote per share on all matters to be voted on by the
stockholders. Subject to preferences that may be applicable to outstanding
shares of Preferred Stock, if any, the holders of Common Stock are entitled to
receive ratably such dividends as may be declared from time to time by the Board
of Directors out of funds legally available therefor. In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior liquidation rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive conversion rights or other
subscription rights. There are no redemption or sinking funds provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be outstanding upon
completion of this Offering will be fully paid and non-assessable.

PREFERRED STOCK

Pursuant to the Company's Amended and Restated Certificate of
Incorporation, the Board of Directors has the authority, without further action
by the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one
or more series and to fix the designations, powers, preferences, privileges, and
relative participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the Common Stock. The Board of
Directors, without stockholder approval, can issue Preferred Stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of Common Stock. Preferred Stock could thus be
issued quickly with terms calculated to delay or prevent a change in control of
the Company or make removal of management more difficult. Additionally, the
issuance of Preferred Stock may have the effect of decreasing the market price
of the Common Stock, and may adversely affect the voting and other rights of the
holders of Common Stock. At present, there are no shares of Preferred Stock
outstanding and the Company has no plans to issue any of the Preferred Stock.
See "Risk Factors -- Anti-Takeover Provisions of the Company's Certificate of
Incorporation, Bylaws and Delaware Law."

REGISTRATION RIGHTS

Under the terms of the Amended and Restated Registration Rights Agreement
dated as of September 6, 1996 among the Company and certain holders of its
securities (the "Rights Agreement"), following the closing of this Offering, the
holders of 3,726,373 shares of Common Stock (the "Registrable Securities") will
be entitled to certain rights with respect to the registration of such shares of
Common Stock under the Securities Act. Under the Rights Agreement, if the
Company proposes to register any of its Common Stock under the Securities Act,
certain holders of Registrable Securities are entitled to notice of such
registration and to include their Registrable Securities therein; provided,
among other conditions, that the underwriters have certain rights to limit the
number of shares included in any such registration. Beginning six months after
the closing of this Offering, the holders of at least fifty percent (50%) of the
Registrable Securities have the right to require the Company, on not more than
two occasions, to file a registration statement under the Securities Act in
order to register all or any part of their Registrable Securities, subject to
certain conditions and limitations. The Company may, in certain circumstances,
defer such registration and the underwriters have the right, subject to certain
limitations, to limit the number of shares included in such registrations.
Further, the holders of Registrable Securities may require the Company to
register all or any portion of their

53
56

Registrable Securities on Form S-3, when such form becomes available to the
Company, subject to certain conditions and limitations.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS

The Company's Amended and Restated Certificate of Incorporation provides
that all stockholder actions must be effected at a duly called annual or special
meeting and may not be effected by written consent. The Company's Bylaws provide
that, except as otherwise required by law, special meetings of the stockholders
can only be called pursuant to a resolution adopted by a majority of the Board
of Directors, by the chief executive officer of the Company or by stockholders
holding shares in the aggregate entitled to cast not less than 10% of the votes
at such meeting. In addition, the Company's Bylaws establish an advance notice
procedure for stockholder proposals to be brought before an annual meeting of
stockholders, including proposed nomination of persons for election to the
Board. Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of the meeting or brought before the meeting
by or at the direction of the Board of Directors or by a stockholder who was a
stockholder of record on the record date for the meeting, who is entitled to
vote at the meeting and who had delivered timely written notice in proper form
to the Company's Secretary of the stockholder's intention to bring such business
before the meeting.

The foregoing provisions of the Company's Amended and Restated Certificate
of Incorporation and Bylaws are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of the
Company. Such provisions are designed to reduce the vulnerability of the Company
to an unsolicited acquisition proposal and, accordingly, could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions are also intended to discourage certain tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for the Company's shares and,
consequently, may also inhibit fluctuations in the market price of the Company's
shares that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
the Company. See "Risk Factors -- Anti-Takeover Provisions of the Company's
Certificate of Incorporation, Bylaws and Delaware Law."

EFFECT OF DELAWARE ANTI-TAKEOVER STATUE

The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Antitakeover Law"), which regulates corporate acquisitions. The
Antitakeover Law prevents certain Delaware corporations, including those whose
securities are listed for trading on the Nasdaq National Market, from engaging,
under certain circumstances in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of the Antitakeover Law, a "business
combination" includes, among other things, a merger or consolidation involving
the Company and the interested stockholder and the sale of more than ten percent
(10%) of the Company's assets. In general, the Antitakeover Law defines an
"interested stockholder" as any entity or person beneficially owning 15% or more
of the outstanding voting stock of the Company and any entity or person
affiliated with or controlling or controlled by such entity or person. A
Delaware corporation may "opt out" of the Antitakeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from amendments approved
by the holders of at least a majority of the Company's outstanding voting
shares. The Company has not "opted out" of the provisions of the Antitakeover
Law. See "Risk Factors -- Antitakeover Provisions of the Company's Certificate
of Incorporation, Bylaws and Delaware Law."

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is American
Securities Transfer & Trust, Inc. Its telephone number is (303) 234-5300.

LISTING

The Company's Common Stock has been approved for listing on the Nasdaq
National Market under the trading symbol "EGHT."

54
57

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have 13,204,078 shares
of Common Stock outstanding. Of this amount, the 2,500,000 shares offered hereby
and 146,550 shares will be available for immediate sale in the public market as
of the date of this Prospectus. Approximately 9,500,000 additional shares will
be available for sale in the public market following the expiration of the
180-day lockup agreements with the Representatives of the Underwriters or the
Company, subject in some cases to compliance with the volume and other
limitations of Rule 144.

SHARES
DAYS AFTER DATE ELIGIBLE
OF THIS PROSPECTUS FOR SALE COMMENT
- ----------------------- ---------- ----------------------------------------------------------

Upon Effectiveness..... 2,646,550 Freely tradeable shares sold in Offering and shares
saleable under Rule 144(k) that are not subject to 180-day
lockup
180 days............... 9,505,767 Lockup released; shares saleable under Rule 144, 144(k) or
701
Thereafter............. 1,032,228 Restricted securities held for two years or less
Thereafter............. 19,533 Securities held for two years or less and not subject to
180- day lockup

In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least two years is entitled
to sell within any three-month period commencing 90 days after the date of this
Prospectus a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock (approximately 132,000 shares
immediately after this Offering) or (ii) the average weekly trading volume
during the four calendar weeks preceding such sale, subject to the filing of a
Form 144 with respect to such sale. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale who has beneficially
owned his or her shares for at least three years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Persons deemed to be affiliates must always sell pursuant to Rule 144, even
after the applicable holding periods have been satisfied.

The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Common Stock of
the Company, the personal circumstances of the sellers and other factors. Prior
to this Offering, there has been no public market for the Common Stock, and
there can be no assurance that a significant public market for the Common Stock
will develop or be sustained after this Offering. Any future sale of substantial
amounts of the Common Stock in the open market may adversely affect the market
price of the Common Stock offered hereby.

The Company, its directors, executive officers, stockholders with
registration rights and certain other stockholders have agreed pursuant to the
Underwriting Agreement and other agreements that they will not sell any Common
Stock without the prior consent of Montgomery Securities for a period of 180
days from the date of this Prospectus (the "180-day Lockup Period"), except that
the Company may, without such consent, grant options and sell shares pursuant to
the 1992 Plan, the Key Personnel Plan, the 1996 Plan, the Director Plan and the
Purchase Plan.

The Company intends to file a registration statement on Form S-8 under the
Securities Act to register certain shares of Common Stock subject to outstanding
options or reserved for issuance under the 1992 Plan, the Key Personnel Plan,
the 1996 Plan, the Director Plan and the Purchase Plan within 180 days after the
date of this Prospectus, thus permitting the resale of such shares by
nonaffiliates in the public market without restriction under the Securities Act.

Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus. As of December 31, 1996, the holders of options exercisable into

55
58

approximately 338,894 shares of Common Stock will be eligible to sell their
shares in reliance upon Rule 701 or pursuant to the Form S-8 upon the expiration
of the 180-day Lockup Period.

In addition, after this Offering, the holders of 3,726,373 shares of Common
Stock will be entitled to certain rights with respect to registration of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by affiliates
of the Company) immediately upon the effectiveness of such registration. See
"Description of Capital Stock -- Registration Rights."

56
59

UNDERWRITING

The underwriters named below (the "Underwriters"), represented by
Montgomery Securities and Donaldson, Lufkin & Jenrette Securities Corporation
(the "Representatives"), have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock indicated below opposite their respective
names at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriting Agreement provides
that the obligations of the Underwriters are subject to certain terms and
conditions precedent and that the Underwriters are committed to purchase all of
such shares, if any are purchased.

NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------

Montgomery Securities.....................................................
Donaldson, Lufkin & Jenrette Securities Corporation.......................
---------
Total........................................................... 2,500,000
=========

The Representatives have advised the Company that the Underwriters
initially propose to offer the Common Stock to the public on the terms set forth
on the cover page of this Prospectus. The Underwriters may allow to selected
dealers a concession of not more than $ per share, and the Underwriters
may allow, and any such dealers may reallow, a concession of not more than
$ per share to certain other dealers. After the initial public
offering, the price and concessions and reallowances to dealers may be changed
by the Representatives. The Common Stock is offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject orders in whole or in part.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 375,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 2,500,000 shares to be purchased by
the Underwriters. To the extent the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover over-
allotments made in connection with this Offering.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities, under the
Securities Act, or will contribute to payments to the Underwriters may be
required to make in respect thereof.

