As noted previously, we redeemed our convertible subordinated debentures in December 2001. The consideration included issuing 1,000,000 shares of our common stock to the lenders. We have committed to maintaining the effectiveness of the registration statement filed with the SEC covering the resale of these shares. Should we fail to maintain the effectiveness of the registration statement we may be required to pay cash penalties and redeem all or a portion of the shares at the higher of $0.898 or the market price of our common stock at the time of the redemption which could have a material adverse effect on our cash flows. The value of the shares still held by the lenders of $669,000 at March 31, 2003, based upon the $0.898 per share minimum potential redemption price, is reflected as contingently redeemable common stock in the consolidated balance sheet.

The consolidated financial statements presented in Part II, Item 8 of this Report have been prepared assuming that 8x8 will continue as a going concern, and do not include any adjustments that might result from the outcome of this uncertainty. 8x8 has incurred recurring losses from operations, had recurring negative cash flows, and has a significant accumulated deficit. These conditions raise substantial doubt about our ability to continue as a going concern. We are currently seeking additional financing in order to meet our cash requirements for fiscal 2004. We may not be able to obtain additional financing as needed on acceptable terms, or at all, which may require us to reduce our operating costs and other expenditures, including reductions of personnel, salaries and capital expenditures. Alternatively, or in addition to such potential measures, we may elect to implement other cost reduction actions as we may determine are necessary and in our best interests, including the possible sale or cessation of certain of our business segments. Any such actions undertaken might limit our opportunities to realize plans for revenue growth and we might not be able to reduce our costs in amounts sufficient to achieve break-even or profitable operations. If we issue additional equity or convertible debt securities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of our common stock.

During the fourth quarter of fiscal 2000, the Company sold 3.7 million shares of its common stock to STMicroelectronics NV (STM) at a purchase price of $7.50 per share and received net proceeds of $27.7 million. During fiscal 2003, we purchased semiconductors from a subsidiary of STM. Such purchases approximated $550,000. In addition, during fiscal 2003 we contracted with a subsidiary of STM for non-recurring engineering services related to the development of our new semiconductor product. As of March 31, 2003, we had recorded liabilities to STM of $392,000 for semiconductor purchases and purchase commitments and engineering services.

In March 2002 the Board authorized us to open securities trading accounts and make investments of up to $1.0 million on behalf of 8x8, Inc. as directed by our Chairman, Joe Parkinson, Chief Executive Officer, or Chief Financial Officer. Mr. Parkinson has agreed to personally reimburse 8x8 on a quarterly basis for any losses resulting from his trading activities in order to maintain a minimum investment account balance of $1.0 million. The Board has been assured of Mr. Parkinson's ability to cover any such losses; however, should he be unable to do so it could have a material impact on our cash flows and results of operations. As part of the arrangement, our Board has expressed its intent, but not obligation, to pay Mr. Parkinson a quarterly bonus in an amount equal to 25% of the profits attributable to investments made on our behalf by Mr. Parkinson to the extent such a bonus exceeds his salary for the corresponding period. The Company or Mr. Parkinson can terminate this arrangement at any time, subject to the terms of an agreement between 8x8 and Mr. Parkinson. Under the arrangement, we are required to return to Mr. Parkinson the amount representing the increase in value of the investment account over $1.0 million to the extent required to restore replenishment payments made by Mr. Parkinson in prior quarters. Through March 31, 2003, Mr. Parkinson had made cumulative replenishment payments of approximately $137,000 to offset losses incurred. As of March 31, 2003, the investment account balance approximated $1,018,000. Accordingly, we had a payable of approximately $18,000 to Mr. Parkinson at March 31, 2003. As of March 31, 2003, approximately $200,000 of the $1.0 million allocated for such investment activities was invested in marketable equity securities. The remaining $800,000 was invested in money market funds.

On October 3, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30. SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale and requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (i) can be distinguished from the rest of the entity, and (ii) will be eliminated from the ongoing operations of the entity in a disposal transaction. We adopted SFAS No. 144 in the first quarter of fiscal 2003, and its adoption did not have a material impact on our results of operations or financial position.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No. 146 supercedes previous accounting guidance, principally Emerging Issues Task Force Issue (EITF) No. 94-3. SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of the entity's commitment to an exit plan. SFAS No. 146 also requires that the liability be initially measured and recorded at fair value. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. We adopted SFAS No. 146 in the fourth quarter of fiscal 2003, and its adoption did not have a material impact on our results of operations or financial position.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN45 requires an entity to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. We do not expect FIN 45 to have a material impact on our consolidated results of operations or financial position. We have included additional disclosures in accordance with FIN 45 in the footnotes to the consolidated financial statements presented in Part II, Item 8 of this Report.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The additional disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. We will continue to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25. We have included additional disclosures in accordance with SFAS No. 148 in the footnotes to the consolidated financial statements presented in Part II, Item 8 of this Report.

As of March 31, 2003, we had approximately $3.6 million in cash and cash equivalents and short-term investments. The possibility that we will not be able to meet our obligations as and when they become due over the next twelve months raises substantial doubt about our ability to continue as a going concern. Accordingly, we have been pursuing, and will continue to pursue, the implementation of certain cost reduction strategies. Additionally, we are seeking additional financing and evaluating financing alternatives in order to meet our cash requirements for fiscal 2004. We may not be able to obtain additional financing as needed on acceptable terms, or at all, which may require us to further reduce our operating costs and other expenditures, including additional reductions of personnel and capital expenditures. Alternatively, or in addition to such potential measures, we may elect to implement other cost reduction actions as we may determine are necessary and in our best interests, including the possible sale or cessation of certain of our business segments. Any such actions undertaken might limit our opportunities to realize plans for revenue growth and we might not be able to reduce our costs in amounts sufficient to achieve break-even or profitable operations. If we issue additional equity or convertible debt securities to raise funds, the ownership percentage of our existing stockholders would be reduced and they may experience significant dilution. New investors may demand rights, preferences or privileges senior to those of existing holders of our common stock. If we are not successful in these actions, we may be forced to cease operations.

We recorded an operating loss of approximately $4 million in the quarter ended March 31, 2003 and we ended the period with an accumulated deficit of $149 million. In addition, we recorded operating losses of $12 million, $10.0 million and $74.5 million for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. We expect that we will continue to incur operating losses for the foreseeable future, and such losses may be substantial. We will need to generate significant revenue growth to achieve an operating profit. Given our history of fluctuating revenues and operating losses, we cannot be certain that we will be able to achieve profitability on either a quarterly or annual basis in the future.

In April 2002, we were notified by the Nasdaq staff that the bid price for our common stock must close at $1.00 per share or more for a minimum of ten consecutive trading days during the ninety calendar day period ending July 9, 2002 or we might be delisted. As we were not in compliance under the Nasdaq National Market minimum bid price listing standard by July 9, 2002, we transferred to and began trading on the Nasdaq SmallCap Market on July 26, 2002. As a result of our transfer to the Nasdaq SmallCap Market, our delisting determination was extended an additional ninety days until October 7, 2002. Although our common stock did not achieve a closing bid price of $1.00 for at least ten consecutive trading days before October 7, 2002, we met the initial listing criteria for the Nasdaq SmallCap Market as of October 7, 2002. As a result, we remained eligible to be quoted on the Nasdaq SmallCap Market for an additional 180-calendar day grace period, which expired on April 7, 2003, subject to our compliance with the continued listing requirements during the extended grace period. On April 8, 2003, the Nasdaq staff notified us that we have been granted an additional ninety days, or until July 7, 2003 to regain compliance with the minimum bid price listing standard. However, there is no assurance that we will be able to maintain the continued listing requirements, and, as a result, may be delisted from trading on that system. Delisting could reduce the ability of our shareholders to purchase or sell shares as quickly and as inexpensively as they have done historically. For instance, failure to obtain listing on another market or exchange may make it more difficult for traders to sell our securities. Broker-dealers may be less willing or able to sell or make a market in our common stock. Not maintaining a listing on a major stock market may:

• result in a decrease in the trading price of our common stock;
• lessen interest by institutions and individuals in investing in our common stock;
• make it more difficult to obtain analyst coverage; and
• make it more difficult for us to raise capital in the future.

