FORWARD-LOOKING INFORMATION

This report contains certain forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) and information relating to us that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. Additional forward looking statements may be identified by the words "anticipate," "believe," "expect," "intend," "plan," or the negative of such terms, or similar expressions, as they relate to us or our management.

The forward-looking statements contained herein reflect our judgment as of the date of this report with respect to future events, the outcome of which is subject to certain risks that may have a significant impact on our business, operating results or financial condition. You are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, or the outcome of present and future litigation, regulatory developments or other contingencies. You should carefully review the cautionary statements contained in our Annual Report on Form 10-K for the year ended September 30, 2008, including those set forth in Item 1A. "Risk Factors" of that report.

OVERVIEW

We are a pioneer and market leader in Internet protocol telephony systems for small- to medium-sized businesses. We design, manufacture and market next generation, Internet protocol phone systems and contact centers that use both the Internet and the public telephone network to take advantage of the convergence of voice and data communications. Unlike traditional proprietary phone systems, our systems are designed with open architecture and are built on an industry standard platform. This adherence to industry standards allows our products to play an important role in the small- to medium-sized business market by delivering phone systems that can interface with other technologies and provide integrated voice and data solutions. We believe this enables our customers to implement communication systems solutions that have an increased return on investment versus past technology investments. We generated net revenue of $3.6 million and $8.4 million for the three and six months ended March 31, 2009, respectively, compared to net revenue of $4.7 million and $9.0 million for the three and six months ended March 31, 2008, respectively. As of March 31, 2009, we had an accumulated deficit of $59.3 million. Net cash used in operating activities was $1.3 million for the six months ended March 31, 2009.

We derive our revenue from sales of our telephone systems. Product revenue is comprised of direct sales to end-users and resellers and sales to distributors. Revenue from product sales to end users and resellers are recognized upon shipment. We defer recognition of revenue for sales to distributors until they resell our products to their customers. Upon shipment, we also provide a reserve for the estimated cost that may be incurred for product warranty. Under our distribution contracts, a distributor has the right, in certain circumstances, to return products it determines are overstocked, so long as it provides an offsetting purchase order for products in an amount equal to or greater than the dollar value of the returned products. In addition, we provide distributors protection from subsequent price reductions.

Our cost of revenue consists of component and material costs, direct labor costs, provisions for excess and obsolete inventory, warranty costs and overhead related to the manufacturing of our products. Several factors that have affected and will continue to affect our revenue growth are the state of the economy, the market acceptance of our products, our ability to add new resellers and our ability to design, develop, and release new products. We engage third-party assemblers, which for the six months ended March 31, 2009 were All Quality Services in Fremont, California and ISIS Surface Mounting, Inc. in San Jose, California to insert the hardware components into the printed circuit board. We purchase fully-assembled chassis from Advantech Corporation, analog phones from Fanstel Corporation, Internet protocol phones from BCM Communications, Inc., single board computers for our MAX product from AAEON Electronics, Inc. and raw material components from Avnet Electronics. We selected our manufacturing partners with the goals of ensuring a reliable supply of high-quality finished products and lowering per unit product costs as a result of manufacturing economies of scale. We cannot assure you that we will maintain the volumes required to realize these economies of scale or when or if such cost reductions will occur. The failure to obtain such cost reductions could materially adversely affect our gross margins and operating results.

We continue to focus on developing enhancements to our current products to provide greater functionality and increased capabilities, based on our market research, customer feedback and our competitors' product offerings, as well as creating new product offerings to both enhance our position in our target market segment and enter new geographical markets. Additionally, we intend to continue selling our products to small- to medium-sized businesses, enterprise businesses, multisite businesses, corporate and branch offices and call centers. Also, we plan to continue to recruit additional resellers and distributors to focus on selling phone systems to our target customers. We believe that the adoption rate for this Internet telephony is much faster with small- to medium-sized businesses because many of these businesses have not yet made a significant investment for a traditional phone system. Also, we believe that small- to medium-sized businesses are looking for call center-type administration to increase the productivity and efficiency of their contacts with customers.