Each director and officer of the Company and certain of other holders of
Common Stock prior to this Offering, as well as certain other holders of
options, warrants or other rights to purchase Common Stock, have agreed not to
sell, offer to sell, or otherwise dispose of any rights with respect to any
shares of Common Stock, any options or warrants to purchase Common Stock, or any
securities convertible or exchangeable for Common Stock, owned directly by such
holders or with respect to which they have power of disposition for a period of
180 days after the date of this Prospectus without the prior written consent of
Montgomery Securities. Montgomery Securities may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
these lock-up agreements. In addition, the Company has agreed not to sell, offer
to sell, contract to sell or otherwise sell or dispose of any shares of Common
Stock or any rights to acquire Common Stock, other than pursuant to the 1992
Plan, the Key Personnel Plan, the 1996 Plan, the Director Plan and the Purchase
Plan, upon exercise of outstanding options and warrants, for a period of 180
days after the Effective Date without the prior consent of Montgomery
Securities. See "Shares Eligible for Future Sale."

Montgomery Associates 1992, L.P. ("Montgomery Associates"), an affiliate of
Montgomery Securities, purchased 84,545 shares of the Company's Series D
Preferred Stock in an October 1996 financing. Montgomery Associates has agreed
not to sell, transfer, assign, pledge or hypothecate such shares for a period of
one year. The National Association of Securities Dealers has deemed that the
difference between the purchase price of those 84,545 shares and the initial
offering price of the Shares to be additional underwriting compensation.

57
60

Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined through negotiations among the Company and the Representatives. Among
the factors to be considered in such negotiations will be the history of, and
prospects for, the Company and the industry in which it competes, an assessment
of the Company's management, the present state of the Company's development, the
prospects for future earnings of the Company, the prevailing market conditions
at the time of this Offering, market valuations of publicly traded companies
that the Company and the Representatives believe to be comparable to the
Company, and other factors deemed relevant. See "Risk Factors -- No Prior
Trading Market for Common Stock; Potential Volatility of Stock Price" and "Risk
Factors -- Dilution."

LEGAL MATTERS

The validity of the issuance of shares of Common Stock offered hereby will
be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, P.C.
("WSGR"), Palo Alto, California. Certain legal matters in connection with this
Offering will be passed upon for the Underwriters by Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. As of the date of
this Prospectus, Jeffrey D. Saper, a member of WSGR, beneficially owns 4,550
shares of the Company's Preferred Stock.

EXPERTS

The consolidated financial statements of the Company as of March 31, 1995
and 1996 and for each of the years ended March 31, 1994, 1995 and 1996, included
in this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of such firm as
experts in auditing and accounting.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 with respect to the shares of
Common Stock offered hereby, of which this Prospectus forms a part. In
accordance with the rules of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the securities offered hereby, reference is made
to the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus concerning the provisions of such
documents are necessarily summaries of such documents and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission as an exhibit to the Registration Statement. Copies of
the Registration Statement and the exhibits and schedules thereto may be
inspected, without charge, at the offices of the Commission, or obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549.

58
61

8X8, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7

F-1
62

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
8x8, Inc.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
8x8, Inc. and its subsidiaries at March 31, 1995 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP
San Jose, California

November 1, 1996, except for note 6, which is as of December 3, 1996.

F-2
63

8X8, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

PRO FORMA
STOCKHOLDERS'
MARCH 31, EQUITY,
----------------- DECEMBER 31, DECEMBER 31,
1995 1996 1996 1996
------- ------- -------------- --------------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents............................... $ 890 $ 4,652 $ 10,221
Short-term investments.................................. 10,433 5,241 39
Accounts receivable, net................................ 2,652 2,951 739
Accounts receivable from related parties................ 543 628 417
Inventory............................................... 1,482 7,270 566
Income taxes receivable................................. 2,241 -- --
Prepaid expenses and other assets....................... 403 284 300
------- ------- -------
Total current assets............................ 18,644 21,026 12,282
Property and equipment, net............................... 1,829 1,526 1,428
Deposits and other assets................................. 171 515 1,277
------- ------- -------
$20,644 $23,067 $ 14,987
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 1,754 $ 5,581 $ 783
Accrued compensation.................................... 1,204 1,779 1,309
Accrued warranty........................................ 1,057 1,058 1,220
Deferred revenue........................................ 765 200 540
Other accrued liabilities............................... 367 1,541 1,171
Income taxes payable.................................... 1,514 1,534 1,534
------- ------- -------
Total current liabilities....................... 6,661 11,693 6,557
------- ------- -------
Commitments and contingencies (Notes 4 and 5)
Minority interest......................................... -- -- 55
------- ------- -------
Stockholders' equity:
Preferred stock $0.001 par value; 5,411,820 shares
authorized actual; 5,000,000 shares authorized pro
forma (unaudited)....................................
Series A convertible preferred noncumulative stock,
$0.001 par value; 1,260,000 shares issued and
outstanding actual; none issued and outstanding pro
forma (unaudited).................................. 1 1 1 $ --
Series B convertible preferred noncumulative stock,
$0.001 par value; 1,100,000 shares issued and
outstanding actual; none issued and outstanding pro
forma (unaudited).................................. 1 1 1 --
Series C convertible preferred noncumulative stock,
$0.001 par value; 681,820 shares issued and
outstanding actual; none issued and outstanding pro
forma (unaudited).................................. 1 1 1 --
Series D convertible preferred noncumulative stock,
$0.001 par value; 684,553 shares issued and
outstanding actual (unaudited); none issued and
outstanding pro forma (unaudited).................. -- -- 1 --
Common stock, $0.001 par value; 40,000,000 shares
authorized; 4,550,721, 4,782,021 and 6,977,705
(unaudited) shares issued and outstanding actual;
10,704,078 shares issued and outstanding pro forma
(unaudited).......................................... 5 5 7 11
Additional paid-in capital.............................. 10,547 11,155 23,507 23,507
Notes receivable from stockholders...................... -- -- (1,078) (1,078)
Deferred compensation................................... -- -- (3,507) (3,507)
Retained earnings/(accumulated deficit)................. 3,428 211 (10,558) (10,558)
------- ------- ------- -------
Total Stockholders' equity...................... 13,983 11,374 8,375 $ 8,375
=======
------- ------- -------
$20,644 $23,067 $ 14,987
======= ======= =======

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

F-3
64

8X8, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------- ------------------------
1994 1995 1996 1995 1996
------- ------- ------- ----------- --------
(UNAUDITED)

Product revenues...................... $31,143 $17,943 $18,654 $ 12,685 $ 10,552
Product revenues from related
parties............................. 3,258 1,986 2,037 1,497 1,853
Technology license revenues........... -- -- 6,333 3,273 2,252
Technology license revenues from
related parties..................... -- -- 1,750 1,750 --
------- ------- ------- ------- -------
Total revenues.............. 34,401 19,929 28,774 19,205 14,657

Cost of product revenues.............. 19,469 11,904 16,668 10,944 10,728
------- ------- ------- ------- -------

Gross profit.......................... 14,932 8,025 12,106 8,261 3,929
------- ------- ------- ------- -------

Operating expenses:
Research and development............ 6,540 8,107 7,714 5,630 7,902
Selling, general and
administrative................... 8,149 6,445 7,938 5,621 6,983
Restructuring costs................. -- -- 603 603 59
------- ------- ------- ------- -------
Total operating expenses.... 14,689 14,552 16,255 11,854 14,944
------- ------- ------- ------- -------

Income (loss) from operations......... 243 (6,527) (4,149) (3,593) (11,015)

Other income, net..................... 189 611 952 313 392
------- ------- ------- ------- -------

Income (loss) before taxes............ 432 (5,916) (3,197) (3,280) (10,623)

Provision (benefit) for income
taxes............................... 780 (35) 20 -- 146
------- ------- ------- ------- -------
Net loss.............................. $ (348) $(5,881) $(3,217) $ (3,280) $(10,769)
======= ======= ======= ======= =======

Pro forma net loss per share
(unaudited)......................... $ (0.27) $ (0.28) $ (0.91)
======= ======= =======

Shares used in pro forma per share
calculations (unaudited)............ 11,722 11,654 11,877
======= ======= =======

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

F-4
65

8X8, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

PREFERRED STOCK
--------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D COMMON STOCK ADDITIONAL
----------------- ----------------- ----------------- ----------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ----------