The market price of the shares of our common stock has been and is likely to be highly volatile. It may be significantly affected by factors such as:

• actual or anticipated fluctuations in our operating results;
• announcements of technical innovations;
• loss of key personnel;
• new products or new contracts by us, our competitors or their customers;
• developments with respect to patents or proprietary rights, general market conditions, changes in financial estimates by securities analysts, and other factors which could be unrelated to, or outside our control; and
• the potential delisting of our common stock.

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 our common stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been initiated against the issuing company. If our stock price is volatile, we may also be subject to such litigation. Such litigation could result in substantial costs and a diversion of management's attention and resources, which would disrupt business and could cause a decline in our operating results. Any settlement or adverse determination in such litigation would also subject us to significant liability.

Under the terms of a registration rights agreement we entered into in connection with the redemption of our outstanding convertible debt, we agreed to register the 1,000,000 shares of our common stock issued to the former note holders for resale. If we fail to maintain the effectiveness of the registration statement, we may be required to pay cash penalties and may be required to redeem all or a portion of the shares of common stock held by the former note holders. Under the agreement, the redemption price would be the higher of $0.898 or the market price of our common stock at the time of the redemption. If we are required to pay a cash penalty or to redeem any of the shares, this will deplete our cash reserves, which may cause significant harm to our business, results of operations and financial condition.

We believe that our business and future profitability will be largely dependent on widespread market acceptance of our IP telephony technology and products. Our videoconferencing semiconductor business has not provided sufficient revenues to profitably operate our business, and we have announced the end of life of these products and expect to make our final shipments in the first quarter of fiscal 2004. To date, we have not generated significant revenue from the sale of our IP telephony products and services. If we are not able to generate significant revenues selling into the IP telephony market, our business and operating results would be seriously harmed.

Success of our IP telephony strategy assumes that there will be future demand for IP telephony systems and services. In order for the IP telephony market to continue to grow, several things need to occur. Telephone service providers must continue to invest in the deployment of high speed broadband networks to residential and commercial customers. IP networks must improve quality of service for real-time communications, managing effects such as packet jitter, packet loss, and unreliable bandwidth, so that toll-quality service can be provided. IP telephony equipment must achieve the 99.999% reliability that users of the public switched telephone network have come to expect from their telephone service. IP telephony service providers must offer cost and feature benefits to their customers that are sufficient to cause the customers to switch away from traditional telephony service providers. If any or all of these factors fail to occur, our business may not grow.

Through the end of 2000, the telecommunications market was experiencing rapid growth spurred by a number of factors including deregulation in the industry, entry of a large number of new emerging service providers, growth in data traffic and the availability of significant capital from the financial markets. In 2001, the telecommunications industry began a reversal of some of these trends, marked by a dramatic reduction in current and projected future capital expenditures by service providers, financial difficulties and, in some cases, bankruptcies experienced by emerging service providers, as well as a sharp contraction in the availability of capital. These conditions caused a substantial reduction in demand for telecommunications equipment and related software, which has had a resulting impact on demand for Netergy's IP telephony semiconductor and software products and for Centile's hosted iPBX solution. If our current or potential customers are forced to defer or further curtail their capital spending programs, sales of our hosted iPBX product and Packet8 IP telephone service to telecommunication service providers and sales of our IP telephony semiconductors to manufacturers of telecommunication equipment may continue to be adversely affected, which would negatively impact our business, financial condition, and results of operations. In addition, many of the industries in which telecommunication service providers operate have experienced consolidation. The loss of one or more of our current or potential telecommunication service provider or telecommunication equipment OEM customers, through industry consolidation or otherwise, could reduce or eliminate our sales to such a customer and consequently harm our business, financial condition, and results of operations.

We expect the developments described above to continue to affect our business for at least the next several quarters in the following manner:

• our ability to accurately forecast revenue will be diminished;
• our revenues could be reduced; and
• our losses may increase because operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses are and will continue to be fixed in the short-term.

Our business, operating results and financial condition could be materially and adversely impacted by any one or a combination of the above.

Our historical operating results have fluctuated significantly and will likely continue to fluctuate in the future, and a decline in our operating results could cause our stock price to fall. On an annual and a quarterly basis, there are a number of factors that may affect our operating results, many of which are outside our control. These include, but are not limited to:

• changes in market demand;
• the timing of customer orders;
• competitive market conditions;
• lengthy sales cycles and/or regulatory approval cycles;
• new product introductions by us or our competitors;
• market acceptance of new or existing products;
• the cost and availability of components;
• the mix of our customer base and sales channels;
• the mix of products sold;
• the management of inventory;
• the level of international sales;
• continued compliance with industry standards; and
• general economic conditions.

Our gross margin is affected by a number of factors including product mix, the recognition of license and other revenues for which there may be little or no corresponding cost of revenues, product pricing, the allocation between international and domestic sales, the percentages of direct sales and sales to resellers, and manufacturing and component costs. The markets for our products are characterized by falling average selling prices. We expect that, as a result of competitive pressures, our product end of life announcement, and other factors, gross profit as a percentage of revenue for our videoconferencing semiconductor products will continue to decrease. Average selling prices realized to date for our IP telephony semiconductors have been lower than those historically attained for our videoconferencing semiconductor products, resulting in lower gross margins. In the likely event that we encounter significant price competition in the markets for our products, we could be at a significant disadvantage compared to our competitors, many of whom have substantially greater resources, and therefore may be better able to withstand an extended period of downward pricing pressure.

Variations in timing of sales may cause significant fluctuations in future operating results. Because a significant portion of our business may be derived from orders placed by a limited number of large customers, including original equipment manufacturers, the timing of such orders can cause significant fluctuations in our operating results. Anticipated orders from customers may fail to materialize. Delivery schedules may be deferred or canceled for a number of reasons, including changes in specific customer requirements or economic conditions. The adverse impact of a shortfall in our revenues may be magnified by our inability to adjust spending to compensate for such shortfall. Announcements by our competitors or us of new products and technologies could cause customers to defer purchases of our existing products, which would also have a material adverse effect on our business and operating results. As a result of these and other factors, it is likely that in some or all future periods our operating results will be below the expectations of investors, which would likely result in a significant reduction in the market price of our common stock.

Historically, a significant portion of our sales has been to relatively few customers, although the composition of these customers has varied. Revenues from our ten largest customers for the fiscal years ended March 31, 2003, 2002 and 2001, accounted for approximately 62%, 73% and 48%, respectively, of total revenues. Substantially all of our product sales have been made, and are expected to continue to be made, on a purchase order basis. None of our customers has entered into a long-term agreement requiring it to purchase our products. In the future, we will need to gain purchase orders for our products to earn additional revenue. Further, substantially all of our license and other revenues are nonrecurring.

