FORWARD-LOOKING STATEMENTS

This Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may," "will," "should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends," and similar expressions are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors. These factors include, but are not limited to, customer acceptance and demand for our VoIP products and services, the reliability of our services, the prices for our services, customer renewal rates, customer acquisition costs, actions by our competitors, including price reductions for their telephone services, potential federal and state regulatory actions, compliance costs, potential warranty claims and product defects, our needs for and the availability of adequate working capital, our ability to innovate technologically, the timely supply of products by our contract manufacturers, potential future intellectual property infringement claims that could adversely affect our business and operating results, and our ability to retain our listing on the NASDAQ Capital Market. The forward-looking statements may also be impacted by the additional risks faced by us as described in this Report. All forward-looking statements included in this Report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. In addition to those factors discussed elsewhere in this Form 10-Q, see the Risk Factors discussion in Item 1A of our 2008 Form 10-K and Part II, Item 1A of this Form 10-Q. The forward-looking statements included in this Form 10-Q are made only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

BUSINESS OVERVIEW

We develop and market telecommunication technology for Internet protocol, or IP, telephony and video applications. We offer the Packet8 broadband voice over Internet protocol, or VoIP, and video communications service, Packet8 Virtual Office service, Packet8 Trunking service, Packet8 Hosted Key System service, Packet8 MobileTalk and videophone equipment and services (collectively, Packet8). We shipped our first VoIP product in 1998, launched our Packet8 service in November 2002, launched the Packet8 Virtual Office business service offering in March 2004, and launched the Packet8 Virtual Trunking service offering in June 2008. Substantially all of our revenues are generated from the sale, license and provisioning of VoIP products, services and technologies.

CRITICAL ACCOUNTING POLICIES & ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience

SELECTED OPERATING STATISTICS

We periodically review certain key business metrics, within the context of our
articulated performance goals, in order to evaluate the effectiveness of our
operational strategies, allocate resources and maximize the financial
performance of our business. The selected operating statistics include the
following:

                                             Selected Operating Statistics
                   ---------------------------------------------------------------------------------

                   Dec. 31,    Sept. 30,   June 30,    March 31,   Dec. 31,    Sept. 30,   June 30,
                     2008        2008        2008        2008        2007        2007        2007
                   ---------   ---------   ---------   ---------   ---------   ---------   ---------

Gross business
customer
additions (1)         2,437       3,324       2,398       2,162       1,924       1,872       1,746
Gross business
customer
cancellations
(less
   cancellations
within 30 days
of sign-up)           1,224       1,187       1,098       1,138         949         849         876
Business
customer churn
(less
cancellations
   within 30
days of sign-up)
(2)                     2.9%        3.1%        3.2%        3.6%        3.3%        3.3%        3.8%
Total business
customers (3)        14,706      13,744      11,898      10,845      10,007       9,111       8,160

Business
customer average
service revenue
   per customer
(4)                   $ 208       $ 220       $ 237       $ 229       $ 233       $ 234       $ 247

Revenue from
business
customers (in
'000s)             $ 10,614     $ 9,826     $ 9,077     $ 8,111     $ 7,542     $ 6,953     $ 6,444
Revenue from
residential and
video
   customers (in
'000s)              $ 5,572     $ 6,356     $ 7,192     $ 7,685     $ 8,182     $ 7,793     $ 8,181
Revenue from           $ 17       $ 243        $ 12       $ 536        $ 80        $ 22       $ 117
technology         ---------   ---------   ---------   ---------   ---------   ---------   ---------
licensing (in
'000s)
   Total Revenue   $ 16,203    $ 16,425    $ 16,281    $ 16,332    $ 15,804    $ 14,768    $ 14,742
                   ---------   ---------   ---------   ---------   ---------   ---------   ---------

Percentage of
revenue from
business
customers              65.5%       59.8%       55.8%       49.7%       47.7%       47.1%       43.7%
Percentage of
revenue from
residential and
   video
customers              34.4%       38.7%       44.1%       47.0%       51.8%       52.8%       55.5%
Percentage of
revenue from
technology
   licensing            0.1%        1.5%        0.1%        3.3%        0.5%        0.1%        0.8%
                   ---------   ---------   ---------   ---------   ---------   ---------   ---------
   Total Revenue      100.0%      100.0%      100.0%      100.0%      100.0%      100.0%      100.0%
                   ---------   ---------   ---------   ---------   ---------   ---------   ---------