Balance at March 31,
1993.................... 1,260,000 $ 1 1,100,000 $ 1 -- $ -- -- $ -- 4,579,189 $ 5 $ 3,009
Issuance of common stock
upon exercise of
options................. -- -- -- -- -- -- -- -- 4,983 1 7
Repurchase of common
stock................... -- -- -- -- -- -- -- -- (40,985) (1) (3)
Payment received on notes
receivable from
Stockholders............ -- -- -- -- -- -- -- -- -- -- --
Net loss.................. -- -- -- -- -- -- -- -- -- -- --
--------- ---- --------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at March 31,
1994.................... 1,260,000 1 1,100,000 1 -- -- -- -- 4,543,187 5 3,013
Issuance of common stock
upon exercise of
options................. -- -- -- -- -- -- -- -- 14,199 -- 35
Repurchase of common
stock................... -- -- -- -- -- -- -- -- (6,665) -- --
Issuance of Series C
convertible preferred
noncumulative stock..... -- -- -- -- 681,820 1 -- -- -- -- 7,499
Net loss.................. -- -- -- -- -- -- -- -- -- -- --
--------- ---- --------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at March 31,
1995.................... 1,260,000 1 1,100,000 1 681,820 1 -- -- 4,550,721 5 10,547
Issuance of common stock
upon exercise of
options................. -- -- -- -- -- -- -- -- 246,389 1 609
Repurchase of common
stock................... -- -- -- -- -- -- -- -- (15,089) (1) (1)
Net loss.................. -- -- -- -- -- -- -- -- -- -- --
--------- ---- --------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at March 31,
1996.................... 1,260,000 1 1,100,000 1 681,820 1 -- -- 4,782,021 5 11,155
Issuance of common stock
upon exercise of options
(unaudited)............. -- -- -- -- -- -- -- -- 2,175,684 2 1,088
Issuance of common stock
(unaudited)............. -- -- -- -- -- -- -- -- 20,000 -- 10
Issuance of Series D
convertible preferred
non-cumulative stock
(unaudited)............. -- -- -- -- -- -- 684,553 1 -- -- 3,764
Deferred compensation
related to stock options
(unaudited)............. -- -- -- -- -- -- -- -- -- -- 7,490
Net loss (unaudited)...... -- -- -- -- -- -- -- -- -- -- --
--------- ---- --------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at December 31,
1996 (unaudited)........ 1,260,000 $ 1 1,100,000 $ 1 681,820 $ 1 684,553 $ 1 6,977,705 $ 7 $ 23,507
========= ==== ========= ==== ========= ==== ========= ==== ========= ==== =======

NOTES
RECEIVABLE DEFERRED
FROM COMPEN- RETAINED
STOCKHOLDERS SATION EARNINGS TOTAL
------------ -------- -------- -------

Balance at March 31,
1993.................... $ (7) $ -- $ 9,657 $12,666
Issuance of common stock
upon exercise of
options................. -- -- -- 8
Repurchase of common
stock................... -- -- -- (4)
Payment received on notes
receivable from
Stockholders............ 7 -- -- 7
Net loss.................. -- -- (348) (348)
------ ------ ------- -------
Balance at March 31,
1994.................... -- -- 9,309 12,329
Issuance of common stock
upon exercise of
options................. -- -- -- 35
Repurchase of common
stock................... -- -- -- --
Issuance of Series C
convertible preferred
noncumulative stock..... -- -- -- 7,500
Net loss.................. -- -- (5,881) (5,881)
------ ------ ------- -------
Balance at March 31,
1995.................... -- -- 3,428 13,983
Issuance of common stock
upon exercise of
options................. -- -- -- 610
Repurchase of common
stock................... -- -- -- (2)
Net loss.................. -- -- (3,217) (3,217)
------ ------ ------- -------
Balance at March 31,
1996.................... -- -- 211 11,374
Issuance of common stock
upon exercise of options
(unaudited)............. (1,078) -- -- 12
Issuance of common stock
(unaudited)............. -- -- -- 10
Issuance of Series D
convertible preferred
non-cumulative stock
(unaudited)............. -- -- -- 3,765
Deferred compensation
related to stock options
(unaudited)............. -- (3,507) -- 3,983
Net loss (unaudited)...... -- -- (10,769) (10,769)
------ ------ ------- -------
Balance at December 31,
1996 (unaudited)........ $ (1,078) $ (3,507) $(10,558) $ 8,375
====== ====== ======= =======

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

F-5
66

8X8, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------- -------------------------
1994 1995 1996 1995 1996
------- ------- ------- ----------- -----------
(UNAUDITED)

Cash flows from operating activities:
Net loss.................................... $ (348) $(5,881) $(3,217) $(3,280) $ (10,769)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 1,091 1,000 775 463 565
Loss on disposition of capital
equipment.............................. -- -- 541 541 123
Deferred income taxes.................... 287 1,905 -- -- --
Amortization of deferred compensation.... -- -- -- -- 3,983
Other.................................... -- -- -- -- 3
Changes in assets and liabilities:
Accounts receivable, net............... 96 663 (384) 898 2,423
Inventory.............................. 1,172 3,264 (5,788) (804) 6,704
Income taxes receivable................ -- (2,241) 2,241 2,241 --
Prepaid expenses and other assets...... 322 114 175 97 (778)
Accounts payable....................... (1,389) (1,704) 3,827 742 (4,798)
Accrued compensation................... 194 133 575 (61) (470)
Accrued warranty....................... (267) (641) 1 (507) 162
Deferred revenue....................... (1,494) 2 (565) (3) 340
Other accrued liabilities.............. (466) (893) 1,174 548 (349)
Income taxes payable................... 1,081 185 20 -- (21)
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities.............. 279 (4,094) (625) 875 (2,882)
------- ------- ------- ------- -------
Cash flows from investing activities:
Acquisitions of property and equipment...... (451) (1,492) (1,013) (282) (590)
Proceeds from the sale of equipment......... -- 138 -- -- --
Sales of short-term investments -- available
for sale................................. 5,442 16,681 21,711 14,479 5,168
Purchases of short-term
investments -- available for sale........ -- (27,114) (16,583) (13,470) --
Sales of short-term
investments -- trading................... -- -- 11,216 4,843 85
Purchases of short-term
investments -- trading................... -- -- (11,152) (3,855) (51)
Purchase of other investments............... -- -- (400) -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities.............. 4,991 (11,787) 3,779 1,715 4,612
------- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of convertible
preferred non-cumulative stock, net...... -- 7,500 -- -- 3,765
Proceeds from issuance of common stock,
net...................................... 4 35 608 606 22
Payments received on stockholders' notes
receivable............................... 7 -- -- -- --
Proceeds from minority interest in
subsidiary............................... -- -- -- -- 52
------- ------- ------- ------- -------
Net cash provided by financing
activities........................ 11 7,535 608 606 3,839
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................. 5,281 (8,346) 3,762 3,196 5,569
Cash and cash equivalents beginning of
period...................................... 3,955 9,236 890 890 4,652
------- ------- ------- ------- -------
Cash and cash equivalents end of period....... $ 9,236 $ 890 $ 4,652 $ 4,086 $ 10,221
======= ======= ======= ======= =======

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

F-6
67

8X8, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:

THE COMPANY

8x8, Inc. (the "Company" or "8x8") was incorporated in California in
February 1987 as Integrated Information Technology, Inc. and formally changed
its name to 8x8, Inc. on April 5, 1996. The Company designs, develops and
markets highly integrated proprietary video compression semiconductors and
associated software for video phones and video conferencing.

FISCAL YEAR

The Company's fiscal year ends on the Thursday closest to March 31. Prior
to the fiscal year ended March 28, 1996, the Company's fiscal year ended on
March 31. The nine month periods ended December 26, 1996 and December 28, 1995
each included 39 weeks of operations. For purposes of these consolidated
financial statements, the Company has indicated its fiscal year as ending on
March 31 and its interim periods as ending on December 31.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly and majority owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated.

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

REVENUE RECOGNITION

Revenues from product sales to equipment manufacturers and other end users
are recognized upon shipment. Technology license revenues are generally
recognized upon the delivery of the licensed technology provided no significant
future obligations exist and collection is probable. Revenues generated by sales
to distributors under agreements allowing certain rights of return are deferred
for financial reporting purposes until the products are sold by the
distributors. Revenues generated by sales to distributors when no rights of
return exist are recognized upon shipment.

CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS

The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.

Effective April 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in
Debt and Equity Securities." The cumulative effect as of April 1, 1994, of
adopting SFAS 115 was immaterial. On March 31, 1996 and December 31, 1996, the
Company classified its investments subject to SFAS 115 either as
available-for-sale or as trading. On March 31, 1995, the Company's investments
were classified as available-for-sale. The cost of the Company's investments are
determined based on specific identification. Investments classified as
available-for-sale are reported at fair value with unrealized gains and losses,
net of related tax, if any, recorded as a separate component of stockholders'
equity. At March 31, 1995 and 1996, the fair value of the Company's investments
classified as available-for-sale approximated cost. The investments classified
as trading are reported at fair

F-7
68

8X8, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

value with realized and unrealized gains and losses from investments subject to
SFAS 115 being reported in the statement of operations. At March 31, 1996 and
December 31, 1996, the fair value of the Company's investments classified as
trading approximated cost. Realized and unrealized gains and losses were
immaterial for the years ended March 31, 1995 and 1996 and the nine months ended
December 31, 1996. Management determines the appropriate classification of debt
and equity securities at the time of purchase and reevaluates the classification
at each reporting date. At March 31, 1995 and 1996, the Company's investments
were primarily comprised of commercial paper with a maturity of less than 12
months. The cost and fair value of investments classified as trading were not
material at March 31, 1996 and December 31, 1996.

INVENTORY

Inventory is stated at the lower of standard cost, which approximates
actual cost, using the first-in, first-out method or market.

NONMARKETABLE EQUITY INVESTMENTS

Nonmarketable equity investments of less than 20% of the investee's
outstanding voting stock are accounted for on the cost method, because the
Company does not have an ability to significantly influence the operating and
financial policies of the investees. Loss resulting from impairment in the value
of investments which is other than a temporary decline is recorded in the period
in which such loss occurs.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are computed using the straight-line method, based
upon the shorter of the estimated useful lives, ranging from three to five
years, or the lease term of the respective assets as follows:

Machinery and computer equipment.......... 3 years
Furniture and fixtures.................... 5 years
Licensed software......................... 3 years
Leasehold improvements.................... shorter of lease term or useful life of the asset

WARRANTY EXPENSE

The Company provides for the estimated cost which may be incurred under its
product warranties upon revenue recognition.