CRITICAL ACCOUNTING POLICIES

Revenue Recognition. Net sales consist primarily of revenue from direct sales to end-users, resellers and distributors. We recognize revenue pursuant to SEC Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, ("SAB No. 104"). Revenue from sales to end-users is recognized upon shipment, when risk of loss has passed to the customer, collection of the receivable is reasonably assured, persuasive evidence of an arrangement exists, and the sales price is fixed and determinable. We provide for estimated sales returns and allowances and warranty costs related to such sales at the time of shipment in accordance with SFAS No. 48, Revenue Recognition when Right of Return Exists ("SFAS No. 48"). Net revenue consists of product revenue reduced by estimated sales returns and allowances. Sales to distributors are made under terms allowing certain rights of return and protection against subsequent price declines on our products held by the distributors. Upon termination of such distribution agreements, any unsold products may be returned by the distributor for a full refund. These agreements may be canceled without cause for convenience following a specified notice period. As a result of the above provisions, we defer recognition of distributor revenue until such distributors resell our products to their customers. The amounts deferred as a result of this policy are reflected as "deferred revenue" in the accompanying consolidated balance sheets. The related cost of revenue is also deferred and reported in the consolidated balance sheets as inventory. As of March 31, 2009, our total deferred revenue was $2.9 million compared to $1.9 million for the same period in fiscal 2008, an increase of $1.0 million over the same period in the prior year. The increase was primarily the result of continued growth of our new recurring revenue programs. These plans include both the Software Assurance Program, which provides our customers with new software releases and support for an annual fee, and the Premier Service Plan, which includes software assurance and extended hardware warranty.

Service Support Plans. In September 2007, we introduced our Software Assurance Program which provides our customers with the latest updates, new releases, and technical support for the applications they are licensed to use. In fiscal 2008, we initiated our Premier Service Plan, which includes software assurance and extended hardware warranty. These programs have an annual subscription and can range from one to three years. Sales from our service support programs are recorded as deferred revenue and recognized as revenue over the terms of their subscriptions. As of March 31, 2009, our deferred revenue was approximately $2.1 million compared to $722,000 for the same period in fiscal 2008. Our new service plan offering remains a significant growth opportunity as we continue to add new service customers.

Software components are generally not sold separately from our hardware components. Software revenue consists of license revenue that is recognized upon delivery of the application products or features. We provide Software Assurance consisting primarily of the latest software updates, patches, new releases and technical support. In accordance with SOP 97-2, revenue earned on software arrangements involving multiple elements is allocated to each element based upon the relative fair value of the elements. The revenue allocated on this element is recognized with the initial licensing fee on delivery of the software. This Software Assurance revenue is in addition to the initial license fee and is recognized over a period of one to three years. The estimated cost of providing Software Assurance during the arrangement is insignificant, and unspecified upgrades and enhancements offered at no cost during Software Assurance arrangements have historically been, and are expected to continue to be, minimal and infrequent. All estimated costs of providing the services, including upgrades and enhancements, are spread over the life of the Software Assurance term.

Cash and Cash Equivalent. We consider all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. Cash and cash equivalents are invested in various investment grade institutional money market accounts, U.S. Agency securities and commercial paper. The Company's investment policy requires investments to be rated single-A or better.

Short-Term Investment. The Company's policy is to invest in highly-rated securities with strong liquidity and requires investments to be rated single-A or better. Short-term investments are comprised of U.S. Agency securities and commercial paper. Short-term investments are highly liquid financial instruments with original maturities greater than three months but less than one year and are classified as "available-for-sale" investments. We classify our available-for-sale securities as current assets and report them at their fair value. Further, we recognize unrealized gains and losses related to these securities as an increase or reduction in stockholders' equity.

Inventory. Inventory is stated at the lower of cost (first-in, first-out method) or market. Our inventory balance for both the six months ended March 31, 2009 and March 30, 2008 was $2.0 million. We perform a detailed review of inventory each fiscal quarter, with consideration given to future customer demand for our products, obsolescence from rapidly changing technology, product development plans, and other factors. If future demand or market conditions for our products are less favorable than those projected by management, or if our estimates prove to be inaccurate due to unforeseen technological changes, we may be required to record additional inventory provision which would negatively affect gross margins in the period when the write-downs were recorded. In prior periods, we had established a reserve to write off excess inventory that management believed would not be sold. For the six months ended March 31, 2009, we disposed of fully-reserved inventory with a carrying value of zero and an original cost at $176,000. We attribute this overall reduction in obsolete inventory to physically disposing of a portion of the reserved inventory. The disposal of such inventory had no material impact on our revenue, gross margins and net loss. For the six months ended March 31, 2009, we recognized a provision of $67,000 for excess and obsolete inventories as compared to a reduction of $1,000 during the same period in the prior year. Inventory allowance was $722,000 as of March 31, 2009 compared to $850,000 as of September 30, 2008. The change in inventory allowance was primarily attributable to the disposal of fully-reserved inventory with a carrying value of zero and an original cost of $176,000.

Warranty Cost. We accrue for warranty costs based on estimated product return rates and the expected material and labor costs to provide warranty services. If actual products return rates, repair cost or replacement costs differ significantly from our estimates, then our gross margin could be adversely affected. The reserve for product warranties was $109,000 as of March 31, 2009 compared to $137,000 as of September 30, 2008. This change was the result of a significant decline in the product return rate caused by changes in our management of the return programs. As a consequence of the Company's standardized manufacturing processes and product testing procedures, returns of defective product are infrequent and the quantities have not been significant. Accordingly, historical warranty costs have not been material.

