Statements contained in this Report on Form 10-K regarding our expectations, beliefs, estimates, intentions or strategies are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and include statements regarding our plans to conduct trials of our IP voice telephony service offering with follow- on video capabilities; our research and development plans for our various product groups; our expectation concerning the adequacy of our facilities; our estimates of litigation exposure and our beliefs about the sufficiency of our manufacturing arrangements. 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. You should not place undue reliance on these forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including a shifting of internal research and development focus based on changes in the market or adequacy of funding; a failure of customers to adopt iPBX systems due to concerns about VoIP technology or advances in competing systems; our business may grow in an unanticipated manner causing us to require different types of facilities; ordinary course litigation may cause a greater than anticipated impact due to factual matters or issues beyond our control; and our ability to source our products may be interrupted if our manufacturers cease operations or no longer desire to do business with us. Please also see the section entitled "Factors That May Affect Future Results" for additional risks that may impact our business.

8x8, Inc., or 8x8, and its subsidiaries (collectively, the Company) develop and market telecommunication technology for Internet Protocol, or IP, telephony and video applications. The Company has three product lines: voice and video semiconductors and related software; software that implements the functionality of a private branch exchange, or PBX, over data networks; and videophones, telephones and communication services that work over broadband networks. The Company has two primary subsidiaries, Netergy Microelectronics, Inc., or Netergy, and Centile, Inc., or Centile, that comprise two of its three product lines. In February 2002, we announced that we were beginning a new effort to add video capabilities to Netergy's existing family of voice-over-IP, or VoIP, semiconductors, along with software and systems support for the latest compression standards for video.

Netergy, formed in December 2000, provides voice and video semiconductors and related communication software to original equipment manufacturers, or OEMs, of telephones, terminal adapters, and other endpoint communication devices and to other semiconductor companies. Netergy's technologies are used to make IP telephones and media hubs and to voice-enable cable and digital subscriber line, or DSL, modems, wireless devices, and other broadband technologies. Netergy's video semiconductors are used in applications such as communication terminals (including videophones, telephones and room videoconferencing systems) that allow video communication over telephone networks, a company's internal networks (e.g., a local area network, or LAN) and the Internet.

Centile, formed in March 2001, develops and markets hosted iPBX solutions that allow service providers to offer, to small and medium-sized businesses over broadband networks, the features and functions found in a typical business phone system. A hosted iPBX solution is a software application that implements the functionality of a business phone system over the same data connection that a business uses for connection to the Internet. The phone system software runs on servers that are located at a central data center so that the only phone system equipment that is required at the customer site are telephones. Centile's hosted iPBX solution was commercially released and became generally available in March 2001.

At the parent company level, 8x8 is developing its third product line that includes consumer videophones, telephones, and communication software and services that work over broadband networks. In January 2002, the Company announced two new consumer products, the DV324 desktop videophone, a videophone for analog phone lines, and the Behind-U privacy peripheral for personal computers. In November 2001, 8x8 announced its enhanced Service Logic Execution Environment, or eSLEE, a high-performance service logic and execution engine that provides a framework for deploying scalable telecommunications applications. The eSLEE succeeds the service creation environment, or SCE, technology that 8x8 acquired as a result of the acquisition of U|Force, Inc. in fiscal 2001. In May 2002, 8x8 announced that it was developing an end-to-end, internet-based voice and video communications platform and service, the Packet8 IP telephony platform and service, based upon 8x8's eSLEE and related technology.

The Company was founded as Integrated Information Technology, Inc. in 1987 and completed its initial public offering on July 2, 1997 under the name 8x8, Inc. In August 2000, the Company changed its name to Netergy Networks, Inc., but subsequently changed it back to 8x8, Inc. in July 2001.

Traditional telecommunication networks use a fixed electrical path that travels through a series of switches across the network. These networks were designed solely to carry low-fidelity audio signals with a high level of reliability. Although these networks are indeed reliable for their initially intended use, these networks are not well suited to service the explosive growth of digital communications applications.