RESEARCH AND SOFTWARE DEVELOPMENT COSTS

Research and development costs are charged to operations as incurred.
Software development costs incurred prior to the establishment of technological
feasibility are included in research and development and are expensed as
incurred. The Company defines establishment of technological feasibility as the
completion of a working model. Software development costs incurred subsequent to
the establishment of technological feasibility through the period of general
market availability of the product are capitalized, if material. To date, all
software development costs have been expensed as incurred.

FOREIGN CURRENCY TRANSLATION

The U.S. dollar is the functional currency of the Company's foreign
subsidiary. Exchange gains and losses resulting from transactions denominated in
currencies other than the U.S. dollar are included in the results of operations
for the year. To date, such amounts have not been material. Total assets of the
Company's foreign subsidiary were $247,000, $320,000, $479,000, and $370,000
(unaudited) as of March 31, 1994, 1995 and

F-8
69

8X8, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1996 and December 31, 1996, respectively. The Company does not undertake any
foreign currency hedging activities.

INCOME TAXES

Income taxes are accounted for using the asset and liability approach.
Under the asset and liability approach, a current tax liability or asset is
recognized for the estimated taxes payable or refundable on tax returns for the
current year. A deferred tax liability or asset is recognized for the estimated
future tax effects attributed to temporary differences and carry forwards. The
deferred tax assets are reduced, if necessary, by the amount of benefits that,
based on available evidence, are not expected to be realized.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments and trade accounts receivable. The Company places its
cash, cash equivalents and short-term investments primarily in market rate
accounts, certificates of deposit, U.S. Treasury bonds and commercial paper. The
Company, by policy, limits the amount of credit exposure for cash and cash
equivalents to any one financial institution and to any one debt or equity
instrument. The Company sells its products to original equipment manufacturers
and distributors throughout the world. The Company performs ongoing credit
evaluations of its customers' financial condition and maintains an allowance for
uncollectible accounts receivable based upon the expected collectibility of all
accounts receivable. At March 31, 1996 three customers accounted for 26%, 18%
and 11% of accounts receivable. At December 31, 1996 one customer accounted for
27% (unaudited) of accounts receivable.

ACCOUNTING FOR STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation" which established a fair value based method of accounting for
Stock-Based Compensation plans and requires additional disclosure for those
companies who elect not to adopt the new method of accounting. FAS 123 is
applicable to the Company for fiscal 1997. The Company has elected to continue
to account for employee stock awards in accordance with Accounting Principles
Board's Opinion No. 25 and will make the disclosures required by FAS 123 in its
annual financial statements for fiscal 1997.

PRO FORMA NET LOSS PER SHARE (UNAUDITED)

Pro forma net loss per share is computed using the weighted average number
of common and common equivalent shares outstanding during the periods assuming
the conversion of all shares of the Company's Convertible Preferred Stock into
Common Stock which will occur upon the consummation of the offering contemplated
by this prospectus ("the Offering"). Pursuant to the requirements of the
Securities and Exchange Commission, common equivalent shares relating to
preferred stock (using the if-converted method) and stock options (using the
treasury stock method and assuming an initial public offering price of $9 per
share) issued subsequent to September 30, 1995 have been included in the
computations for all periods presented.

Historical net loss per share data has not been presented since such
amounts are not deemed to be meaningful due to the significant change in the
Company's capital structure which will occur in connection with the offering.

F-9
70

8X8, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)

If the Offering is consummated, all shares of convertible preferred stock
outstanding at the closing date will automatically convert into an aggregate of
3,726,373 shares of Common Stock.

The pro forma effect of the above mentioned transactions has been reflected
in the accompanying unaudited pro forma stockholders' equity as of December 31,
1996.

INTERIM RESULTS (UNAUDITED)

The accompanying consolidated balance sheet as of December 31, 1996, the
consolidated statements of operations and of cash flows for the nine months
ended December 31, 1995 and 1996 and the consolidated statement of stockholders'
equity for the nine months ended December 31, 1996 are unaudited. In the opinion
of management, these statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of only
normal recurring adjustments, necessary for the fair presentation of the results
for the interim periods. The data disclosed in these notes to consolidated
financial statements related to these periods are unaudited.

NOTE 2 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):

MARCH 31,
----------------- DECEMBER 31,
1995 1996 1996
------- ------- ------------
(UNAUDITED)

Accounts receivable:
Accounts receivable.................................. $ 3,049 $ 3,471 $ 1,151
Less: allowance for doubtful accounts............. (397) (520) (412)
------- ------- -------
$ 2,652 $ 2,951 $ 739
======= ======= =======
Inventories:
Raw materials........................................ $ 216 $ 262 $ 87
Work-in-process...................................... 578 6,231 367
Finished goods....................................... 688 777 112
------- ------- -------
$ 1,482 $ 7,270 $ 566
======= ======= =======
Property and equipment:
Machinery and computer equipment..................... $ 4,073 $ 4,005 $ 3,739
Furniture and fixtures............................... 703 729 674
Licensed software.................................... 1,521 1,782 2,152
Leasehold improvements............................... 499 532 554
------- ------- -------
6,796 7,048 7,119
Less: accumulated depreciation and amortization...... (4,967) (5,522) (5,691)
------- ------- -------
$ 1,829 $ 1,526 $ 1,428
======= ======= =======

NOTE 3 -- TRANSACTIONS WITH RELATED PARTIES:

During fiscal 1995, the Company issued 681,820 shares of Series C Preferred
Stock to a major semiconductor manufacturer for $11.00 per share (see Note 6).
This transaction resulted in the other company obtaining a seat on 8x8's Board
of Directors. In addition, the Company entered into three agreements with this
company. Two of these agreements involved the joint development and production
of specific products and the third was a supply agreement under which 8x8 had
reserved a specific level of production capacity at the other company's
fabrication facilities and was obligated to make certain minimum

F-10
71

8X8, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

purchases on a monthly basis. All three agreements were terminated by mutual
agreement between the parties in fiscal 1996. The Company recognized, during
fiscal 1995, contract revenue and related costs under these agreements of
$294,000 and $229,000, respectively. Also, the Company purchased $868,000 in
inventory from this stockholder during 1995. Accounts receivable from this
stockholder were $252,000 at March 31, 1995.

During the years ended March 31, 1995 and 1996 and the nine months ended
December 31, 1996 (unaudited), the Company's product revenues included $897,000,
$2,037,000 and $1,853,000, respectively, in sales to a company which is one of
the Company's stockholders. An executive of this company is also on the
Company's Board of Directors. Accounts receivable from this stockholder
aggregated $245,000, $628,000 and $417,000 at March 31, 1995 and 1996 and
December 31, 1996 (unaudited), respectively.

During the years ended March 31, 1994 and 1995, the Company sold $3,258,000
and $795,000, respectively, of product to one of its stockholders. The
stockholder is also the guarantor of the Company's facility lease (see Note 5).

During fiscal 1994, the Company paid $940,000 to two related entities 100%
owned by a founder and officer of the Company for various marketing, sales and
distribution and research and development activities undertaken on behalf of the
Company. Besides providing certain marketing and research and development
services to 8x8, these entities did not have any other operations or activities.
At March 31, 1994, the Company purchased all assets and assumed all liabilities
of these companies at a nominal purchase price of $1. The assets acquired and
liabilities assumed were not material to the Company.

During fiscal 1996, the Company licensed certain technologies to a
privately held entity founded by one of 8x8's former officers, in exchange for
$600,000 in cash and 10% ownership of this entity. This entity was subsequently
acquired by another entity and the Company received $727,000 for its 10%
interest. The gain on sale of the stock has been included in other income, net
during fiscal 1996.

During fiscal 1996, the Company licensed certain technologies to a
privately held semiconductor company founded by another of 8x8's former
officers, in exchange for $1,000,000 in cash and 10% ownership in that company.

During fiscal 1996, the Company acquired for cash approximately 14% of the
outstanding voting stock of a privately held company. The Company is accounting
for this investment on the cost method.

In April 1996, the Company and certain of its employees formed VidUs, Inc.
("VidUs"). The Company paid $158,000 for a 75% ownership in VidUs and the
employees paid $52,000 for a 25% ownership. VidUs is engaged in the design of
integrated camera and video compression solutions. VidUs has been consolidated
in the Company's financial statements since inception.