IP telephony is an emerging market that is characterized by rapid changes in customer requirements, frequent introductions of new and enhanced products, and continuing and rapid technological advancement. To compete successfully in this emerging market, we must continue to design, develop, manufacture, and sell new and enhanced semiconductor and IP telephony software products and services that provide increasingly higher levels of performance and reliability at lower cost. These new and enhanced products must take advantage of technological advancements and changes, and respond to new customer requirements. Our success in designing, developing, manufacturing, and selling such products and services will depend on a variety of factors, including:

• the identification of market demand for new products;
• the scalability of our IP telephony software products;
• product and feature selection;
• timely implementation of product design and development;
• product performance;
• cost-effectiveness of products under development;
• effective manufacturing processes; and
• success of promotional efforts.

Additionally, we may also be required to collaborate with third parties to develop our products and may not be able to do so on a timely and cost-effective basis, if at all. We have in the past experienced delays in the development of new products and the enhancement of existing products, and such delays will likely occur in the future. If we are unable, due to resource constraints or technological or other reasons, to develop and introduce new or enhanced products in a timely manner, if such new or enhanced products do not achieve sufficient market acceptance, or if such new product introductions decrease demand for existing products, our operating results would decline and our business would not grow.

Our IP telephony software and semiconductor products, including our hosted iPBX, Packet8 telephone service and our Audacity family of semiconductors, have lengthy sales cycles, and we may incur substantial sales and marketing expenses and expend significant management effort without making a sale. A customer's decision to purchase our products often involves a significant commitment of its resources and a lengthy product evaluation and qualification process. We do not possess the capital infrastructure required to invest in extensive marketing or advertising campaigns that may be required in order to sell these products. In addition, the length of our sales cycles will vary depending on the type of customer to whom we are selling and the product being sold. Even after making the decision to purchase our products, our customers may deploy our products slowly. Timing of deployment can vary widely and will depend on various factors, including:

• the size of the network deployment;
• the complexity of our customers' network environments;
• our customers' skill sets;
• the hardware and software configuration and customization necessary to deploy our products; and
• our customers' ability to finance their purchase of our products.

As a result, it is difficult for us to predict the quarter in which our customers may purchase our IP telephony products, and our revenue and operating results may vary significantly from quarter to quarter.

The development and marketing of our IP telephony products will continue to place a significant strain on our limited personnel, management, and other resources. While the pace of economic growth in the San Francisco Bay Area (where our corporate headquarters are located) has slowed, competition for highly-skilled engineering, sales, marketing, and support personnel has remained strong. Our future success depends upon the continued services of our executive officers and other key employees who have critical industry experience and relationships that we rely on to implement our business plan. None of our officers or key employees are bound by employment agreements for any specific term. The loss of the services of any of our officers or key employees could delay the development and introduction of, and negatively impact our ability to sell our products which could adversely affect our financial results and impair our growth. We currently do not maintain key person life insurance policies on any of our employees.

We outsource the manufacturing of our semiconductor products to independent foundries and as such do not have internal manufacturing capabilities to meet our customers' demands. We have shifted the manufacture of our voice over IP semiconductors to an affiliate of STMicroelectronics NV, or STM, from Taiwan Semiconductor Manufacturing Corporation, or TSMC. STM or its contract manufacturer, TSMC, will be the sole manufacturer of our semiconductor products. Furthermore, to the extent TSMC is utilized, Taiwan is always subject to geological or geopolitical disturbances that could instantly cut off such supply. We also rely on other third party manufacturers for packaging and testing of our semiconductors.

We do not have long-term purchase agreements with our contract manufacturers or our component suppliers. There can be no assurance that our subcontract manufacturers will be able or willing to reliably manufacture our products, in volumes, on a cost-effective basis or in a timely manner. For our semiconductor products, the time to port our technology to another foundry, the time to qualify the new versions of product, and the cost of this effort as well as the tooling associated with wafer production would have a material adverse effect on our business, operating results, and financial condition. For our consumer videophones, IP telephones and media hub devices that are used with our hosted iPBX and Packet8 voice and video IP telephone service, we rely on the availability of these semiconductor products. These devices are also sourced solely from certain overseas contract manufacturers and partners, and are not available from any other manufacturer.

Our products have lead times of up to several months, and are built to forecasts that are necessarily imprecise. Because of our practice of building our products to necessarily imprecise forecasts, it is likely that, from time to time, we will have either excess or insufficient product inventory. Excess inventory levels would subject us to the risk of inventory obsolescence and the risk that our selling prices may drop below our inventory costs, while insufficient levels of inventory may negatively affect relations with customers. For instance, our customers rely upon our ability to meet committed delivery dates, and any disruption in the supply of our products could result in legal action from our customers, loss of customers or harm to our ability to attract new customers. Any of these factors could have a material adverse effect on our business, operating results, and financial condition.

Many of the potential customers for our hosted iPBX product and Packet8 voice and video IP telephone service have requested that our products and services be designed to interoperate with their existing networks, each of which may have different specifications and use multiple standards. Our customers' networks may contain multiple generations of products from different vendors that have been added over time as their networks have grown and evolved. Our products must interoperate with these products as well as with future products in order to meet our customers' requirements. In some cases, we may be required to modify our product designs to achieve a sale, which may result in a longer sales cycle, increased research and development expense, and reduced operating margins. If our products do not interoperate with existing equipment or software in our customers' networks, installations could be delayed, orders for our products could be canceled or our products could be returned. This could harm our business, financial condition, and results of operations. Our Packet8 telephone service depends on the availability of third party network service providers that provide telephone numbers and PSTN call termination and origination services for our customers. Many of these network service providers are financially affected by the downturn in the telecommunications industry and may be forced to terminate the services that we depend on. The time to interface our technology to another network service provider, if available, and qualify this new service could have a material adverse effect on our business, operating results, and financial condition.

Our hosted iPBX and Packet8 IP telephone service must successfully integrate with products from other vendors, such as gateways to traditional telephone systems. As a result, when problems occur in a network, it may be difficult to identify the source of the problem. The occurrence of hardware and software errors, whether caused by our hosted iPBX solution, Packet8 service or another vendor's products, may result in the delay or loss of market acceptance of our products and any necessary revisions may force us to incur significant expenses. The occurrence of some of these types of problems may seriously harm our business, financial condition and results of operations.

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

In addition, our focus on developing a range of technology products, including semiconductors and related embedded software, hosted iPBX solutions, and the Packet8 telephone service products, places a significant strain on our research and development resources. Competitors that focus on one aspect of technology, such as software or semiconductors, may have a considerable advantage over us. In addition, many of our current and potential competitors have longer operating histories, are substantially larger, and have greater financial, manufacturing, marketing, technical, and other resources. For example, certain competitors in the market for our semiconductor products maintain their own semiconductor foundries and may therefore benefit from certain capacity, cost and technical advantages. Many also have greater name recognition and a larger installed base of products than we have. Competition in our markets may result in significant price reductions. As a result of their greater resources, many current and potential competitors may be better able than us to initiate and withstand significant price competition or downturns in the economy. There can be no assurance that we will be able to continue to compete effectively, and any failure to do so would harm our business, operating results, and financial condition.