Traditional networks transmit data at very low rates and resolutions, making them poorly suited for delivering high-fidelity audio, entertainment-quality video or other rich multimedia content. Traditional networks are also expensive to build because each subscriber's telephone must be individually connected to the central office switch, which is usually several miles away from a typical subscriber's location. The digital component of the traditional telecommunications infrastructure is also less efficient than modern networks because it allots fixed bandwidth throughout the duration of each call, whether or not voice is actually being transmitted. Further, it is difficult for telecommunication service providers to provide new or differentiated services or functions, like video communications, that the network was not designed to accommodate.

In contrast to the traditional telecommunications infrastructure or public switched telephone network (PSTN), data networks -- such as the Internet or a corporate LAN -- utilize a "packet-switched" system in which information between two communicating terminals (for example, a PC downloading a page from a web server) is transmitted in the form of small data packets that travel through a series of switches, routers, and hubs across the network. Packet-switched networks have been built mainly for carrying non real-time data. The advantages of such networks are their efficiency, flexibility, and scalability. Bandwidth is only consumed when needed. Networks can be built in a variety of configurations to suit the number of users, client/server application requirements and desired availability of bandwidth. Furthermore, many terminals can share the same connection to the network. The exponential growth of the Internet in recent years has proven the scalability of these underlying packet networks. The most common protocol used for communicating on these packet networks is Internet Protocol, or IP.

As broadband connectivity has become more available and less expensive, it is now possible for service providers to offer voice and video services that run over these IP networks to businesses and consumers. Providing such services has the potential to both substantially lower the cost of telephone and equipment costs to these customers and to increase the breadth of features available to the end-user. Services like full-motion, two-way video are now supported by the bandwidth spectrum commonly available to broadband customers, whether business or residential. To enable such new products to take hold, service and equipment suppliers need semiconductor products and software to connect input and output devices to the networks and the software that runs on the network that enables these input/output devices to be easily installed, operated, and managed, as well as to replace common functionalities of the legacy switched network, such as billing and operator/directory assistance.

The Company has developed a broad range of communication technologies, including semiconductors, embedded software, system designs, telephony call management software, and consumer voice and video systems that enable communication services over IP networks.

The Company has leveraged its technologies to develop the following product lines: semiconductors and embedded software designed for IP telephony and videoconferencing applications, developed and marketed by Netergy; hosted iPBX solutions, developed and marketed by Centile; and consumer systems and communication software and services, developed and marketed by 8x8.

Netergy develops and markets a range of technology products, including semiconductors, embedded software, system software, and reference designs, that allow telecommunication equipment OEMs to: i) build voice and video IP phones, ii) build IP-to-analog phone adapter products, and iii) add IP telephony functions to DSL, cable, and wireless modems. Additionally, Netergy provides semiconductors and embedded software for use in videoconferencing applications. The following sections describe Netergy's technology and products in more detail.

SEMICONDUCTOR ARCHITECTURE -- Netergy's semiconductors are based on programmable processor architectures that enable implementation of IP telephony and videoconferencing applications in a highly efficient manner. Netergy's semiconductor architectures employ 32-bit reduced instruction set computer, or RISC, microprocessor cores, which execute the embedded applications software. Some of Netergy's semiconductors also employ a 64-bit Single Instruction Multiple Data, or SIMD, digital signal processor, or DSP, to accelerate the execution of signal processing intensive operations. Furthermore, Netergy's Audacity-T2 and T2U semiconductors benefit from the unique feature of not requiring any external SRAM or DRAM to operate.

Netergy's RISC processor cores use a proprietary instruction set specifically designed for multimedia communication applications. The RISC cores control the overall chip operation and manage the input/output interface through a variety of specialized ports that connect the chip directly to external host, audio, and network subsystems. The cores are programmable in the C programming language and allow customers to add their own features and functionality to the device software provided by Netergy. Netergy's DSP core architecture is a SIMD processor that implements computationally intensive video, audio, and graphics processing routines as well as certain digital communication protocols. The DSP cores are programmable with a proprietary instruction set consisting of variable-length 32-bit and 64-bit microcode instructions that provide the flexibility to improve algorithm performance, enhance audio and video quality, and maintain compliance with changing digital audio, video, graphics, and communication protocol standards. The DSP cores access their instructions through an internal bus that interfaces to on-chip SRAM and read-only memory, or ROM, that is pre-programmed with video and audio processing subroutines.