Results of Operations

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

                                                  Three Months Ended               Six Months Ended
                                                      March 31,                        March 31,
                                                 2009            2008            2009            2008
Consolidated Statements of Operations Data:
Net revenue:
Hardware                                            86.7 %          87.6 %          86.5 %          86.5 %
Software                                            13.3            12.4            13.5            13.5
Total net revenue                                  100.0           100.0           100.0           100.0
Cost of revenue:
Hardware                                            41.0            42.8            39.8            42.4
Software                                             0.1             1.6             0.1             1.5
Total cost of revenue                               41.1            44.4            39.9            43.9

Gross profit                                        58.9            55.6            60.1            56.1

Operating expenses:
Research and development                            34.7            22.0            29.3            21.7
Sales and marketing                                 51.4            39.1            46.5            40.2
General and administrative                          22.7            20.1            21.1            19.6

Total operating expenses                           108.8            81.2            96.9            81.5

Loss from operations                               (49.9 )         (25.6 )         (36.8 )         (25.4 )
Equity in net loss of investee                      (0.1 )          (0.1 )         ( 0.1 )         ( 0.0 )
Interest and other income, net                       0.6             1.7             0.7             2.2
Net loss before income taxes                       (49.4 )         (24.0 )         (36.2 )         (23.2 )
Provision for income taxes                         ( 0.0 )         ( 0.0 )           0.2           ( 0.0 )

Net loss                                           (49.4 ) %       (24.0 ) %       (36.0 ) %       (23.2 ) %

Net Revenue

Net sales consist primarily of revenue from direct sales to end-users and resellers and sales to distributors.

We are organized and operate as two operating segments, the Americas and International. The Americas is comprised of the United States, Canada, Mexico, Central America and the Caribbean. The International segment is comprised of China, the United Kingdom and Norway.

The following table sets forth percentages of net revenue by geographic region with respect to such revenue for the periods indicated:

                                Three Months Ended           Six Months Ended
                                     March 31,                   March 31,
                               2009            2008          2009          2008
             Americas               86 %            88 %         86 %         87 %
             International          14 %            12 %         14 %         13 %

             Total                 100 %           100 %        100 %        100 %



Net revenue by customers that individually accounted for more than 10% of our
revenue for the three and six months ended March 31, 2009 and 2008,
respectively, were as follows:

                               Three Months Ended          Six Months Ended
                                   March 31,                   March 31,
                              2009             2008       2009          2008
               Synnex              28 %           34 %        30 %          35 %
               Jenne               14 %           11 %        18 %           7 %
               AltiSys              9 %           15 %         6 %          16 %
               Graybar(*)           -             15 %         -            14 %
               Total               51 %           75 %        54 %          72 %


_______________________

The following table sets forth percentage of net revenue by product type with respect to such revenue for the periods indicated:

                                      Three Months Ended           Six Months Ended
                                           March 31,                   March 31,
                                     2009            2008          2009           2008
       Hardware                           69 %            88 %          72 %         86 %
       Software                           13 %            12 %          14 %         14 %
       Service Support Plans (1)          18 %             -            14 %          -
       Total                             100 %           100 %         100 %        100 %


_______________________

Net revenue for the three months ended March 31, 2009 was $3.6 million as compared to $4.7 million for the three months ended March 31, 2008. Revenue generated in the Americas segment accounted for $3.1 million, or 86% of our total net revenue, as compared to $4.1 million, or 88% of our total net revenue, for the three months ended March 31, 2009 and March 31, 2008, respectively. Revenue generated in the International segment accounted for $489,000, or 14% of our total net revenue, as compared to $576,000, or 12% of our total net revenue, for the three months ended March 31, 2009 and March 31, 2008, respectively. In the Americas segment, during the three months ended March 31, 2009 and 2008, we generated $664,000 and $183,000, respectively, in non-system related revenue. Non-system related revenue is primarily comprised of revenue generated from our service support plans. In the Americas segment, the decrease in net revenue excluding non-system related revenue was approximately 39%. This decrease was primarily attributable to a lower number of systems shipped during the three months ended March 31, 2009 as compared to the corresponding period in the previous year.