We are entering into new market areas and our success is partly dependent on our ability to forge new marketing and engineering partnerships. IP telephony communication systems are extremely complex and few, if any, companies possess all the required technology components needed to build a complete end to end solution. We will likely need to enter into partnerships to augment our development programs and to assist us in marketing complete solutions to our targeted customers. We may not be able to develop such partnerships in the course of our product development. Even if we do establish the necessary partnerships, we may not be able to adequately capitalize on these partnerships to aid in the success of our business.

We rely in part on trademark, copyright, and trade secret law to protect our intellectual property in the United States and abroad. We seek to protect our software, documentation, and other written materials under trade secret and copyright law, which afford only limited protection. We also rely in part on patent law to protect our intellectual property in the United States and internationally. We hold fifty-four United States patents and have a number of United States and foreign patent applications pending. We cannot predict whether such pending patent applications will result in issued patents. We may not be able to protect our proprietary rights in the United States or internationally (where effective intellectual property protection may be unavailable or limited), and competitors may independently develop technologies that are similar or superior to our technology, duplicate our technology or design around any patent of ours. We have in the past licensed and in the future expect to continue licensing our technology to others; many of who are located or may be located abroad. There are no assurances that such licensees will protect our technology from misappropriation. Moreover, litigation may be necessary in the future to enforce our 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 our business, financial condition, and operating results. Any settlement or adverse determination in such litigation would also subject us to significant liability.

There has been substantial litigation in the semiconductor, electronics, and related industries regarding intellectual property rights, and from time to time third parties may claim infringement by us of their intellectual property rights. Our broad range of technology, including systems, digital and analog circuits, software, and semiconductors, increases the likelihood that third parties may claim infringement by us of their intellectual property rights. If we were found to be infringing on the intellectual property rights of any third party, we could be subject to liabilities for such infringement, which could be material. We could also be required to refrain from using, manufacturing or selling certain products or using certain processes, either of which could have a material adverse effect on our business and operating results. From time to time, we have received, and may continue to receive in the future, notices of claims of infringement, misappropriation or misuse of other parties' proprietary rights. There can be no assurance that we will prevail in these discussions and actions or that other actions alleging infringement by us of third party patents will not be asserted or prosecuted against the Company.

We rely upon certain technology, including hardware and software, licensed from third parties. There can be no assurance that the technology licensed by us will continue to provide competitive features and functionality or that licenses for technology currently utilized by us or other technology which we may seek to license in the future will be available to us 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 technology or suitable alternative products could be developed, identified, licensed and integrated, and could harm our business. These licenses are on standard commercial terms made generally available by the companies providing the licenses. The cost and terms of these licenses individually are not material to our business.

Circuit-switched telephony networks feature very high reliability, with a guaranteed quality of service. In addition, such networks have imperceptible delay and consistently satisfactory audio quality. Emerging broadband IP networks, such as LANs, WANs, and the internet, or emerging last mile technologies such as cable, digital subscriber lines, and wireless local loop, may not be suitable for telephony unless such networks and technologies can provide reliability and quality consistent with these standards.

In addition to reliability and quality standards, the market acceptance of telephony over broadband IP networks is dependent upon the adoption of industry standards so that products from multiple manufacturers are able to communicate with each other. Our IP telephony products rely heavily on standards such as SIP, H.323, MGCP and Megaco to interoperate with other vendors' equipment. There is currently a lack of agreement among industry leaders about which standard should be used for a particular application, and about the definition of the standards themselves. These standards, as well as audio and video compression standards, continue to evolve. We also must comply with certain rules and regulations of the Federal Communications Commission (FCC) regarding electromagnetic radiation and safety standards established by Underwriters Laboratories, as well as similar regulations and standards applicable in other countries. Standards are continuously being modified and replaced. As standards evolve, we may be required to modify our existing products or develop and support new versions of our products. The failure of our products to comply, or delays in compliance, with various existing and evolving industry standards could delay or interrupt volume production of our IP telephony products, which would have a material adverse effect on our business, financial condition and operating results.

At present there are few laws, regulations or rulings that specifically address access to or commerce on the internet, including IP telephony. We are unable to predict the impact, if any, that future legislation, legal decisions or regulations concerning the internet may have on our business, financial condition, and results of operations. Regulation may be targeted towards, among other things, assessing access or settlement charges, imposing taxes related to internet communications, imposing tariffs or regulations based on encryption concerns or the characteristics and quality of products and services, imposing regulations and requirements related to the handling of emergency 911 services, any of which could restrict our business or increase our cost of doing business. The increasing growth of the broadband IP telephony market and popularity of broadband IP telephony products and services heighten the risk that governments or other legislative bodies will seek to regulate broadband IP telephony and the internet. In addition, large, established telecommunication companies may devote substantial lobbying efforts to influence the regulation of the broadband IP telephony market, which may be contrary to our interests. Recent federal legislation provides for a significant deregulation of the U.S. telecommunications industry, including the local exchange, long distance and cable television industries. This legislation remains subject to judicial review and additional Federal Communications Commission, or FCC, rulemaking. As a result, we cannot predict the legislation's effect on our future operations. Many regulatory actions are under way or are being contemplated by federal and state authorities regarding important items. These actions could have a material adverse effect on our business, financial condition and operating results.

                                                  Year Ended March 31,
                                          -------------------------------------
                                             2003         2002         2001
                                          -----------  -----------  -----------
United States........................... $     4,218  $     5,777  $     5,632
Europe..................................       2,657        4,126        5,862
Taiwan..................................       1,569        2,026        2,739
Japan...................................         919        1,119        1,188
Other...................................       1,640        1,643        2,807
                                          -----------  -----------  -----------
                                         $    11,003  $    14,691  $    18,228
                                          ===========  ===========  ===========

                                                                   March 31,
                                                             --------------------
                                                               2003       2002
                                                             ---------  ---------
                          ASSETS
Current assets:
  Cash and cash equivalents................................ $   3,371  $  12,422
  Short term investments...................................       208         --
  Accounts receivable, net of allowance of
   $141 and $286, respectively.............................     1,290      1,239
  Inventory................................................       352        733
  Other current assets.....................................       595        612
                                                             ---------  ---------
          Total current assets.............................     5,816     15,006
Property and equipment, net................................       841      2,740
Intangibles and other assets...............................        48      1,907
                                                             ---------  ---------
                                                            $   6,705  $  19,653
                                                             =========  =========
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable......................................... $     652  $     548
  Accrued compensation.....................................       847        921
  Accrued warranty.........................................       477        478
  Deferred revenue.........................................       545      2,421
  Other accrued liabilities................................     1,125        958
  Income taxes payable.....................................       226        280
                                                             ---------  ---------
          Total current liabilities........................     3,872      5,606
                                                             ---------  ---------
Contingently redeemable common stock.......................       669        813
                                                             ---------  ---------
Commitments and contingencies (Note 9)
Stockholders' equity:
  Preferred stock, $0.001 par value:
     Authorized: 5,000,000 shares;
     Issued and outstanding: 1 share at March 31, 2003
      and March 31, 2002...................................        --         --
  Common stock, $0.001 par value:
     Authorized: 100,000,000 shares at March 31, 2003
      and March 31, 2002;
     Issued and outstanding: 28,470,987 shares
      at March 31, 2003 and 28,228,215 shares
      at March 31, 2002....................................        28         27
Additional paid-in capital.................................   150,827    150,612
Deferred compensation......................................       (12)       (30)
Accumulated other comprehensive loss.......................        --        (99)
Accumulated deficit........................................  (148,679)  (137,276)
                                                             ---------  ---------
          Total stockholders' equity.......................     2,164     13,234
                                                             ---------  ---------
                                                            $   6,705  $  19,653
                                                             =========  =========