EMBEDDED SOFTWARE -- Netergy has developed a broad range of embedded application software that runs on its semiconductor products. Netergy's application software allows the use of its semiconductors in systems that conform to various emerging and established international telephony standards for audio and video encoders and decoders (also known as codecs) and call signaling protocols. By refining its software, Netergy can enhance quality, address new standards, and add significant features and functionality to systems that contain the semiconductor products. In addition, certain customers have licensed source code to which they add proprietary features and custom interfaces and, in some cases, port to other semiconductor or processor architectures.

Call signaling protocol stacks are complex software programs required to make voice calls over IP networks, including the Internet. Codecs format and compress digital audio and video signals so they can be represented and efficiently transmitted in a digital form. Developing functional VoIP and video software and obtaining interoperability with other VoIP and video systems requires significant development time, which is why many OEMs choose to license it instead. Netergy's protocol stacks support the four most commonly deployed VoIP protocols, along with seven codecs.

Netergy is also developing new video compression algorithm technology that is based on the H.26L standard. The H.26L standard is a new algorithm being jointly specified by standards bodies in the International Teleconferencing Union, or ITU, and the Motion Pictures Expert Group, or MPEG, with the goal of improving video compression ratios by a factor of two against any current video algorithm specification at any bit rate. For a given bit rate, implementations of the new H.26L video codec are expected to improve the picture quality of video streaming, telephony, and entertainment applications beyond the quality of pictures that are available today from either the MPEG-2 or MPEG-4 algorithms.

SYSTEM DESIGN -- Netergy has developed expertise in integrating its semiconductors and software with peripheral components to produce complete IP telephony and multimedia communication systems. Netergy's system technology consists of modular subsystems that can be combined and rearranged to interface to various networks (such as analog telephone, ISDN, Ethernet LAN, wireless, and home networks) and to various telephony devices, such as the analog phones in a home or FAX machines in an office environment.

AUDACITY-T2 IP TELEPHONY PROCESSOR -- The Audacity-T2 semiconductor performs the digital processing functions required to build an IP phone, including formatting digital audio data for transmission over packet networks (such as Ethernet, the Internet, DSL links and digital cable systems). The chip can also be used in two-port analog telephone terminal adapters or gateway applications.

AUDACITY-T2U IP TELEPHONY PROCESSOR -- The Audacity-T2U semiconductor has all of the functionality of the Audacity-T2 processor but runs at faster processing speeds, features more on-chip memory, and contains an extra interface for connecting the chip to interfaces commonly found on DSL modem chipsets. The additional on-chip memory and higher processing speed enable the Audacity-T2U to address more advanced products, such as higher-end IP phones and four-port terminal adapters or gateways.

VERACITY SOFTWARE -- The Veracity software suite is a comprehensive package of VoIP call control protocols, standard network protocols, and audio processing functions. Veracity software stacks can run on either the Audacity family of semiconductors or on third-party VoIP processors. These stacks are designed for cost competitive, high quality applications, including VoIP/VoDSL gateways, Ethernet PBXs, and IP phones.

VP7 AUDIO COMPRESSION ENGINE -- The VP7 audio compression engine, or VP7, is a synthesizable core that can be integrated into custom semiconductor designs to add voice compression capability (e.g., telephony applications). For example, the VP7 has been integrated into STMicrolectronics' STV0397 semiconductor. The VP7 is based on Netergy's proprietary DSP architecture.

REFERENCE DESIGN KITS -- Netergy currently supplies the following reference design kits for its semiconductor products:

• The Media Hub MH2 reference design is a two-line, VoIP gateway based on the Audacity-T2 processor. It supports two analog telephone interfaces, a 10/100 Mbps Ethernet port, and a simple LCD display.
• The IP phone reference design includes plastics, keypad, display, and handset and is based on the Audacity-T2 processor.
• The Media Hub MHx reference design is similar to the MH2; however, it is based on the Audacity-T2U processor and supports up to four analog telephone interfaces.