F-11
72

8X8, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- INCOME TAXES:

Income (loss) before income taxes includes $50,000, $62,000, $51,000, and
$61,000 (unaudited) of income of a foreign subsidiary for the fiscal years ended
March 31, 1994, 1995 and 1996 and the nine months ended December 31, 1996,
respectively. The components of the consolidated provision (benefit) for income
taxes consisted of the following (in thousands):

YEARS ENDED MARCH 31, NINE MONTHS
------------------------------- ENDED
1994 1995 1996 DECEMBER 31,
------- ------- ------- 1996
------------
(UNAUDITED)

Current:
Federal................................ $ 170 $(1,962) $ -- $ --
State.................................. 14 -- -- --
Foreign................................ 19 22 20 146
---- ------- --- ----
203 (1,940) 20 146
---- ------- --- ----
Deferred:
Federal................................ (49) 1,905 -- --
State.................................. 626 -- -- --
---- ------- --- ----
577 1,905 -- --
---- ------- --- ----
$ 780 $ (35) $ 20 $ 146
==== ======= === ====

Deferred tax assets are comprised of the following (in thousands):

MARCH 31,
------------------- DECEMBER 31,
1995 1996 1996
------- ------- ------------
(UNAUDITED)

Deferred revenue................................... $ 324 $ 85 $ 216
Inventory reserves................................. 1,291 1,543 1,036
Section 263A adjustments........................... 61 292 326
Provision for doubtful accounts.................... 168 220 163
Warranty reserve................................... 223 449 483
Research and development........................... 957 1,200 1,270
NOL carry forwards................................. -- 594 2,886
Other.............................................. 331 386 944
------- ------- -------
3,355 4,769 7,324
Valuation allowance................................ (3,355) (4,769) (7,324)
------- ------- -------
Total.................................... $ -- $ -- $ --
======= ======= =======

Based on factors which include the lack of significant history of recent
profits, the fact that the market in which the Company competes is intensely
competitive and characterized by rapidly changing technology, and the lack of
carryback capacity to realize these assets, the weight of available evidence
indicates that it is more likely than not that it will not be able to realize
its deferred tax assets and thus a full valuation allowance has been recorded at
December 31, 1996.

At March 31, 1996 and December 31, 1996 (unaudited), the Company had
approximately $1,400,000 and $7,500,000, respectively, of federal net operating
loss carryforwards for tax reporting purposes available to offset future taxable
income; such carryforwards expire at various dates beginning 2011. In addition,
at March 31, 1996 and December 31, 1996 (unaudited), the Company had research
and development credit carryforwards for federal and state tax reporting
purposes of approximately $446,000 and $824,000, respec-

F-12
73

8X8, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

tively, which begin expiring in 2010. Under the Tax Reform Act of 1986, the
amounts of and benefits from net operating losses and credits that can be
carried forward may be impaired or limited in certain circumstances. Events
which may cause limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50% over a three year period. As of
December 31, 1996, the net operating loss carry forwards of the Company were not
subject to any material annual limitations.

A reconciliation of the tax provision (benefit) to the amounts computed
using the statutory U.S. federal income tax rate of 34% is as follows (in
thousands):

YEARS ENDED MARCH 31, NINE MONTHS
--------------------------- ENDED
1994 1995 1996 DECEMBER 31,
------- ------- ------- 1996
------------
(UNAUDITED)

Provision (benefit) at statutory rate.......... $ 147 $(2,012) $(1,087) $ (3,612)
State income taxes before valuation allowance,
net of federal benefit....................... 24 (328) (177) (156)
Research and development credits............... (591) (366) (243) (70)
Valuation allowance............................ 1,048 2,307 1,414 2,555
Non-deductible compensation.................... -- -- -- 1,354
Other.......................................... 152 364 113 75
------ ------- ------- -------
Provision (benefit) for income taxes........... $ 780 $ (35) $ 20 $ 146
====== ======= ======= =======

The Internal Revenue Service (the "IRS") is currently conducting an
examination of the Company's federal income tax return for the fiscal year ended
March 31, 1992. In August 1995, the IRS asserted a deficiency against the
Company for the taxable year 1992 in the amount of approximately $1,365,000,
together with a penalty in the amount of approximately $273,000 plus accrued
interest. The IRS alleged that as of March 31, 1992, the Company had accumulated
earnings beyond the reasonable needs of the Company's business. The Company has
not made any payments under this assessment. On October 30, 1995, in accordance
with IRS procedures, the Company formally protested this assessment. The Company
has not received an official response from the IRS to this protest. The outcome
of this matter cannot be predicted. In the event that the IRS prevails, the
Company will have to make cash payments for the amount of the deficiency,
penalty and accrued interest. However, any adverse outcome of this assessment is
not likely to impact the Company's tax position on this matter for any other
fiscal year. Additionally, the IRS has requested information related to the
Company's federal tax returns for fiscal year 1995. The IRS has disclosed to the
Company that the purpose of this request was to gain information regarding the
economic circumstances underlying the Company's loss for the year ended March
31, 1995.

NOTE 5 -- LEASES AND OTHER COMMITMENTS:

LEASES

The Company leases its facility under a non-cancelable operating lease
agreement. This agreement provides for annual increments of rent in
predetermined amounts, requires the Company to pay property taxes, insurance and
normal maintenance costs and expires in December 1997 with an option to extend
the lease for an additional five-year period. The lease has been partially
guaranteed by a corporate stockholder of the Company.

For accounting purposes, the rent expense for the facility lease is based
on straight-line amortization of the total minimum payments required over the
lease term. Rent expense so recognized before its payment due date amounted to
$265,000, $192,000 and $120,000 (unaudited) at March 31, 1995 and 1996 and
December 31, 1996, respectively, and is included in "Other accrued liabilities."

F-13
74

8X8, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Future minimum lease payments under this non-cancelable operating lease
(inclusive of the aforementioned deferred rent) as of March 31, 1996 are as
follows (in thousands):

YEAR ENDING MARCH 31, MARCH 31
--------------------------------- --------

1997....................................................................... $ 753
1998....................................................................... 546
------
Total minimum payments..................................................... $1,299
======

Rent expense for all operating leases for the years ended March 31, 1994,
1995 and 1996 and the nine months ended December 31, 1996 was $574,000,
$776,000, $767,000 and $536,000 (unaudited), respectively.

OTHER COMMITMENTS

As of March 31, 1996, the Company had an outstanding letter of credit in
the amount of $435,000 which expired on August 15, 1996 and was secured by
certain of the Company's short-term investments.

NOTE 6 -- STOCKHOLDERS' EQUITY:

PREFERRED STOCK

As of December 31, 1996, the Company had issued 3,726,373 shares of
non-cumulative, convertible preferred stock, of which 1,260,000 shares,
1,100,000 shares, 681,820 and 684,553 shares have been designated as Series A,
B, C and D, respectively. The Series A, B, C and D preferred stock were sold for
$0.50, $2.00, $11.00 and $5.50 per share, respectively, representing fair market
value of the stock at the date of issuance, as determined by the Board of
Directors. The shares of Series D preferred stock were issued in September and
October 1996.

Each share of preferred stock is convertible into one share of common
stock, subject to adjustment for dilution, and will be automatically converted
into common stock in the event of the closing of an underwritten public offering
of at least $5,000,000. The preferred stock has voting rights equal to common
stock on an as-if converted basis.

Holders of the Series A, B, C and D preferred stock are entitled to receive
noncumulative dividends at a rate of $0.05, $0.20, $1.10 and $0.55 per share per
annum, respectively, when and as declared by the Board of Directors, prior to
payment of dividends on common stock.

In the event of liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, holders of the Series A, B, C and D preferred
stock shall be entitled to receive $0.50, $2.00, $11.00 and $5.50 per share,
respectively, plus any declared but unpaid dividends, prior to any distribution
to the holders of common stock. To date, no dividends have been declared.

The Company has reserved 3,726,373 shares of its common stock for issuance
upon conversion of the outstanding preferred stock.

DELAWARE REINCORPORATION

On December 3, 1996, the Company was reincorporated in Delaware and
exchanged each share of each series of stock of the predecessor company into 1
share of each corresponding series of stock of the Delaware successor. These
financial statements have been prepared giving effect to the reincorporation for
all periods presented.

On October 21, 1996 the Company's Board of Directors approved that
effective upon the closing of the initial public offering, the Company will be
authorized to issue five million shares of undesignated Preferred

F-14
75

8X8, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Stock and the Board of Directors will have the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof.

1987 INCENTIVE STOCK PLAN

In 1987, the Company adopted an Incentive Stock Plan ("the 1987 Plan")
which was subsequently terminated by the Board of Directors in January 1992. The
Company had reserved 2,962,000 shares of its common stock for issuance under the
1987 Plan. The 1987 Plan provided for grants of stock purchase rights at prices
equal to the fair market value of stock as determined by the Company's Board of
Directors. Stock purchase rights granted under the plan generally vested over
five years. During the years ended March 31, 1994, 1995 and 1996, unvested
shares aggregating 40,985, 6,665 and 15,089, respectively, were repurchased at
prices ranging from $0.10 to $0.40 per share. In January 1992, on termination,
all unissued shares under the 1987 Plan were canceled. At December 31, 1996, all
shares of common stock purchased under the 1987 Plan were fully vested.