Net revenue for the six months ended March 31, 2009 was $8.4 million as compared to $9.0 million for the six months ended March 31, 2008. Revenue generated in the Americas segment accounted for $7.2 million, or 86% of our total net revenue, as compared to $7.8 million, or 87% of our total net revenue, for the six months ended March 31, 2009 and March 31, 2008, respectively. Revenue generated in the International segment accounted for $1.2 million, or 14% of our total net revenue, as compared to $1.2 million, or 13% of our total net revenue, for the six months ended March 31, 2009 and March 31, 2008, respectively. In the Americas segment, during the six months ended March 31, 2009 and 2008, we generated approximately $1.3 million and $241,000, respectively, in non-system related revenue. Non-system related revenue is primarily comprised of revenue generated from our service support plans. In the Americas segment, the decrease in net revenue excluding non-system related revenue was approximately 21%. This decrease in this segment was primarily attributable to change in our product
mix. During the six months ended March 31, 2009, the number of systems shipped was approximately 23% lower than the corresponding period in the previous year but the average revenue per system was higher by approximately 1.7%. The average revenue per system was higher as result of a decrease in our smaller systems of approximately 33% and an increase in our larger systems of approximately 11%, reflecting a higher number of extensions per system shipped.

Cost of Revenue

Our cost of product revenue consists primarily of component and material costs, direct labor costs, provisions for excess and obsolete inventory, warranty costs and overhead related to the manufacturing of our products. The majority of these costs vary with the unit volumes of product sold.

Cost of revenue as a percentage of net revenue decreased to 41% for the three months ended March 31, 2009 as compared to 44% for the same period of the previous fiscal year. This decrease was primarily caused by a shift in our product mix in the period and the impact of lower sales volume over the prior year quarter. For the six months ended March 31, 2009 and 2008, cost of revenue as a percentage of net revenue decreased from 44% to 40%, respectively. This change was primarily attributable to an increase of our non-system related revenue.

Research and Development

Research and development expenses consist primarily of costs related to personnel and overhead expenses, consultant expenses and other costs associated with the design, development, prototyping and testing of our products and enhancements of our converged telephone system software. For the second quarter of fiscal 2009, research and development expenses were $1.2 million, or 35% of net revenue, compared to $1.0 million, or 22% of net revenue, for the second quarter of fiscal 2008. The increase in absolute dollars was primarily attributable to an increase of $52,000 in personnel-related expenses, an increase of $56,000 in project related expenses and an increase of $53,000 in consulting related services. Research and development expenses increased to $2.4 million, or 29% of net revenue, for the six months ended March 31, 2009 from $1.9 million, or 22% of net revenue, for the same period in fiscal 2008. This increase in absolute dollars reflects increased personnel-related and overhead expenses of approximately $134,000, an increase of $144,000 in project related expenses and an increase of $121,000 in consulting related services. Additionally, research and development activities increased in Shanghai, which resulted in an increase of $68,000 in overall expenses.

We intend to continue to make investments in our research and development and we believe that focused investments in research and development are critical to the future growth and our ability to enhance our competitive position in the marketplace. We believe that our ability to develop and meet enterprise customer requirements is essential to our success. Accordingly, we have assembled a team of engineers with expertise in various fields, including voice and IP communications, unified communications network design, data networking and software engineering. Our principal research and development activities are conducted in Fremont, California and our subsidiary in Shanghai, China. Management continues to focus on cost control until business conditions improve. If business conditions deteriorate or the rate of improvement does not meet our expectations, we may implement additional cost-cutting actions.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales and customer support functions, as well as trade shows, advertising, and promotional expenses. For the second quarter of fiscal 2009 and 2008, sales and marketing expenses were $1.8 million. Sales and marketing as a percentage of net revenue increased to 51% for the three months ended March 31, 2009 from 39% for the same period in the previous fiscal year. Sales and marketing expenses increased to $3.9 million, or 46% of net revenue, for the six months ended March 31, 2009 from $3.6 million, or 40% of net revenue, for the same period in fiscal 2008. This increase in absolute dollars was driven by an increase in personnel-related and overhead expenses of $287,000, primarily as a result of increased headcount of approximately 12%.

We anticipate that sales and marketing expenses will decrease but will remain the largest category of our operating expenses in future periods over the short term. We plan to continue investing in our domestic and international marketing activities to help build brand awareness and create sales leads for our channel partners. Management continues to focus on cost control until business conditions improve. If business conditions deteriorate or the rate of improvement does not meet our expectations, we may implement additional cost-cutting actions.

General and Administrative

General and administrative expenses consist of salaries and related expenses for executive, finance and administrative personnel, facilities, allowance for doubtful accounts, legal and other general corporate expenses. For the second quarter of fiscal 2009, general and administrative expenses were $811,000 or 23% of revenue, compared to $946,000 or 20% of revenue for the second quarter of fiscal 2008. The decrease in absolute dollars in general and administrative was attributable to decreased non-cash stock-based compensation expenses of $62,000 and decreased consulting related services of $54,000. For the six months ended March 31, 2009 and 2008, general and administrative expenses were $1.8 million. As a percentage of net revenue, general and administrative increased to 21% for the six months ended March 31, 2009 from 20% for the same period in the previous fiscal year.

Management continues to focus on cost control until business conditions improve. If business conditions deteriorate or the rate of improvement does not meet our expectations, we may implement additional cost-cutting actions.

. . .