Overall service
margin                   74%         73%         75%         74%         70%         67%         70%
Overall product
margin                    9%        -10%        -13%        -23%         15%        -77%         -4%
   Overall gross
margin                   67%         65%         68%         67%         65%         52%         64%

Total (business,
residential and
video)
   subscriber
acquisition cost
per service (5)       $ 135       $ 163       $ 162       $ 155       $ 129        $ 99       $ 138
Business
subscriber
acquisition cost
per
   service (6)        $ 141       $ 171       $ 171       $ 158       $ 161       $ 142       $ 141
Average number
of services
subscribed to
per
   business
customer                6.6         6.9         7.1         7.2         7.3         7.2         7.0
Business
customer
subscriber
acquisition cost
(7)                   $ 933     $ 1,174     $ 1,217     $ 1,135     $ 1,177     $ 1,028       $ 991

Residential
lines in service     86,992      93,865     100,937     107,260     112,229     117,338     100,571
Total (business,
residential and
video)
   customer
churn (less
cancellations
within
   30 days of
sign-up) (8)            3.9%        4.2%        3.5%        4.0%        3.8%        3.9%        4.6%

(1) Includes 1,154 "Find me, Follow me" and 40 8x8 Virtual Office customers acquired in the second quarter of fiscal 2009 from Avtex Solutions, LLC ("Avtex"). During the second fiscal quarter of 2009, we incurred an expense of approximately $0.1 million related to the acquisition of 1,194 business customers from Avtex.

(3) Business customers are defined as customers paying for service. Prior to April 1, 2008, 8x8 included customers in the business customer count that were using the service as a trial or evaluation and not yet paying for service. The numbers in this table prior to and after April 1, 2008, only include business customers that are paying for service. Customers that have prepaid for their first month of service and are currently in the 30 day trial period are considered to be customers that are paying for service.

(4) Business customer average service revenue per customer is service revenue from business customers in the period divided by the number of months in the period divided by the simple average number of business customers during the period.

(5) Total (business, residential and video) subscriber acquisition cost per service is defined as the combined costs of advertising, marketing, promotions, commissions and equipment subsidies during the period divided by the number of gross services added during the period.

(6) Business subscriber acquisition cost per service is defined as the combined costs of advertising, marketing, promotions, commissions and equipment subsidies for business services sold during the period divided by the number of gross business services added during the period. The addition of 1,154 Avtex customers that migrated to 8x8 in the second fiscal quarter of 2009 but subscribed to "Find me, Follow me" services rather than 8x8 Virtual Office service, and the $79,230 in expense related to the acquisition of these 1,154 customers, is excluded from this calculation.

(7) Business customer subscriber acquisition cost is business subscriber acquisition cost per service times the average number of services subscribed to per business customer.

(8) Total (business, residential and video) customer churn is calculated by dividing the number of services terminated (after the expiration of the 30 day trial) during that period by the simple average number of services during the period and dividing the result by the number of months in the period. The simple average number of services during the period is the number of services on the first day of the period plus the number of services on the last day of the period divided by two.

OUTLOOK

As reflected in the Selected Operating Statistics above, 8x8 achieved record organic (non-acquisition-related) sales to business customers during the third fiscal quarter of 2009. While our IP-based communications services are innately designed to save businesses money on monthly telecommunications costs, we are conscious that, in light of the current macroeconomic environment, our new sales could potentially decline if business customers are forced to reduce their telecommunication spending. In addition, we actively monitor business customer cancellations for non- payment. While our business customer churn declined to 2.9% in the third quarter of 2009 compared with 3.6% in the same period a year ago, we have determined that in the first and second quarter of fiscal 2009, cancellations for non-payment represented 33% and 34% of our total business customer cancellations while in the third quarter of fiscal 2009, cancellations for non-payment of our business customer cancellations increased to 40% of total business customer cancellations. Management remains focused on monitoring these metrics in light of the current U.S. macroeconomic conditions.

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our condensed
consolidated financial statements and the notes thereto.

                                       December 31,
                                 -------------------------     Dollar   Percent
                                   2008            2007        Change   Change
Service revenues                 ---------       ---------     ------   -------
                                    (dollar amounts in thousands)
Three months ended             $   14,366     $    14,426    $   (60)     -0.4%
Percentage of total revenues         88.7%           91.3%
Nine months ended              $   44,288     $    41,109    $ 3,179       7.7%
Percentage of total revenues         90.6%           90.7%

Service revenues consist primarily of revenues attributable to the provision of our Packet8 service and royalties earned under our VoIP technology licenses. We expect that Packet8 service revenues will continue to comprise nearly all of our service revenues for the foreseeable future.