1992 STOCK OPTION PLAN

In January 1992, the Board of Directors adopted the 1992 Stock Option Plan
("the 1992 Plan") and reserved 1,000,000 shares of the Company's common stock
for issuance under this plan. In August 1994, the Board of Directors authorized
an increase in the number of shares of the common stock reserved for issuance
under the 1992 Plan to 2,000,000 shares. The 1992 Plan provides for granting
incentive and non-statutory stock options to employees at prices equal to the
fair market value of stock at the grant dates as determined by the Company's
Board of Directors. Options generally vest over periods ranging from two to four
years. Vesting for certain options accelerates, if certain predefined milestones
are met. The following is a summary of the activity under the 1992 Stock Option
Plan during the fiscal years ended March 31, 1994, 1995 and 1996 and the nine
months ended December 31, 1996:

OPTIONS SHARES SUBJECT EXERCISE
AVAILABLE TO OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
---------- -------------- ------------

Balance at March 31, 1993....................... 381,167 616,550 $1.00-$2.50
Granted......................................... (226,800) 226,800 $2.50
Exercised....................................... -- (4,983) $1.00-$2.50
Returned to plan................................ 51,017 (51,017) $1.00-$2.50
----------- ----------- -----------
Balance at March 31, 1994....................... 205,384 787,350 $1.00-$2.50
Increase in options available for grant......... 1,000,000 --
Granted......................................... (423,367) 423,367 $2.50
Exercised....................................... -- (14,199) $2.50
Returned to plan................................ 98,168 (98,168) $1.00-$2.50
----------- ----------- -----------
Balance at March 31, 1995....................... 880,185 1,098,350 $1.00-$2.50
Granted......................................... (1,422,550) 1,422,550 $2.50
Exercised....................................... -- (203,264) $1.00-$2.50
Returned to plan................................ 861,879 (861,879) $1.00-$2.50
----------- ----------- -----------
Balance at March 31, 1996....................... 319,514 1,455,757 $1.00-$2.50
Granted (unaudited)............................. (1,961,312) 1,961,312 $0.50-$6.80
Exercised (unaudited)........................... -- (18,249) $0.50-$2.50
Returned to plan (unaudited).................... 1,772,870 (1,772,870) $0.50-$6.80
----------- ----------- -----------
Balance at December 31, 1996 (unaudited)........ 131,072 1,625,950 $0.50-$6.80
=========== =========== ===========
Options exercisable at March 31, 1996........... -- 310,995 $1.00-$2.50
Options exercisable at December 31, 1996 ----------- -----------
(unaudited)................................... -- 322,734 $0.50

F-15
76

8X8, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

KEY PERSONNEL OPTION PLAN

In July 1995, the Board of Directors adopted the Key Personnel Option Plan
("the Key Personnel Plan") and reserved 2,000,000 shares of the Company's common
stock for issuance under this plan. The 1995 Key Personnel Plan provides for
granting incentive and non-statutory stock options to officers of the Company at
prices equal to fair market value of stock at the grant dates as determined by
the Company's Board of Directors. Options generally vest over periods ranging
from two to four years. Vesting for certain options accelerates if certain
predefined milestones are met. The following is a summary of the activity under
the Key Personnel Stock Option Plan since inception:

OPTIONS SHARES SUBJECT EXERCISE
AVAILABLE TO OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
---------- -------------- ------------

Adoption of plan................................ 2,000,000 -- $2.50
Granted......................................... (1,551,000) 1,551,000 $2.50
Exercised....................................... -- (43,125) $2.50
Returned to plan................................ 402,875 (402,875) $2.50
---------- ---------- -----------
Balance at March 31, 1996....................... 851,875 1,105,000 $2.50
Increase in options available for grant......... 200,000 -- $0.50
Granted (unaudited)............................. (2,206,800) 2,206,800 $0.50-$2.50
Exercised (unaudited)........................... -- (2,156,800) $0.50
Cancellation of options available for grant
(unaudited)................................... (75) -- --
Returned to plan (unaudited).................... 1,155,000 (1,155,000) $2.50
---------- ---------- -----------
Balance at December 31, 1996 (unaudited)........ -- -- --
========== ========== ===========

During the nine months ended December 31, 1996, options to purchase
2,156,800 shares were exercised for partial recourse notes. At December 31,
1996, approximately 1,390,241 (unaudited) shares issued under this plan were not
vested and are subject to repurchase if the employee departs.

In June 1996, in connection with restructuring of the Company's operations,
the Board of Directors approved a proposal under which employees could elect to
cancel their options in exchange for grants of new options with exercise price
of $0.50. Options for the purchase of approximately 2,467,000, shares of the
1992 Plan and the Key Personnel Plan were canceled in exchange for newly issued
options to purchase an equal number of shares.

In connection with the Offering, the Company has recorded a deferred
compensation charge of $7.5 million with respect to options repriced and certain
additional options granted in fiscal 1997. The Company has recognized
compensation expense of $2.5 million in the quarter ended June 30, 1996;
$809,000 in the quarter ended September 30, 1996; and $707,000 in the quarter
ended December 31, 1996. The financial statements for the quarters ended June
30, 1996 and September 30, 1996 have been restated to reflect the compensation
expense. The Company will recognize the remainder of the deferred compensation
over the related vesting period of the options (which is generally 48 months).

1996 STOCK PLAN

In June 1996, the Board of Directors adopted the 1996 Stock Plan (the 1996
Plan) and reserved 1,000,000 shares of the Company's common stock for issuance.
This amount is to be increased annually on the first day of each of the
Company's fiscal years commencing November 1, 1997 in an amount equal to 5% of
the Company's common stock issued and outstanding at the end of the immediately
preceding fiscal year subject to certain maximum limitations. The 1996 Plan
provides for granting incentive and nonstatutory stock options to employees at
prices equal to the fair market value of the stock at the grant dates as
determined by

F-16
77

8X8, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the Company's Board of Directors. Options generally vest over a period of not
more than five years. The following is a summary of the activity of the 1996
Plan during the nine months ended December 31, 1996 (unaudited):

OPTIONS SHARES SUBJECT EXERCISE
AVAILABLE TO OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
--------- ---------------- --------------

Adoption of plan........................... 1,000,000 -- --
Granted.................................... (177,150) 177,150 $0.50 - $6.80
Exercised.................................. -- (635) $0.50
Returned to plan........................... 19,365 (19,365) $0.50 - $6.80
--------- ------- -------------
Balance at December 31, 1996............... 842,215 157,150 $0.50 - $6.80
========= ======= =============
Options exercisable at December 31, 1996... -- 16,160 $0.50

1996 DIRECTOR OPTION PLAN

The Company's 1996 Director Option Plan ("the Director Plan") was adopted
in June 1996 and will become effective upon the closing of an initial public
offering. A total of 150,000 shares of common stock have been reserved for
issuance under the Director Plan. The Director Plan provides for the grant of
nonstatutory stock options to certain nonemployee directors of the Company ("the
Outside Directors"). The Director Plan provides that each Outside Director shall
be granted a nonstatutory stock option to purchase 16,000 shares of common stock
on the date upon which such person first becomes an Outside Director or, if
later, on the effective date of the Director Plan. Thereafter, each Outside
Director shall be automatically granted an option to purchase 4,000 shares of
common stock on the date such Outside Director is reelected to the Board of
Directors, if on such date, such Outside Director shall have served on the
Company's Board of Directors for at least six months. The Director Plan provides
that each option shall become exercisable in monthly installments over a period
of one year from the date of grant. The exercise price per share of all options
granted under the Director Plan shall be equal to the fair market value of a
share of the Company's common stock on the date of grant. Options granted to
Outside Directors under the Director Plan have a ten year term, or shorter upon
termination of an Outside Director's status as a director. If not terminated
earlier, the Director Plan will have a term of ten years.

1996 EMPLOYEE STOCK PURCHASE PLAN

The Company's 1996 Stock Purchase Plan ("the Purchase Plan") was adopted in
June 1996 and will become effective upon the closing of an initial public
offering. Under the Purchase Plan a total of 500,000 shares of common stock have
been reserved for issuance to participating employees who meet eligibility
requirements.

The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 10% of an employee's base
compensation, including commissions, bonuses and overtime, at a price equal to
85% of the fair market value of the common stock at the beginning of each
offering period or the end of a six month purchase period, whichever is lower.
In the event of a merger of the Company with or into another corporation or the
sale of all or substantially all of the assets of the Company, the Purchase Plan
provides that a new exercise date shall be set for each option under the plan
which exercise date shall occur before the date of the merger or asset sale.

NOTE 7 -- EMPLOYEE BENEFITS PLANS:

401(K) SAVINGS PLAN

In April 1991, the Company adopted a 401(k) savings plan (the "Savings
Plan") covering substantially all of its U.S. employees. Under the Savings Plan,
eligible employees may contribute up to the maximum

F-17
78

8X8, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

allowed by the IRS from their compensation to the Savings Plan with the Company
matching participants' contributions up to $300 per employee per year at a
dollar for dollar rate of the employee contribution. The Company matching vests
over 3 years. To date, the Company's contributions have not been material.

PROFIT SHARING PLAN

In July 1995, the Company's Board of Directors approved a profit sharing
plan which provides for additional compensation to all employees of the Company
based on quarterly income before income taxes. The profit sharing plan is
effective beginning in fiscal 1996 and provides for payments of up to 15% of
total quarterly income before income taxes. Additionally the plan provides for
payment of certain discretionary bonuses based on criterion established by
management. Charges related to this plan were not material for the fiscal year
ended March 31, 1996 or the nine months ended December 31, 1996.

NOTE 8 -- GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION:

The Company's export sales to Europe represented 21%, 26%, 17% and 23%
(unaudited) of total revenues in fiscal years 1994, 1995, 1996 and the nine
months ended December 31, 1996, respectively. The Company's export sales to the
Asia Pacific region represented less than 10% of total revenues in 1994, 14% of
total revenues in 1995, 32% of total revenues in 1996, and 34% (unaudited) of
total revenues in the nine months ended December 31, 1996.

Product sales to three different customers accounted for approximately 23%,
13% and 13% (unaudited), of the Company's total revenues for the years ended
March 31, 1994 and 1995 and the nine months ended December 31, 1996,
respectively. During the year ended March 31, 1996, product sales to no customer
accounted for 10% or more of the Company's total revenues. License revenues from
one customer accounted for approximately 24% of the Company's total revenues for
the year ended March 31, 1996.

