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, including those set forth under the section entitled "Factors that May Affect Future Results." 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 2009 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.

We develop and market telecommunication technology for Internet protocol, or IP, telephony and video applications. We offer the 8x8 broadband and video communications service and launched the 8x8 residential service offering in November 2002 and the 8x8 business service offering in March 2004. Substantially all of our revenue is generated from the sale, license and provisioning of VoIP products, services and technologies.

Our fiscal year ends March 31 of each calendar year. Each reference to a fiscal year in this report refers to the fiscal year ending March 31 of the calendar year indicated (for example, fiscal 2010 refers to the fiscal year ending March 31, 2010).

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, revenue 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 and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-1, "Topic 105 - Generally Accepted Accounting Principles," ("ASU 2009-1") which amended ASC 105, "Generally Accepted Accounting Principles," to establish the Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All previous references to the superseded standards in our consolidated financial statements have been replaced by references to the applicable sections of the Codification. The adoption of ASU 2009-1 did not have a material impact on our financial position or results of operation.

In May 2009, the FASB issued an amendment to ASC 855 - Subsequent Events (formerly SFAS No. 165, "Subsequent Events"). The statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The adoption of ASC 855 did not have a material impact on our financial position or results of operation.

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
                 ---------------------------------------------------------------------------------------------
                 Sept. 30,   June 30,    March 31,   Dec. 31,    Sept. 30,   June 30,    March 31,   Dec. 31,
                   2009        2009        2009        2008        2008        2008        2008        2007
                 ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
Gross business
customer
additions (1)       2,609       2,907       2,792       2,437       3,324       2,398       2,162       1,924
Gross business
customer
cancellations
(less
   cancellations
within 30 days
of sign-up)         1,416       1,371       1,245       1,224       1,187       1,098       1,138         949
Business
customer churn
(less
cancellations
   within 30
days of sign-up)
(2)                   2.7%        2.7%        2.7%        2.9%        3.1%        3.2%        3.6%        3.3%
Total business
customers (3)      18,199      17,266      16,013      14,706      13,744      11,898      10,845      10,007

Business
customer average
monthly service
   per customer
(4)                 $ 201       $ 196       $ 202       $ 208       $ 220       $ 237       $ 229       $ 233

Revenue from
business
customers (in
'000s)           $ 11,842    $ 10,722    $ 10,728    $ 10,614     $ 9,826     $ 9,077     $ 8,111     $ 7,542
Revenue from
residential and
video
   customers (in
'000s)            $ 4,168     $ 4,811     $ 5,236     $ 5,572     $ 6,356     $ 7,192     $ 7,685     $ 8,182
Revenue from         $ 17        $ 25      $ (199)       $ 17       $ 243        $ 12       $ 536        $ 80
technology       ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
licensing (in
'000s)
   Total Revenue $ 16,027    $ 15,558    $ 15,765    $ 16,203    $ 16,425    $ 16,281    $ 16,332    $ 15,804
                 ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------

Percentage of
revenue from
business
customers            73.9%       68.9%       68.1%       65.5%       59.8%       55.8%       49.7%       47.7%
Percentage of
revenue from
residential and
   video
customers            26.0%       30.9%       33.2%       34.4%       38.7%       44.1%       47.0%       51.8%
Percentage of
revenue from
technology
   licensing          0.1%        0.2%       -1.3%        0.1%        1.5%        0.1%        3.3%        0.5%
                 ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
   Total Revenue    100.0%      100.0%      100.0%      100.0%      100.0%      100.0%      100.0%      100.0%
                 ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------

Overall service
margin                 76%         76%         71%         74%         73%         75%         74%         70%
Overall product
margin                -42%        -75%        -50%          9%        -10%        -13%        -23%         15%
   Overall gross
margin                 67%         66%         59%         67%         65%         68%         67%         65%

Total (business,
residential and
video)
   subscriber
acquisition cost
per service (5)      $ 88       $ 108       $ 119       $ 135       $ 163       $ 162       $ 155       $ 129
Business
subscriber
acquisition cost
per
   service (6)       $ 90        $ 93       $ 118       $ 141       $ 171       $ 171       $ 158       $ 161
Average number
of services
subscribed to
per
   business
customer              7.1         6.9         6.6         6.6         6.9         7.1         7.2         7.3
Business
customer
subscriber
acquisition cost
(7)                 $ 638       $ 638       $ 785       $ 933     $ 1,174     $ 1,217     $ 1,135     $ 1,177

Residential
lines in service   68,682      74,809      81,569      86,992      93,865     100,937     107,260     112,229
Total (business,
residential and
video)
   customer
churn (less
cancellations
within
   30 days of
sign-up) (8)          4.3%        3.7%        3.5%        3.9%        4.2%        3.5%        4.0%        3.8%

(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").
(2) Business customer churn is calculated by dividing the number of business customers that terminated (after the expiration of the 30 day trial) during that period by the simple average number of business customers during the period and dividing the result by the number of months in the period. The simple average number of business customers during the period is the number of business customers on the first day of the period plus the number of business customers on the last day of the period divided by two.
(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 monthly 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.