Netergy's reference design kits are intended to serve as prototype system products and allow a customer to leverage Netergy's system design expertise to accelerate the time to market with new products. Each reference design is provided with schematics, bills of materials, or BOMs, documentation, embedded software, and a software development environment that enables a customer to add new features and otherwise customize the software.

VIDEOCONFERENCING SEMICONDUCTORS -- Netergy's family of videoconferencing semiconductors includes the VCP, LVP, VPIC, and VCPex. These semiconductors are used in H.323, H.320, and H.324 videoconferencing applications, including group videoconferencing systems, personal computer, or PC, videophone add-in boards, consumer videophones, and video monitoring systems. These semiconductors are based on Netergy's proprietary architecture, which combines a custom RISC microprocessor, a high performance DSP core, SRAM, and proprietary software on a single chip. The integrated semiconductors perform the core processing functions required by LAN, ISDN, and analog telephone-based video communication and other digital video applications. Revenues derived from the sale of videoconferencing semiconductor products were $4.1 million, $9.5 million and $11.3 million for the fiscal years ended March 31, 2002, 2001 and 2000, respectively. Revenues derived from videoconferencing technology licenses and related maintenance revenues, as well as royalties earned under such licenses, the majority of which were non-recurring in nature, were $3.6 million, $3.1 million and $4.3 million for the fiscal years ended March 31, 2002, 2001 and 2000, respectively.

Centile has developed and markets a hosted iPBX, which is a software-driven telephony solution that allows network service providers and PBX resellers to offer PBX functionality as a business communication service over broadband IP networks. The following sections describe Centile's technology and products in more detail.

Typically, today's businesses require an individual phone for each office worker. The phones include various productivity functions, such as voicemail, transfer and hold capability, and other services. Small and medium-sized enterprises will generally deploy dozens of such phones. Until recently, there were two ways that businesses could obtain this type of phone service: i) subscribe to Centrex services from their local telephone company, or ii) buy a dedicated piece of hardware that operates as a business PBX system. In a Centrex service, the telephone company provides a telephone line from its central office switch for each "extension" and associates all of the lines with a central number assigned to the business. Centrex, however, scales poorly for both regulatory and architectural reasons. It is expensive on a per-line basis when compared to enterprise-owned PBXs, which typically deliver additional functionality as well. In addition, Centrex services do not offer the ability for easy integration with computer programs, require long lead times to implement service changes, and are difficult to manage.

Rather than subscribe to individual telephone lines for each employee (as with Centrex), most companies purchase a dedicated PBX system, a telephone switch that allows dozens or hundreds of employees to share a few incoming and outgoing telephone lines, resulting in a more efficient use of those lines. Traditional PBXs use circuit-switched technology and must be installed on the enterprise premise because every phone is connected to it by an individual cable. These systems are expensive (from $20,000 to $200,000 or more, depending on the number of extensions), difficult to manage, maintain, and use, typically require vendor-specific telephones and cannot be easily integrated with data processing systems. Suppliers have recently offered versions of these dedicated PBXs that run over a company's LAN. Often, these offerings have the same costs and drawbacks of the legacy PBX systems.

With the availability of broadband IP connectivity to businesses, however, a third alternative has emerged: hosted iPBX services. In this model, the service provider delivers PBX functionality over an IP connection, which reduces the scaling problems by allowing many extensions to share a single connection. This solution also offers many of the advantages of an enterprise-owned PBX and further enables integration with enterprise data processing systems and support of call centers, while eliminating the capital and maintenance investments required for dedicated on-site hardware that provides the PBX functionality.

TELEPHONY CALL MANAGEMENT SOFTWARE -- Centile's telephony call management software (the iPBX server software, hosted iPBX, or iPBX) uses an IP network for its switching fabric and media connections, and provides the call routing, setup, and teardown necessary to establish a connection between two terminals on an IP network. It also provides a variety of more complex PBX features such as call transfers, web-based control, voice message retrieval, and conferencing.