NOTE 9 -- RESTRUCTURING COSTS AND INVENTORY CHARGES:

During fiscal 1996, the Company recorded restructuring charges resulting
from the Company's decision to reduce the scope of its research and development
activities by eliminating certain product development efforts. The restructuring
costs related primarily to a write off of equipment associated with the
terminated development efforts.

During fiscal 1997, the Company recorded an additional charge for
restructuring its operations by reducing its workforce by approximately 25%. As
of December 31, 1996, the Company's restructuring actions were fully completed
and there were no outstanding restructuring cost accruals.

During the quarter ended June 30, 1996, the Company recorded a charge of
$4.0 million related to its MPEG inventories. In September 1996, the Company
sold its remaining MPEG inventory.

F-18
79

APPENDIX -- DESCRIPTION OF GRAPHICS

OUTSIDE FRONT COVER

Graphic: 8x8, Inc. logo.

INSIDE FRONT COVER

The graphic heading reads "Silicon, software and systems for video
conferencing." Underneath this heading, and to the left, there is a picture of a
prototype of the Company's VideoCommunicator product, the VC100. To the right of
this picture is the following text: "8x8 is developing a family of
VideoCommunicator products. The initial VideoCommunicator, the VC100, is
compliant with the H.324 standard for POTS video telephony and connects to a
television and touch-tone phone to add video to an otherwise normal telephone
call." Underneath the heading, and to the right, there is a picture of the
Company's VCP and LVP semiconductor products. To the left of this picture is the
following text: "8x8's video compression semiconductors combine, on a single
chip, a RISC microprocessor, a digital signal processor, specialized video
processing circuitry, static RAM memory and proprietary software to perform the
real time compression and decompression of video and audio information and
establish and maintain network connections in a manner consistent with
international standards for video telephony." Underneath this picture on the
left are pictures demonstrating the use of the Company's planned
VideoCommunicator product.

Underneath these four pictures is the following text: "8x8, Inc. designs,
develops and markets highly integrated, proprietary video compression
semiconductors and associated software to manufacturers of corporate video
conferencing systems. To address new opportunities, the Company intends to
leverage its strengths in semiconductor design and related software by
introducing video conferencing systems for the consumer market."

INSIDE BACK COVER

Top Graphic: A picture of the Company's VC100 ViaTV Product.

Bottom Graphic: A picture of a prototype of the Company's VC200 Product
(desktop phone with LCD display).

OUTSIDE BACK COVER

Graphic: 8x8, Inc. logo.
80

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

No dealer, sales representative or any other person has been authorized to give
any information or to make any representations in connection with this Offering
other than those contained in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any of the Underwriters. This Prospectus does not constitute
an offer to sell or a solicitation of any offer to buy any securities other than
the shares of Common Stock to which it relates or an offer to, or a solicitation
of, any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company or that information contained herein is
correct as of any time subsequent to the date hereof.

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

TABLE OF CONTENTS
----------------------------

Page
----

Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 27
Management............................ 40
Certain Transactions.................. 49
Principal Stockholders................ 51
Description of Capital Stock.......... 53
Shares Eligible for Future Sale....... 55
Underwriting.......................... 57
Legal Matters......................... 58
Experts............................... 58
Additional Information................ 58
Index to Consolidated Financial
Statements.......................... F-1

Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.

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

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

2,500,000 SHARES

LOGO

COMMON STOCK

----------------------------
PROSPECTUS
----------------------------
MONTGOMERY SECURITIES

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

, 1997

------------------------------------------------------
------------------------------------------------------
81

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
the Common Stock being registered hereby. All amounts are estimates except the
SEC registration fee and the NASD filing fee.

AMOUNT TO BE
PAID BY
REGISTRANT
------------

SEC Registration Fee................................................... $ 8,712
NASD Filing Fee........................................................ 3,375
Nasdaq National Market Application Fee................................. 50,000
Printing............................................................... 175,000
Legal Fees and Expenses................................................ 275,000
Accounting Fees and Expenses........................................... 250,000
Blue Sky Fees and Expenses............................................. 10,000
Director and Officer Liability Insurance............................... 350,000
Custodial Fees......................................................... 2,500
Transfer Agent and Registrar Fees...................................... 5,000
Miscellaneous.......................................................... 170,413
--------
Total........................................................ $1,300,000
========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article Ten of the Registrant's Certificate
of Incorporation (Exhibit 3.1 hereto) and Article VI of the Registrant's Bylaws
(Exhibit 3.3 hereto) provide for indemnification of the Registrant's directors,
officers, employees and other agents to the maximum extent permitted by Delaware
Law. In addition, the Registrant has entered into Indemnification Agreements
(Exhibit 10.1 hereto) with its officers and directors. The Underwriting
Agreement (Exhibit 1.1) also provides for crossindemnification among the Company
and the Underwriters with respect to certain matters, including matters arising
under the Securities Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since December 31, 1993, the Registrant has issued and sold the following
unregistered securities:

1. Between March 3, 1994 and June 26, 1996, the Registrant sold an
aggregate of 214,921 shares of Common Stock at a price of $2.50 per share for an
aggregate purchase price of $537,302.50 to the following stockholders pursuant
to the exercise of an option granted under the Registrant's 1992 Stock Option
Plan: 183 shares to Maria Balicka; 150 shares to Yu-Chuan Liu; 83 shares to
Aaron Emigh; 600 shares to Amit Gulati; 8,000 shares to David Laws; 125 shares
to Kathleen Hassett; 441 shares to Norman Duong; 600 shares to Leslie Jan; 4,200
shares to Faisal Khan; 200 shares to Laura Stansfield; 1,900 shares to Xiaolin
(Richard) Tang; 177 shares to Henry Hao-jan Tung; 538 shares to Deborah Rudd;
867 shares to Chiao-er Allisa Lee; 1,642 shares to Dong Ha Lim; 1,300 shares to
Clyde Wright; 980 shares to Wen-Huei Adam Wang; 90,000 shares to Chi-Shin Wang;
1,042 shares to Duat Hoang Tran; 50 shares to Manu Gulati; 20,000 shares to Mark
Birman; 4,000 shares to Brett Coon; 68,333 shares to Richard Johnson; 850 shares
to Hay-Pang Stephen Leung; 600 shares to Ekman Tsang; 418 shares to Joanna Liu;
1,000 shares to Dawn Wang; 2,925 shares to

II-1
82

Arijanto Soemedi; 2,042 shares to Sehat Sutardja; 100 shares to Peter Kong; and
1,575 shares to Robin Chirico.

2. Between February 24, 1994 and November 21, 1995, the Registrant sold an
aggregate of 12,100 shares of Common Stock at a price of $1.00 per share for an
aggregate purchase price of $12,100 to the following stockholders pursuant to
the exercise of an option granted under the Registrant's 1992 Stock Option Plan:
2,500 shares to Sydney Lee; 5,200 shares to Sergio Golombek; and 4,400 shares to
Ramah Sutardja.

3. In November 1995, the Registrant sold 43,125 shares of Common Stock at a
price of $2.50 per share for an aggregate purchase price of $107,812.50 to
Chi-Shin Wang pursuant to the exercise of an option granted under the
Registrant's Key Personnel Plan.

4. In May 1994, the Registrant sold 681,820 shares of Series C Preferred
Stock to National Semiconductor Corporation at a purchase price of $7,500,020.

5. In July 1996, the Registrant sold an aggregate of 2,156,800 shares to
the following officers and directors at an aggregate purchase price of
$1,078,400: 122,400 shares to Sandra L. Abbott; 122,400 shares to David Harper;
160,400 shares to Bryan Martin; 176,400 shares to Chris McNiffe; 125,400 shares
to Michael Noonen; 1,000,000 shares to Joe Parkinson; 292,400 shares to Y.W.
Sing; and 157,400 shares to Samuel Wang.

6. Between August 24, 1996 and December 12, 1996, the Registrant sold an
aggregate of 635 shares of Common Stock at a price of $0.50 per share for an
aggregate purchase price of $317.50 to the following stockholders pursuant to
the exercise of an option granted under the Registrant's 1996 Stock Option Plan:
205 shares to Scott Shengwei Zhang; 42 shares to Richard Williams; 250 shares to
Susan Velasquez; and 138 shares to Bernadette Romero.

7. Between August 24, 1996 and December 17, 1996, the Registrant sold an
aggregate of 16,574 shares of Common Stock at a price of $0.50 per share for an
aggregate purchase price of $8,287 to the following stockholders pursuant to the
exercise of an option granted under the Registrant's 1992 Stock Option Plan:
3,271 shares to Scott Shengwei Zhang; 958 shares to Richard Williams; 2,000
shares to Rong-Xiang Ni; and 3,603 shares to Carl Fong; 750 shares to Shannon
Rhoades; 542 shares to Susan Velasquez; 2,375 shares to Art Rawers; 275 shares
to Bernadette Romero; and 2,800 shares to Chun-Chau Lin.

8. In September 1996, the Registrant sold an aggregate of 413,640 shares of
Series D Preferred Stock to the following investors at an aggregate purchase
price of $2,275,020: 363,640 shares to Sanyo Semiconductor Corporation; and
50,000 shares to Guy Hecker.

9. In September 1996, the Registrant issued 20,000 shares of Common Stock
to Daniel Helman at a value of $0.50 per share for an aggregate value of
$10,000. The Registrant issued to Mr. Helman such shares in connection with
services provided to the Registrant.