RESULTS OF OPERATIONS

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

                                       September 30,
                                 -------------------------     Dollar   Percent
Service revenues                   2009            2008        Change   Change
                                 ---------       ---------     ------   -------
                                    (dollar amounts in thousands)
Three months ended             $   14,838      $   14,903    $   (65)     -0.4%
Percentage of total revenues         92.6%           90.7%
Six months ended               $   29,358      $   29,922    $  (564)     -1.9%
Percentage of total revenues         92.9%           91.5%

Service revenue consists primarily of revenue attributable to the provision of our 8x8 service and royalties earned under our VoIP technology licenses. We expect that 8x8 service revenue will continue to comprise nearly all of our service revenue for the foreseeable future.

The decrease for the second quarter of fiscal 2010 was primarily due to a $2.1 million decrease in revenue attributable to the decline in the residential and videophone services as we have directed our marketing efforts toward our business customer service. We also had a $0.2 million reduction in royalty revenue. Service revenue from residential and video customers declined primarily because the number of residential and video lines in service fell from approximately 94,000 in the second quarter of fiscal 2009 to approximately 69,000 in the second quarter of fiscal 2010. The decrease in service revenue during the second quarter of fiscal 2010 was partially offset by an increase of $2.2 million in revenue attributable to the growth in the business customer base. The business customer base grew from serving approximately 13,700 businesses on September 30, 2008 to approximately 18,200 on September 30, 2009.

The decrease for the first six months of fiscal 2010 was primarily due to a $4.3 million decrease in revenue attributable to the decline in the residential and videophone services as the number of residential and video lines in service declined from approximately 107,000 at the beginning of fiscal 2009 to approximately 69,000 in the second quarter of fiscal 2010. The decrease in service revenue during the second quarter of fiscal 2010 was partially offset by an increase of $3.9 million in revenue attributable to the growth in the business customer base, which grew from serving approximately 10,800 businesses on April 1, 2008 to approximately 18,200 on September 30, 2009.

                                      September 30,
                                 -----------------------      Dollar   Percent
Product revenues                   2009           2008        Change   Change
                                 --------       --------      ------   -------
                                    (dollar amounts in thousands)
Three months ended             $   1,189      $   1,522     $  (333)    -21.9%
Percentage of total revenues         7.4%           9.3%
Six months ended               $   2,227      $   2,784     $  (557)    -20.0%
Percentage of total revenues         7.1%           8.5%

Product revenue consists of revenue from sales of VoIP terminal adapters, telephones and videophones, primarily attributable to our 8x8 service.

Product revenue for the three and six months ended September 30, 2009 was lower primarily because of a decrease in new residential customers and discounting of equipment sold to business service customers in the three and six months ended September 30, 2009.

No customer represented greater than 10% of our total revenue for the three and six months ended September 30, 2009 and 2008. Revenue from customers outside the United States was not material for the three and six months ended September 30, 2009 or 2008.

                                        September 30,
                                   -----------------------      Dollar   Percent
Cost of service revenues             2009           2008        Change   Change
                                   --------       --------      ------   -------
                                      (dollar amounts in thousands)
Three months ended               $   3,535      $   4,022     $  (487)    -12.1%
Percentage of service revenues        23.8%          27.0%
Six months ended                 $   7,036      $   7,836     $  (800)    -10.2%
Percentage of service revenues        24.0%          26.2%

The cost of service revenue 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 revenue for the three and six months ended September 30, 2009 decreased $0.5 million and $0.8 million, respectively, over the comparable periods in the prior fiscal year 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.

                                        September 30,
                                   -----------------------      Dollar   Percent
Cost of product revenues             2009           2008        Change   Change
                                   --------       --------      ------   -------
                                      (dollar amounts in thousands)
Three months ended               $   1,686      $   1,673     $    13       0.8%
Percentage of product revenues       141.8%         109.9%
Six months ended                 $   3,507      $   3,105     $   402      12.9%
Percentage of product revenues       157.5%         111.5%

The cost of product revenue 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. We generally do not charge residential subscribers for the terminal adapters used to provide our service when they subscribe through our website. We also have offered incentives to customers who purchase terminal adapters and telephones to offset the customer's cost of the equipment. We allocate a portion of service revenue to product revenue but this revenue is less than the cost of the terminal adapters.