                                                              Year Ended March 31,
                                                         -------------------------------
                                                           2003       2002       2001
                                                         ---------  ---------  ---------
Product revenues....................................... $   5,739  $   6,044  $  12,808
License and other revenues.............................     5,264      8,647      5,420
                                                         ---------  ---------  ---------
          Total revenues...............................    11,003     14,691     18,228
                                                         ---------  ---------  ---------
Cost of product revenues...............................     2,781      2,626      5,225
Cost of license and other revenues.....................     1,509        197      1,761
                                                         ---------  ---------  ---------
          Total cost of revenues.......................     4,290      2,823      6,986
                                                         ---------  ---------  ---------
          Gross profit.................................     6,713     11,868     11,242
                                                         ---------  ---------  ---------
Operating expenses:
  Research and development.............................     7,835     12,559     19,950
  Selling, general and administrative..................     7,441      8,560     16,899
  In-process research and development..................        --         --      4,563
  Amortization of intangibles..........................        --        763     10,987
  Restructuring and other charges......................     3,437         --     33,316
                                                         ---------  ---------  ---------
          Total operating expenses.....................    18,713     21,882     85,715
                                                         ---------  ---------  ---------
Loss from operations...................................   (12,000)   (10,014)   (74,473)
Other income, net......................................       597      1,029      2,628
Interest expense.......................................        --       (884)    (1,456)
                                                         ---------  ---------  ---------
Loss before provision for income taxes.................   (11,403)    (9,869)   (73,301)
Provision for income taxes.............................        --         15         17
                                                         ---------  ---------  ---------
Net loss before extraordinary gain and cumulative
  effect of change in accounting principle ............   (11,403)    (9,884)   (73,318)
Extraordinary gain on extinguishment of debt, net......        --        779         --
Cumulative effect of change in accounting principle....        --         --     (1,081)
                                                         ---------  ---------  ---------
Net loss............................................... $ (11,403) $  (9,105) $ (74,399)
                                                         =========  =========  =========

Basic and diluted per share amounts:
  Net loss before extraordinary gain and cumulative
    effect of change in accounting principle .......... $   (0.40) $   (0.36) $   (2.95)
  Extraordinary gain on extinguishment of debt, net....        --       0.03         --
  Cumulative effect of change in accounting principle..        --         --      (0.04)
                                                         ---------  ---------  ---------
  Net loss............................................. $   (0.40) $   (0.33) $   (2.99)
                                                         =========  =========  =========

Basic and diluted shares outstanding...................    28,386     27,271     24,846
                                                         =========  =========  =========

                                                                                       Notes                Accumulated
                                                                                     Receivable               other
                                  Preferred Stock     Common Stock       Additional    from      Deferred   Comprehen-
                                  ---------------- --------------------   Paid-in     Stock-    Compensa-      sive     Accumulated
                                  Shares   Amount    Shares     Amount    Capital     holders      tion        Loss      Deficit      Total
                                  -------  ------- -----------  -------  ----------  ---------  ----------  ----------  ----------  ---------
Balance at March 31, 2000........     --  $    --  22,958,921  $    23  $  101,559  $     (69) $     (376) $       --  $  (53,747) $  47,390
Acquisition of UForce, Inc. .....      1       --   3,555,303        4      44,584         --          --          --          --     44,588
Issuance of common stock under
  stock plans....................     --       --   1,206,591        1       2,761         --          --          --          --      2,762
Repayment of notes receivable
  from stockholders..............     --       --          --       --          --         60          --          --          --         60
Repurchase of common stock and
  Exchangeable Shares............     --       --  (1,040,089)      (1)       (521)         8          --          --          --       (514)
Deferred compensation related
  to stock options...............     --       --          --       --         551         --         202          --          --        753
Value of beneficial conversion
  feature associated with the
  convertible subordinated
  debentures.....................     --       --          --       --       1,081         --          --          --          --      1,081
Change in unrealized loss on
  investments....................     --       --          --       --          --         --          --         (24)         --
Cumulative translation
  adjustment.....................     --       --          --       --          --         --          --         (65)         --
Net loss.........................     --       --          --       --          --         --          --          --     (74,399)
Total comprehensive loss.........     --       --          --       --          --         --          --          --          --    (74,488)
                                  -------  ------- -----------  -------  ----------  ---------  ----------  ----------  ----------  ---------
Balance at March 31, 2001........      1  $    --  26,680,726  $    27  $  150,015  $      (1) $     (174) $      (89) $ (128,146) $  21,632
Redemption of convertible
  subordinated debentures........     --       --   1,000,000       --         321         --          --          --         (25)       296
Issuance of common stock under
  stock plans....................     --       --     457,346       --         335         --          --          --          --        335
Issuance of common stock to debt
  holders to satisfy interest
  obligations....................     --       --      95,699       --          97         --          --          --          --         97
Forgiveness of note receivable...     --       --      (5,556)      --          (1)         1          --          --          --         --
Deferred compensation related
  to stock options...............     --       --          --       --        (155)        --         144          --          --        (11)
Cumulative translation
  adjustment.....................     --       --          --       --          --         --          --         (10)         --
Net loss.........................     --       --          --       --          --         --          --          --      (9,105)
Total comprehensive loss.........     --       --          --       --          --         --          --          --          --     (9,115)
                                  -------  ------- -----------  -------  ----------  ---------  ----------  ----------  ----------  ---------
Balance at March 31, 2002........      1  $    --  28,228,215  $    27  $  150,612  $      --  $      (30) $      (99) $ (137,276) $  13,234
Issuance of common stock under
  stock plans....................     --       --     242,772        1          88         --          --          --          --         89
Common stock no longer
  contingently redeemable........     --       --          --       --         144         --          --          --          --        144
Deferred compensation related
  to stock options...............     --       --          --       --         (17)        --          18          --          --          1
Cumulative translation
  adjustment.....................     --       --          --       --          --         --          --          99          --
Net loss.........................     --       --          --       --          --         --          --          --     (11,403)
Total comprehensive loss.........     --       --          --       --          --         --          --          --          --    (11,304)
                                  -------  ------- -----------  -------  ----------  ---------  ----------  ----------  ----------  ---------
Balance at March 31, 2003........      1  $    --  28,470,987  $    28  $  150,827  $      --  $      (12) $       --  $ (148,679) $   2,164
                                  =======  ======= ===========  =======  ==========  =========  ==========  ==========  ==========  =========