The increase in revenues from operations for the first nine months of fiscal 2009 compared with the same period in the prior fiscal year resulted primarily from a $7.1 million increase in revenues attributable to the growth in the business customer base and a $0.1 million increase in revenue attributable to royalties earned. The increase in service revenues from business customers was partially offset by a net reduction of $3.4 million attributable to residential and videophone services in the nine-month period. Also, compared with the same period last year, there was a $0.6 million reduction in the one time recognition of revenue due to a ruling by the U.S. Court of Appeals for the District of Columbia in June 2007 that interconnected VoIP providers are not required to obtain pre-approval of traffic studies. As a result of the ruling, in the first quarter of fiscal 2008 we retroactively applied our traffic study contribution rate to the historical subscriber retail revenues which resulted in the recognition of revenue of $0.6 million from the reduction of the related accrued liability in the first fiscal quarter of 2008.

                                      December 31,
                                 -----------------------      Dollar   Percent
                                   2008           2007        Change   Change
Product revenues                 --------       --------      ------   -------
                                    (dollar amounts in thousands)
Three months ended             $   1,837     $    1,378     $   459      33.3%
Percentage of total revenues        11.3%           8.7%
Nine months ended              $   4,621     $    4,205     $   416       9.9%
Percentage of total revenues         9.4%           9.3%

Product revenues consist of revenues from sales of VoIP terminal adapters, telephones and videophones, primarily attributable to our Packet8 service. The increase in product revenue for the three and nine months ended December 31, 2008 was primarily due to growth in the business customer base. This increase in product revenues was offset by a decrease in new residential customers.

No customer represented greater than 10% of our total revenues for the three and nine months ended December 31, 2008 and 2007. Revenues from customers outside the United States were not material for the three and nine months ended December 31, 2008 or 2007.

                                        December 31,
                                   -----------------------     Dollar    Percent
                                     2008           2007       Change    Change
Cost of service revenues           ---------       -------     -------   -------
                                      (dollar amounts in thousands)
Three months ended               $    3,699     $   4,364    $   (665)    -15.2%
Percentage of service revenues         25.7%         30.3%
Nine months ended                $   11,535     $  12,780    $ (1,245)     -9.7%
Percentage of service revenues         26.0%         31.1%

The cost of service revenues primarily consists of costs associated with network operations and related personnel, telephony origination and termination services provided by third party carriers and technology license and royalty expenses. Cost of service revenues for the three and nine months ended December 31, 2008 decreased $0.7 million and $1.2 million, respectively, over the comparable periods in the prior fiscal year primarily due to a reduction in pricing by third party network service vendors and our use of multiple third party network provider vendors, which allows us to route call traffic to the third party network provider vendor with the most favorable pricing. The reduction in pricing by third party network service vendors was partially offset by an increase in personnel costs over the comparable periods in the prior fiscal year.

                                        December 31,
                                   -----------------------      Dollar   Percent
                                     2008           2007        Change   Change
Cost of product revenues           --------       --------      ------   -------
                                      (dollar amounts in thousands)
Three months ended               $   1,681     $    1,175     $   506      43.1%
Percentage of product revenues        91.5%          85.3%
Nine months ended                $   4,786     $    5,210     $  (424)     -8.1%
Percentage of product revenues       103.6%         123.9%

The cost of product revenues consists of costs associated with systems, components, system manufacturing, assembly and testing performed by third-party vendors, estimated warranty obligations and direct and indirect costs associated with product purchasing, scheduling, quality assurance, shipping and handling.

The increase for the third quarter of fiscal 2009 compared with the same period in the prior fiscal year was primarily due to the one time reduction in product reserves of $0.5 million in the third quarter of fiscal 2008, as we eliminated a royalty expense accrual after determining that we were unlikely to pay royalties in the future, and a $0.4 million increase in the shipment of equipment to our business customers. The increase in cost of product revenues was partially offset by a $0.4 million decrease in shipments of equipment to residential subscribers.

The decrease in cost of product revenues for the first nine months of fiscal 2009 compared with the same period in the prior fiscal year was primarily due to a $1.5 million decrease in shipments of equipment to residential subscribers and a $0.3 million decrease in shipping costs. This decrease was partially offset by a $0.9 million increase in shipments of equipment to our business customers and a one time reduction in product reserves of $0.5 million in the third quarter of fiscal 2008 resulting from the elimination of a royalty expense accrual..