10. In October 1996, the Registrant sold an aggregate of 270,913 shares of
Series D Preferred Stock to the following investors at an aggregate purchase
price of $1,490,021.50: 84,545 shares to Montgomery Associates 1992, L.P.;
10,364 shares to G. Farman-Farmaian; 100,000 shares to Bexley Enterprises;
26,000 shares to Alidad Farman Farma; 4,550 shares to Jeffrey D. Saper; and
45,454 shares to John Price.

There was no underwriter involved in connection with any transaction set
forth above. The issuances of the securities set forth in paragraph 1, 2, 3, 5,
6 and 7 of this Item 15 were deemed to be exempt from registration under the
Securities Act in reliance upon Rule 701 promulgated thereunder. The other
issuances set forth in this Item 15 were deemed to be exempt from registration
pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder as a transaction by an issuer not involving a public offering.

In all of such transactions, the recipients of securities represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends
were affixed to the securities issued.

II-2
83

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS.

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ---------------------------------------------------------------------

1.1+ Form of Underwriting Agreement.
3.1+ Certificate of Incorporation of Registrant.
3.2+ Form of Amended and Restated Certificate of Incorporation of
Registrant.
3.3+ Bylaws of Registrant.
5.1+ Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1+ Form of Indemnification Agreement.
10.2+ 1992 Stock Option Plan, as amended, and form of Stock Option
Agreement.
10.3+ Key Personnel Plan, as amended, and form of Stock Option Agreement.
10.4+ 1996 Stock Plan, as amended, and form of Stock Option Agreement.
10.5+ 1996 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement.
10.6+ 1996 Director Option Plan, as amended, and form of Director Option
Agreement.
10.7+ Amended and Restated Registration Rights Agreement dated as of
September 6, 1996 among the Registrant and certain holders of the
Registrant's Common Stock.
10.8+ Facility lease dated as of July 3, 1990 by and between Sobrato
Interests, a California Limited Partnership, and the Registrant, as
amended.
10.9*+ License Agreement dated as of May 7, 1996 by and between Kyushu
Matsushita Electric Industrial Co., Ltd. and the Registrant.
10.10+ Promissory Note between Joe Parkinson and Registrant dated June 29,
1996.
10.11+ Promissory Note between Y.W. Sing and Registrant dated June 29, 1996.
10.12+ Promissory Note between Sandra L. Abbott and Registrant dated June
29, 1996.
10.13+ Promissory Note between David M. Harper and Registrant dated June 29,
1996.
10.14+ Promissory Note between Bryan R. Martin and Registrant dated June 29,
1996.
10.15+ Promissory Note between Chris McNiffe and Registrant dated June 29,
1996.
10.16+ Promissory Note between Mike Noonen and Registrant dated June 29,
1996.
10.17+ Promissory Note between Samuel T. Wang and Registrant dated June 29,
1996.
11.1+ Computation Regarding Earnings Per Share.
21.1+ Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
23.2+ Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney (see page II-5 of initial filing).
27.1+ Financial Data Schedule.

- ---------------
* Confidential treatment requested as to certain portions of this exhibit.

+ Previously filed.

(B) FINANCIAL STATEMENT SCHEDULES

Schedule II Valuation and Qualifying Accounts.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this

II-3
84

Registration Statement or otherwise, the Registrant has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of this prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing, as specified in the Underwriting Agreement, certificates in such
denomination and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

II-4
85

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 5 to the Registrant's Registration Statement
on its behalf by the undersigned, thereunto duly authorized, in the City of
Santa Clara, State of California, on February 3, 1997.

8X8, INC.

By: /s/ JOE PARKINSON

------------------------------------
Joe Parkinson,
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1933, this
Amendment No. 5 to the Registrant's Registration Statement has been signed by
the following persons in the capacities and on the dates indicated:

SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------- ------------------

*/s/ JOE PARKINSON Chairman of the Board and Chief February 3, 1997
- ------------------------------------- Executive Officer (Principal
Joe Parkinson Executive Officer)

*/s/ Y.W. SING Vice Chairman of the Board February 3, 1997
- -------------------------------------
Y.W. Sing
*/s/ SANDRA L. ABBOTT Chief Financial Officer and Vice February 3, 1997
- ------------------------------------- President, Finance (Principal
Sandra L. Abbott Financial and Accounting Officer)

*/s/ SAMUEL WANG Vice President, Process Technology February 3, 1997
- ------------------------------------- and Director
Samuel Wang

*/s/ BERND GIROD Director February 3, 1997
- -------------------------------------
Bernd Girod

*/s/ RICHARD CHANG Director February 3, 1997
- -------------------------------------
Richard Chang

*/s/ SADA CHIDAMBARAM Director February 3, 1997
- -------------------------------------
Sada Chidambaram

*/s/ AKIFUMI GOTO Director February 3, 1997
- -------------------------------------
Akifumi Goto

*/s/ THOMAS HUMPHREY Director February 3, 1997
- -------------------------------------
Thomas Humphrey

*/s/ WILLIAM TAI Director February 3, 1997
- -------------------------------------
William Tai

*By: /s/ JOE PARKINSON
--------------------------------
Joe Parkinson (Attorney-in-Fact)

II-5
86

8 X 8 INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

ADDITIONS WRITE-OFFS/
BALANCE AT CHARGED TO RECOVERIES OF BALANCE AT
BEGINNING COSTS AND UNCOLLECTIBLE END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS PERIOD
- ---------------------------------------------- ---------- ---------- ------------- ----------

Allowance for doubtful accounts:
March 31, 1994................................ $681 $137 $ 142 $676
March 31, 1995................................ $676 -- $ 279 $397
March 31, 1996................................ $397 $234 $ 111 $520

S-1
87

EXHIBIT INDEX

EXHIBIT NO. EXHIBIT
- ----------- ------------------------------------------------------------------

1.1+ Form of Underwriting Agreement.
3.1+ Certificate of Incorporation of Registrant.
3.2+ Form of Amended and Restated Certificate of Incorporation of
Registrant.
3.3+ Bylaws of Registrant.
5.1+ Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1+ Form of Indemnification Agreement.
10.2+ 1992 Stock Option Plan, as amended, and form of Stock Option
Agreement.
10.3+ Key Personnel Plan, as amended, and form of Stock Option
Agreement.
10.4+ 1996 Stock Plan, as amended, and form of Stock Option Agreement.
10.5+ 1996 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement.
10.6+ 1996 Director Option Plan, as amended, and form of Director Option
Agreement.
10.7+ Amended and Restated Registration Rights Agreement dated as of
September 6, 1996 among the Registrant and certain holders of the
Registrant's Common Stock.
10.8+ Facility lease dated as of July 3, 1990 by and between Sobrato
Interests, a California Limited Partnership, and the Registrant,
as amended.
10.9*+ License Agreement dated as of May 7, 1996 by and between Kyushu
Matsushita Electric Industrial Co., Ltd. and the Registrant.
10.10+ Promissory Note between Joe Parkinson and Registrant dated June
29, 1996.
10.11+ Promissory Note between Y.W. Sing and Registrant dated June 29,
1996.
10.12+ Promissory Note between Sandra L. Abbott and Registrant dated June
29, 1996.
10.13+ Promissory Note between David M. Harper and Registrant dated June
29, 1996.
10.14+ Promissory Note between Bryan R. Martin and Registrant dated June
29, 1996.
10.15+ Promissory Note between Chris McNiffe and Registrant dated June
29, 1996.
10.16+ Promissory Note between Mike Noonen and Registrant dated June 29,
1996.
10.17+ Promissory Note between Samuel T. Wang and Registrant dated June
29, 1996.
11.1+ Computation Regarding Earnings Per Share.
21.1+ Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
23.2+ Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney (see page II-5 of initial filing).
27.1+ Financial Data Schedule.

- ---------------
* Confidential treatment requested as to certain portions of this exhibit.

+ Previously filed.

   1
                                                                    EXHIBIT 11.1

                                    8x8, Inc.

            STATEMENTS OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
                   (in thousands, except per share data)



                                                                                            
                                                                                  Nine Months Ended 
                                                                                    December 31,
                                                                                --------------------
                                                                                       
                                                              Year Ended
                                                               March 31,        
                                                                 1996            1995           1996
                                                                 ----            ----           ----

Net loss                                                       $(3,217)        $(3,280)       $(10,769)
                                                               --------        --------       ---------
Reconciliation of weighted average number of
shares outstanding to amount used in proforma 
loss per share computation:

Weighted average number of shares                
outstanding                                                      7,679            7,611         7,834
                                                                   
Additional shares included in accordance                      
with requirements of the Securities and
Exchange Commission under Staff
Accounting Bulletin 83                                           4,043            4,043          4,043
                                                                ------           ------         ------

Weighted average number of shares                               
outstanding as adjusted                                         11,722           11,654         11,877
                                                                ======           ======         ======

Proforma net loss per share                                     $ (.27)          $ (.28)        $ (.91)  
                                                                =======          =======        ======

   1
                                                                    EXHIBIT 23.1

                       CONSENT OF INDEPENDENT ACCOUNTANTS


        We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated November 1, 1996, except
as to the reincorporation described in Note 6 which is as of December 3, 1996,
relating to the consolidated financial statements of 8x8, Inc., which appears in
such Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the three years ended March 31, 1996 listed
under Item 16(b) of this Registration Statement when such schedule is read in
conjunction with the consolidated financial statements referred to in our
report. The audits referred to in such report also included this schedule. We
also consent to the reference to us under the heading "Experts" in such
prospectus. 




PRICE WATERHOUSE LLP
San Jose, California
February 3, 1996