                                                                    Year Ended March 31,
                                                               -------------------------------
                                                                 2003       2002       2001
                                                               ---------  ---------  ---------
Cash flows from operating activities:
  Net loss................................................... $ (11,403) $  (9,105) $ (74,399)
  Adjustments to reconcile net loss to net cash used
    in operating activities:
    Depreciation and amortization............................     1,780      3,862     14,355
    Extraordinary gain due to debt redemption ...............        --       (779)        --
    Stock compensation expense...............................         1        (11)       753
    Cumulative effect of change in accounting principle......        --         --      1,081
    In-process research and development......................        --         --      4,563
    Gain on sale of investments, net.........................        --       (131)      (225)
    Non-cash portion of restructuring and other charges......     2,273         --     32,331
    Other....................................................       204         26        (20)
  Changes in assets and liabilities, net of effects
    of businesses acquired and sold:
      Accounts receivable....................................       (71)     1,668        851
      Inventory..............................................       298        501        (85)
      Other current and noncurrent assets....................        64      1,607     (1,281)
      Accounts payable.......................................       104       (839)    (2,197)
      Accrued compensation...................................      (249)      (610)      (623)
      Accrued warranty.......................................        (1)       (47)      (169)
      Deferred revenue.......................................    (1,876)    (3,482)       197
      Other accrued liabilities..............................        93       (579)       378
      Income taxes payable...................................       (54)       (26)       (78)
                                                               ---------  ---------  ---------
         Net cash used in operating activities...............    (8,837)    (7,945)   (24,568)
                                                               ---------  ---------  ---------
Cash flows from investing activities:
  Acquisitions of property and equipment.....................      (137)      (172)    (6,127)
  Cash paid for acquisitions, net............................        --         --       (558)
  Proceeds from sale of investments..........................        --        543        225
  Proceeds from the sale of video monitoring assets, net.....        --         --      5,160
  Proceeds from the sale of equipment........................        42        116         --
  Purchases of short-term investments........................      (208)        --         --
                                                               ---------  ---------  ---------
         Net cash (used in) provided by investing activities.      (303)       487     (1,300)
                                                               ---------  ---------  ---------
Cash flows from financing activities:
  Debt repayments............................................        --     (4,581)      (891)
  Proceeds from issuance of common stock, net................        89        335      2,763
  Repayment of notes receivable from stockholders............        --         --         60
  Repurchase of common stock and Exchangeable Shares.........        --         --       (514)
                                                               ---------  ---------  ---------
         Net cash provided by (used in) financing activities.        89     (4,246)     1,418
                                                               ---------  ---------  ---------
Net decrease in cash and cash equivalents....................    (9,051)   (11,704)   (24,450)
Cash and cash equivalents, beginning of year.................    12,422     24,126     48,576
                                                               ---------  ---------  ---------
Cash and cash equivalents, end of year....................... $   3,371  $  12,422  $  24,126
                                                               =========  =========  =========
Supplemental and non-cash disclosures:
  Income taxes paid.......................................... $      36  $      12  $      25
                                                               =========  =========  =========
  Interest paid.............................................. $      --  $     204  $     308
                                                               =========  =========  =========
  Common stock issued to satisfy interest obligations........ $      --  $      97  $      --
                                                               =========  =========  =========
   Issuance of shares and repricing of warrants in
     connection with the debt extinguishment................. $      --  $   1,109  $      --
                                                               =========  =========  =========
   Issuance of shares and assumption of options in
     connection with the acquisition of U|Force.............. $      --  $      --  $  44,586
                                                               =========  =========  =========
   Marketable securities received in exchange for
     furniture and equipment................................. $      --  $      --  $     412
                                                               =========  =========  =========

                                                                   March 31,
                                                              --------------------
                                                                2003       2002
                                                              ---------  ---------
                                                                (in thousands)
  Raw materials and work-in-process.........................       147        528
  Finished goods............................................       205        205
                                                              ---------  ---------
                                                             $     352  $     733
                                                              =========  =========

                                                                   March 31,
                                                              --------------------
                                                                2003       2002
                                                              ---------  ---------
                                                                (in thousands)
  Machinery and computer equipment.......................... $   7,378  $   8,076
  Furniture and fixtures....................................       847      1,084
  Licensed software.........................................     4,142      4,105
  Leasehold improvements....................................       914        991
                                                              ---------  ---------
                                                                13,281     14,256
Less: accumulated depreciation and amortization.............   (12,440)   (11,516)
                                                              ---------  ---------
                                                             $     841  $   2,740
                                                              =========  =========

                                                     Year Ended March 31,
                                             -------------------------------------
                                                2003         2002         2001
                                             -----------  -----------  -----------
Net loss:                                   $   (11,403) $    (9,105) $   (74,399)
Add: Stock-based compensation expense
     included in reported net income.......           1          (11)         753
Deduct: Total stock-based compensation
        determined pursuant to SFAS No.123*      (4,446)      (9,483)     (10,486)
                                             -----------  -----------  -----------
Pro forma net loss (basic and diluted)      $   (15,848) $   (18,599) $   (84,132)
                                             ===========  ===========  ===========
As reported net loss per share............. $     (0.40) $     (0.33) $     (2.99)
Pro forma net loss per share............... $     (0.56) $     (0.68) $     (3.39)

                                                      Year Ended March 31,
                                                 ---------------------------------
                                                    2003        2002       2001
                                                 -----------  ---------  ---------
Net loss....................................... $   (11,403) $  (9,105) $ (74,399)
Accretion of dividends on contingently
  redeemable common stock......................          --        (25)        --
                                                 -----------  ---------  ---------
Net loss available to common
  stockholders................................. $   (11,403) $  (9,130) $ (74,399)
                                                 ===========  =========  =========

                                                      Year Ended March 31,
                                                 ---------------------------------
                                                    2003        2002       2001
                                                 -----------  ---------  ---------
Common stock options...........................       7,615      9,900      7,732
Warrants.......................................          --        701        701
Convertible subordinated debentures............          --         --        638
Unvested restricted common stock...............          --         --         30
                                                 -----------  ---------  ---------
                                                      7,615     10,601      9,101
                                                 ===========  =========  =========

Value of common stock and Exchangable Shares issued......... $  38,042
Value of stock otions assumed...............................     6,546
Cash advanced to U|Force prior to closing...................     1,500
Direct transaction costs....................................       747
                                                              ---------
                                                             $  46,835
                                                              =========

In-process research and development......................... $   4,563
Distribution agreement......................................     1,053
Workforce...................................................     1,182
U|Force net tangible assets.................................     1,801
Goodwill....................................................    38,236
                                                              ---------
                                                             $  46,835
                                                              =========

                                                        Year Ended March 31,
                                                   ---------------------------------
                                                      2003        2002       2001
                                                   -----------  ---------  ---------
Reported net loss ............................... $   (11,403) $  (9,105) $ (74,399)
Add back: Goodwill and intangibles amortization..          --        763     10,987
                                                   -----------  ---------  ---------
Adjusted net loss................................ $   (11,403) $  (8,342) $ (63,412)
                                                   ===========  =========  =========
Basic and diluted earnings per share:
  Reported net loss per share.................... $     (0.40) $   (0.33) $   (2.99)
  Goodwill and intangibles amortization..........          --       0.03       0.44
                                                   -----------  ---------  ---------
Adjusted net loss per share...................... $     (0.40) $   (0.30) $   (2.55)
                                                   ===========  =========  =========

                                     Total        Cash       Non-Cash      Liability at
                                    Charges     Payments      Charges     March 31, 2003
                                  -----------  -----------  -----------  ----------------
Restructuring Charges:
 Severance...................... $     1,177  $    (1,002) $        --  $            175
 Facility related...............         508         (161)        (273)               74
                                  -----------  -----------  -----------  ----------------
   Total restructuring charges..       1,685       (1,163)        (273)              249
                                  -----------  -----------  -----------  ----------------
Asset Impairments:
 Fixed Assets...................         212           --         (212)               --
 Goodwill.......................       1,539           --       (1,539)               --
                                  -----------  -----------  -----------  ----------------
   Total impairment charges.....       1,751           --       (1,751)               --
                                  -----------  -----------  -----------  ----------------
   Total restructuring and
     impairment charges......... $     3,436  $    (1,163) $    (2,024) $            249
                                  ===========  ===========  ===========  ================