We generally do not separately charge Packet8 residential subscribers for the terminal adapters or telephone equipment used to provide our service when they subscribe via our website. We have offered incentives to customers who purchase terminal adapters in our retail channels to offset the cost of the equipment purchased from a retailer, and generally these incentives are recorded as reductions of revenue. In accordance with FASB Emerging Issues Task Force Issue No. 00-21, a portion of Packet8 services revenues is allocated to product revenues, but these revenues are less than the cost of the terminal adapters at the time of purchase.

Cost of product revenues as a percentage of product revenues increased from 85.3% for the third quarter of fiscal 2008 to 91.5% for the third quarter of fiscal 2009. The cost of product revenues as a percentage of product revenue increased due to a one-time $0.5 million reduction in product reserves in the third quarter of fiscal 2008 resulting from the elimination of a royalty expense accrual.

Cost of product revenues as a percentage of product revenues decreased from 123.9% for the nine months ended December 31, 2007 to 103.6% for the nine months ended December 31, 2008. The cost of product revenues as a percentage of product revenues decreased in part due to a reduction in discounting of product sales by our sales force in the nine months ended December 31, 2008.

                                      December 31,
                                 -----------------------      Dollar   Percent
                                   2008           2007        Change   Change
Research and development         --------       --------      ------   -------
                                    (dollar amounts in thousands)
Three months ended             $   1,183     $    1,081     $   102       9.4%
Percentage of total revenues         7.3%           6.8%
Nine months ended              $   3,674     $    3,164     $   510      16.1%
Percentage of total revenues         7.5%           7.0%

Research and development expenses consist primarily of personnel, system prototype, software and equipment costs necessary for us to conduct our engineering and development efforts. The increase in research and development expenses for the third quarter of fiscal 2009 and the first nine months of fiscal 2009 compared with the same periods in the prior fiscal year was primarily attributable to an increase in personnel expenses.

                                              December 31,
                                        -------------------------     Dollar   Percent
                                          2008            2007        Change   Change
Selling, general and administrative     ---------       ---------     ------   -------
                                           (dollar amounts in thousands)
Three months ended                    $    9,562     $     9,604    $   (42)     -0.4%
Percentage of total revenues                59.0%           60.8%
Nine months ended                     $   27,980     $    28,573    $  (593)     -2.1%
Percentage of total revenues                57.2%           63.1%

Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, customer support, finance, human resources and general management. Such costs also include sales commissions, trade show, advertising and other marketing and promotional expenses. Selling, general and administrative expenses for the third quarter of fiscal 2009 decreased over the same quarter in the prior fiscal year primarily because of a $0.3 million reduction in advertising, public relations and other marketing and promotional expenses, a $0.3 million reduction in sales agent and retailer commissions and a $0.1 reduction in sales and use tax expense as we began collecting such taxes directly from customers in fiscal 2008. The decrease in expenses was partially offset by a $0.7 million increase in personnel and temporary personnel costs.

Selling, general and administrative expenses for the first nine months of fiscal 2009 decreased over the same period in the prior fiscal year primarily because of a $1.3 million reduction in sales and use tax expense as we began collecting such taxes directly from customers in fiscal 2008, a $1.2 million reduction in sales agent and retailer commissions, a $0.3 million reduction in accounting and tax expenses and a $0.1 million reduction credit card processing fees. The decrease in expenses was partially offset by a $1.6 million increase in personnel and temporary personnel costs, a $0.5 million increase in advertising, public relations and other marketing and promotional expenses, a $0.1 million increase in travel expenses and a $0.1 million increase in printing expenses.

                                      December 31,
                                 ----------------------      Dollar    Percent
                                  2008          2007         Change    Change
Other income, net                ------       ---------      -------   -------
                                    (dollar amounts in thousands)
Three months ended             $    74     $     1,361     $ (1,287)    -94.6%
Percentage of total revenues       0.5%            8.6%
Nine months ended              $   266     $     1,654     $ (1,388)    -83.9%
Percentage of total revenues       0.5%            3.7%

In the third fiscal quarter of 2009 and the first nine months of fiscal 2009, other income, net primarily consisted of interest and investment income earned on our cash, cash equivalents and investment balances. The decrease in other income, net for the third quarter of fiscal 2009 and the first nine months of . . .