The increase in the cost of product revenue for the three and six months ended September 30, 2009 compared with the same periods in the prior fiscal year was primarily due to an increase in the shipment of equipment to our business service customers. The increase in cost of product revenue was partially offset by a decrease in shipments of equipment to residential subscribers. The cost of product revenue as a percentage of product revenue increased in part due to an increase in discounting of product sales during the three and six months ended September 30, 2010.

                                      September 30,
                                 -----------------------      Dollar   Percent
Research and development           2009           2008        Change   Change
                                 --------       --------      ------   -------
                                    (dollar amounts in thousands)
Three months ended             $   1,265      $   1,299     $   (34)     -2.6%
Percentage of total revenues         7.9%           7.9%
Six months ended               $   2,502      $   2,491     $    11       0.4%
Percentage of total revenues         7.9%           7.6%

Research and development expenses consist primarily of personnel, system prototype, software and equipment costs necessary for us to conduct our engineering and development efforts. We expense research and development costs, including software development costs, as they are incurred.

The decrease in research and development expenses for the second quarter of fiscal 2010 compared with the same period in the prior fiscal year was primarily attributable to an overall decrease in non-personnel expenses partially offset by an increase in personnel costs due to an increase in employee profit sharing.

The increase in research and development expenses for the six months ended September 30, 2009 compared with the same period in the prior fiscal year was primarily attributable to an increase in personnel cost.

                                             September 30,
                                        -----------------------     Dollar    Percent
Selling, general and administrative       2009           2008       Change    Change
                                        ---------       -------     -------   -------
                                           (dollar amounts in thousands)
Three months ended                    $    8,156      $  9,667    $ (1,511)    -15.6%
Percentage of total revenues                50.9%         58.9%
Six months ended                      $   16,729      $ 18,418    $ (1,689)     -9.2%
Percentage of total revenues                53.0%         56.3%

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 second quarter of fiscal 2010 decreased over the same quarter in the prior fiscal year primarily because of a $0.7 million decrease in advertising, public relations and other marketing and promotional expenses, a $0.6 million reduction in sales agent and retailer commissions, a $0.1 million reduction in personnel costs and a $0.1 million reduction in credit card processing fees.

Selling, general and administrative expenses for the first six months of fiscal 2010 decreased over the same period in the prior fiscal year primarily because of a $1.3 million decrease in advertising, public relations and other marketing and promotional expenses, a $1.0 million reduction in sales agent and retailer commissions, and a $0.1 million reduction in credit card processing fees. The decrease in expenses was partially offset by the one time reduction in the sales and use tax accrual of $0.6 million in the first six months of fiscal 2009, as we released a sales and use tax expense accrual after determining that we had a sufficient sales and use tax accrual for any deemed exposure and a $0.1 million increase in facilities expenses.

The primary reason for the significant decline of selling, general and administrative expenses over the same period in the prior fiscal year is a shift in sales focus to primarily selling direct rather than through third parties. We believe the growth in business customers has validated the strategic shift to direct sales. In the third quarter, we intend to modestly increase marketing expense to accelerate the gross number of sales to new customers and the conversion rates on sales opportunities.

                                      September 30,
                                 -----------------------      Dollar   Percent
Other income, net                  2009            2008       Change   Change
                                 ---------        ------      ------   -------
                                    (dollar amounts in thousands)
Three months ended             $       31       $   107     $   (76)    -71.0%
Percentage of total revenues          0.2%          0.7%
Six months ended               $       43       $   192     $  (149)    -77.6%
Percentage of total revenues          0.1%          0.6%

In the three and six months ended September 30, 2009, other income, net consists of interest income earned on cash and cash equivalents. The decrease in other income, net for the three and six months ended September 30, 2009 was primarily due to lower average interest rates.

                                         September 30,
Income (loss) on change in fair     -----------------------      Dollar   Percent
   value of warrant liability         2009            2008       Change   Change
                                    ---------        ------      ------   -------
                                       (dollar amounts in thousands)
Three months ended                $      (90)      $   190     $  (280)   -147.4%
Percentage of total revenues            -0.6%          1.2%
Six months ended                  $      (97)      $   259     $  (356)   -137.5%
Percentage of total revenues            -0.3%          0.8%

In connection with the sale of shares of our common stock in fiscal 2006, we issued warrants. The warrants included a provision that we must deliver freely tradable shares upon exercise of the warrant. Because there are circumstances that may not be within our control that could prevent delivery of registered shares, ASC 480 requires the warrants to be recorded as a liability at fair value with subsequent changes in fair value recorded as a gain or loss. The fair value of the warrants is determined using a Black-Scholes option pricing model and is affected by changes in inputs to that model including our stock price, expected stock price volatility and contractual term. To the extent the fair value of the warrant liability increases or decreases, we record a loss or income in our statement of operations. The loss on change in fair value of the warrant liability in the three and six months ended September 30, 2009 is . . .