Employee separation........................................... $     765
Fixed asset losses and impairments............................     2,084
Intangible asset impairments..................................    30,247
Lease obligation and termination..............................       220
                                                                ---------
                                                               $  33,316
                                                                =========

                                                          Year Ended March 31,
                                                   ---------------------------------
                                                      2003        2002       2001
                                                   -----------  ---------  ---------
Current:
  Federal........................................ $        --  $     (10) $      --
  State..........................................          --         --         --
  Foreign........................................          --         25         17
                                                   -----------  ---------  ---------
                                                  $        --  $      15  $      17
                                                   ===========  =========  =========

                                                                     March 31,
                                                                --------------------
                                                                  2003       2002
                                                                ---------  ---------
Research and development credit carryforwards................. $   5,459  $   4,809
Net operating loss carryforwards..............................    41,543     23,954
Inventory valuation...........................................       419        569
Reserves and allowances.......................................       349        471
Goodwill......................................................        --     14,193
Other.........................................................     2,806      3,335
                                                                ---------  ---------
                                                                  50,576     47,331
Valuation allowance...........................................   (50,576)   (47,331)
                                                                ---------  ---------
          Total............................................... $      --  $      --
                                                                =========  =========

                                                        Year Ended March 31,
                                                   ---------------------------------
                                                      2003        2002       2001
                                                   -----------  ---------  ---------
Benefit at statutory rate........................ $    (3,877) $  (3,090) $ (25,296)
State income taxes (benefit) before valuation
  allowance, net of federal effect...............        (684)       229     (3,909)
In-process research and development..............          --         --      1,551
Non-deductible goodwill..........................         523        259         --
Discount on issuance of Common Stock.............          --        558         --
Research and development credits.................          --       (216)    (1,162)
Change in valuation allowance....................       4,030      2,302     29,027
Non-deductible compensation......................          --         (4)       256
Foreign rate differences.........................          --        (30)         1
Other............................................           8          7       (451)
                                                   -----------  ---------  ---------
                                                  $        --  $      15  $      17
                                                   ===========  =========  =========

 YEAR ENDING MARCH 31,
 ---------------------
2004.......................................................... $     544
2005..........................................................       280
2006..........................................................        37
                                                                ---------
          Total minimum payments.............................. $     861
                                                                =========

                                                                   Weighted
                                                        Shares      Average
                                           Shares     Subject to   Exercise
                                          Available    Options       Price
                                          for Grant  Outstanding   Per Share
                                         ----------- ------------  ---------
Balance at March 31, 2000...............     15,437    4,173,762  $    5.25
Change in options available for grant...  7,373,898           --         --
Granted or assumed...................... (8,116,100)   8,116,100       6.26
Exercised...............................         --     (925,008)      2.30
Returned to plan........................  3,632,963   (3,632,963)      8.29
                                         ----------- ------------
Balance at March 31, 2001...............  2,906,198    7,731,891       5.24
Change in options available for grant...    (23,898)          --         --
Granted................................. (4,901,073)   4,901,073       1.09
Exercised...............................         --      (40,757)      0.01
Returned to plan........................  2,692,381   (2,692,381)      6.18
                                         ----------- ------------
Balance at March 31, 2002...............    673,608    9,899,826       2.95
Change in options available for grant...  1,370,187           --         --
Granted.................................   (857,800)     857,800       0.48
Exercised...............................         --      (53,040)      0.37
Returned to plan........................  3,089,997   (3,089,997)      3.05
                                         ----------- ------------
Balance at March 31, 2003...............  4,275,992    7,614,589       2.65
                                         =========== ============

                         Options Outstanding              Options Exercisable
                    ----------------------------------  -------------------------
                                Weighted    Weighted                   Weighted
                                 Average    Average                     Average
                                Exercise   Remaining                   Exercise
 Range of Exercise                Price   Contractual                    Price
      Prices          Shares    Per Share Life (Years)     Shares      Per Share
- ------------------- ----------  --------- ------------  ------------  -----------
$ 0.01 to $ 3.16... 5,974,588  $    1.38          8.0     2,394,740  $      1.66
$ 3.16 to $ 6.32...   811,511       3.84          6.8       791,165         3.82
$ 6.32 to $ 9.49...   311,327       7.42          5.4       249,693         7.43
$ 9.49 to $12.65...   445,268      11.72          6.7       318,470        11.72
$12.65 to $15.81...    33,895      14.56          5.4        26,537        14.56
$15.81 to $28.46...    38,000      21.25          6.9        28,852        21.20
                    ----------                          ------------
                    7,614,589  $    2.65          7.7     3,809,457  $      3.57
                    ==========                          ============

                                                             Weighted
                                                  Shares      Average
                                      Shares    Subject to   Exercise
                                     Available    Options      Price
                                     for Grant  Outstanding  Per Share
                                    ----------- -----------  ---------
Shares reserved at Netergy Plan's
  inception........................  5,000,000          --  $      --
Granted............................ (3,572,000)  3,572,000       0.50
Returned to plan...................    400,000    (400,000)      0.50
                                    ----------- -----------
Balance at March 31, 2001..........  1,828,000   3,172,000       0.50
Granted............................   (136,000)    136,000       0.50
Exercised..........................         --          --         --
Returned to plan...................    264,834    (264,834)      0.50
                                    ----------- -----------
Balance at March 31, 2002..........  1,956,834   3,043,166  $    0.50
Granted............................   (617,000)    617,000       0.50
Exercised..........................         --          --         --
Returned to plan...................  1,945,490  (1,945,490)      0.50
                                    ----------- -----------
Balance at March 31, 2003..........  3,285,324   1,714,676  $    0.50
                                    =========== ===========

                                                             Weighted
                                                  Shares      Average
                                      Shares    Subject to   Exercise
                                     Available    Options      Price
                                     for Grant  Outstanding  Per Share
                                    ----------- -----------  ---------
Shares reserved at Centile Plan's
  inception........................  4,500,000          --         --
Granted............................ (4,107,000)  4,107,000       0.43
                                    ----------- -----------
Balance at March 31, 2001..........    393,000   4,107,000       0.43
Granted............................   (846,000)    846,000       0.43
Exercised..........................         --          --
Returned to plan...................  2,688,000  (2,688,000)      0.43
                                    ----------- -----------
Balance at March 31, 2002..........  2,235,000   2,265,000       0.43
Granted............................    (96,000)     96,000       0.43
Exercised..........................         --          --         --
Returned to plan...................    459,128    (459,128)      0.43
                                    ----------- -----------
Balance at March 31, 2003..........  2,598,128   1,901,872  $    0.43
                                    =========== ===========

                                                     Year Ended March 31,
                                             -------------------------------------
                                                2003         2002         2001
                                             -----------  -----------  -----------
Net loss:
  As reported.............................. $   (11,403) $    (9,105) $   (74,399)
  Pro forma*............................... $   (15,848) $   (18,599) $   (84,132)
Basic and diluted loss per share:
  As reported.............................. $     (0.40) $     (0.33) $     (2.99)
  Pro forma................................ $     (0.56) $     (0.68) $     (3.39)

                                                     Year Ended March 31,
                                             -------------------------------------
                                                2003         2002         2001
                                             -----------  -----------  -----------
Expected volatility........................         162%         135%         141%
Expected dividend yield....................         0.0%         0.0%         0.0%
Risk-free interest rate....................  2.8% to 4.7% 3.5% to 4.9% 4.7% to 6.8%
Weighted average expected option term......   5.1 years    5.1 years      5 years
Weighted average fair value of options
  granted.................................. $      0.45  $      0.96  $      5.17

                                                     Year Ended March 31,
                                             -------------------------------------
                                                2003         2002         2001
                                             -----------  -----------  -----------
Expected volatility........................          81%          67%          70%
Expected dividend yield....................         0.0%         0.0%         0.0%
Risk-free interest rate....................  2.8% to 4.8% 4.1% to 4.8% 4.7% to 5.1%
Weighted average expected option term......   5.16 years   5.25 years     5 years
Netergy weighted average fair value
  of options granted....................... $      0.34  $      0.31  $      0.31
Centile weighted average fair value
  of options granted....................... $      0.29  $      0.26  $      0.26

                                                     Year Ended March 31,
                                             -------------------------------------
                                                2003         2002         2001
                                             -----------  -----------  -----------
Expected volatility........................         162%         135%         141%
Expected dividend yield....................        0.0%         0.0%         0.0%
Risk-free interest rate....................        1.53%        3.82%        4.92%
Weighted average expected rights term......   1.25 years   1.25 years   1.25 years
Weighted average fair value of rights
  granted.................................. $      0.30  $      1.16  $      3.00

                                                     Year Ended March 31,
                                             -------------------------------------
                                                2003         2002         2001
                                             -----------  -----------  -----------
Revenues:
  Netergy.................................. $     9,719  $    13,350  $    15,850
  Centile..................................         861          260          198
  Corporate and Other......................         423        1,081        2,180
                                             -----------  -----------  -----------
          Total revenues................... $    11,003  $    14,691  $    18,228
                                             ===========  ===========  ===========
Gross profit:
  Netergy.................................. $     5,928  $    10,656  $    10,792
  Centile..................................         667          205           71
  Corporate and Other......................         118        1,007          379
                                             -----------  -----------  -----------
          Total gross profit............... $     6,713  $    11,868  $    11,242
                                             ===========  ===========  ===========
Operating loss:
  Netergy.................................. $    (4,169) $    (1,509) $    (5,668)
  Centile..................................      (4,081)      (5,721)     (13,024)
  Corporate and Other......................      (3,750)      (2,784)     (55,781)
                                             -----------  -----------  -----------
          Total operating loss............. $   (12,000) $   (10,014) $   (74,473)
                                             ===========  ===========  ===========
Net loss:
  Netergy.................................. $    (4,002) $    (1,318) $    (5,661)
  Centile..................................      (4,337)      (5,627)     (12,955)
  Corporate and Other......................      (3,064)      (2,160)     (55,783)
                                             -----------  -----------  -----------
          Total net loss................... $   (11,403) $    (9,105) $   (74,399)
                                             ===========  ===========  ===========

                                                     Year Ended March 31,
                                             -------------------------------------
                                                2003         2002         2001
                                             -----------  -----------  -----------
United States.............................. $     4,218  $     5,777  $     5,632
Europe.....................................       2,657        4,126        5,862
Taiwan.....................................       1,569        2,026        2,739
Japan......................................         919        1,119        1,188
Other......................................       1,640        1,643        2,807
                                             -----------  -----------  -----------
                                            $    11,003  $    14,691  $    18,228
                                             ===========  ===========  ===========

                                                                     March 31,
                                                                --------------------
                                                                  2003       2002
                                                                ---------  ---------
                                                                  (in thousands)

United States................................................. $     645  $   2,051
United Kingdom................................................        --        602
France........................................................       244        452
                                                                ---------  ---------
                                                               $     889  $   3,104
                                                                =========  =========

                                      Balance   Additions
                                        at      Charged to             Balance
                                     Beginning  Costs and              at End
Description                           of Year   Expenses   Deductions  of Year
- -----------------------------------  ---------  ---------  ---------  ---------
Allowance for doubtful accounts:
 Year ended March 31, 2001......... $     442  $      25  $      78  $     389
 Year ended March 31, 2002.........       389          --       103        286
 Year ended March 31, 2003.........       286         20        165        141

                                                                        QUARTER ENDED
                                        ------------------------------------------------------------------------------
                                        March 31, Dec. 31,  Sept. 30, June 30,  March 31, Dec. 31,  Sept. 30, June 30,
                                          2003      2002      2002      2002      2002      2001      2001      2001
                                        --------  --------  --------  --------  --------  --------  --------  --------
Total revenues........................ $  2,907  $  2,386  $  2,442  $  3,268  $  2,221  $  4,944  $  3,926  $  3,600
Cost of revenues......................    1,692       755       982       861       692       659       434     1,038
                                        --------  --------  --------  --------  --------  --------  --------  --------
Gross profit..........................    1,215     1,631     1,460     2,407     1,529     4,285     3,492     2,562
                                        --------  --------  --------  --------  --------  --------  --------  --------
Operating expenses:
  Research and development............    1,540     1,825     2,078     2,392     2,705     2,295     2,697     3,868
  Selling, general, and
    administrative....................    1,383     2,023     1,852     2,183     1,956     2,269     2,367     2,962
  Amortization of intangibles.........       --                                     191       190       191       191
  Restructuring and other charges.....    2,097     1,340         --       --         --        --        --       --
                                        --------  --------  --------  --------  --------  --------  --------  --------
        Total operating expenses......    5,020     5,188     3,930     4,575     4,852     4,754     5,255     7,021
                                        --------  --------  --------  --------  --------  --------  --------  --------
Loss from operations..................   (3,805)   (3,557)   (2,470)   (2,168)   (3,323)     (469)   (1,763)   (4,459)
Other income (expense), net...........       27        16       511        43       218       135      (220)       12
                                        --------  --------  --------  --------  --------  --------  --------  --------
Loss before income taxes..............   (3,778)   (3,541)   (1,959)   (2,125)   (3,105)     (334)   (1,983)   (4,447)
Provision for income taxes............       --        --        --        --        15        --        --        --
                                        --------  --------  --------  --------  --------  --------  --------  --------
Net loss before extraordinary gain       (3,778)   (3,541)   (1,959)   (2,125)   (3,120)     (334)   (1,983)   (4,447)
Extraordinary gain on extinguishment
  of debt, net........................       --        --        --        --        --       779        --        --
                                        --------  --------  --------  --------  --------  --------  --------  --------
Net income (loss)..................... $ (3,778) $ (3,541) $ (1,959) $ (2,125) $ (3,120) $    445  $ (1,983) $ (4,447)
                                        ========  ========  ========  ========  ========  ========  ========  ========
Net income (loss) per share:
  Basic............................... $  (0.13) $  (0.12) $  (0.07) $  (0.08) $  (0.11) $   0.02  $  (0.07) $  (0.17)
  Diluted.............................    (0.13)    (0.12)    (0.07)    (0.08)    (0.11)     0.02     (0.07)    (0.17)
Shares used in per share calculations:
  Basic...............................   28,460    28,452    28,387    28,246    28,156    27,201    26,958    26,769
  Diluted.............................   28,460    28,452    28,387    28,246    28,156    27,438    26,958    26,769