The iPBX software runs on a cluster of carrier-grade server platforms that are located in a data center. A cluster typically consists of both active and backup servers. Each active server runs several copies or "instances" of the iPBX software simultaneously. Each instance is dedicated to a particular enterprise end customer. The server cluster in the data center is linked to customer sites with a dedicated broadband IP link such as a T1 line. On the customer premise, terminal adapters or IP telephones are connected to the IP link via an IP router and Ethernet hubs or switches. Terminal adapters connect standard analog telephones and fax machines to the IP network.

To address scalability and reliability issues, Centile uses a modular and distributed architecture for the iPBX system. In this architecture, a single instance of the iPBX server software provides complete PBX functionality. A single instance is designed to support approximately 100 extensions. This limitation minimizes both the processing capacity and memory requirements of the server platform, allowing less powerful, less expensive servers to be used. Multiple iPBX instances can be run on each server and larger enterprises can be served by combining instances together to form a single larger PBX. The system can be scaled in overall capacity by adding more servers.

Much of the flexibility of the iPBX is due to the use of abstraction layers between the core iPBX engine and the devices with which it interfaces and controls. To allow it to interface to a variety of different telephone sets, PSTN gateways, and softswitches, the iPBX uses software drivers that support various industry standard and proprietary call setup and teardown protocols. Currently, the iPBX supports session initiation protocol, or SIP, media gateway control protocol, or MGCP, H.323v2, and a variety of third-party proprietary protocols.

To allow easy integration with computer programs (computer telephony integration, or CTI), the iPBX supports Sun Microsystems' Java Telephony Application Program Interface, or JTAPI, version 1.3 for telephony call control. JTAPI provides an industry standard series of function calls to allow computer programs to control PBXs from more than one manufacturer. Computer programs interfaced to the PBX might provide a graphical user interface to make it easier to transfer calls or initiate conference calls, or they might connect a company's customer relationship management software directly to the phone system, displaying customer information on a computer screen when that customer calls for support.

The iPBX solution was designed to address the shortcomings of traditional Centrex service offerings in a number of ways as described below:

• The use of an IP network allows the iPBX to scale relatively easily and economically because subscribers can add additional extensions without adding a new cable for each extension. Client devices such as IP phones and media hubs can be plugged into a company's existing LAN.
• The iPBX uses an IP network instead of a circuit-switched one so it can be located in the service provider's data center which may be miles away from the customer enterprise premise and connected to it by only a single broadband IP link.
• The redundancies built into the system increase its reliability, particularly when compared to enterprise owned PBXs.

IPBX SERVER SOFTWARE -- The Centile iPBX server software runs on a cluster of five Sun Microsystems carrier grade server platforms and provides software PBX functionality over IP networks. The iPBX software was designed specifically to allow service providers to deliver hosted iPBX services to small and medium-sized business customers. The Centile iPBX allows service providers to support up to eighty discrete iPBXs per cluster, each dedicated to an individual customer, and up to five thousand total extensions.

The server clusters running the iPBX server software are located in a service provider's data center. It is connected to the customer's premise using any broadband IP connection, though deployments to date have generally utilized a T1 connection. For telephone sets, customers can use terminal adapters to adapt standard analog telephones to IP service or they can use IP phones. The iPBX server software connects to the PSTN and the long- distance IP backbone through a gateway.

Service providers control and configure the iPBX server software via a Web interface, allowing the system administrator to manage the iPBX from any location using any workstation with a browser. The administrator interface is designed to provide control of phone number block assignments, dial plans, service provisioning, direct dial phone number assignments, iPBX status, and bandwidth management. The iPBX supports voicemail, interactive voice response, automatic call distribution, auto attendants, directory service, unified messaging modules, and operation, service, and support, or OSS, integration.

MULTIPBX - Introduced in May 2002, the MultiPBX combines the iPBX server software with a complete package of VoIP and data equipment suited for a building owner who desires to offer converged voice and data services through a multi-tenant building. The product can support thousands of user extensions in its standard configuration and can be located anywhere within the building. Regular PSTN phones can be used with the MultiPBX and all regular PSTN functions are supported with these phones: message waiting indicator, caller ID, transfer, conference and others. IP phones can also be used to enable the more advanced features of the system at the user's desktop. The MultiPBX is able to place and receive local and long distance calls via a PSTN gateway integrated with the product. Interoffice and telecommuter calls can be carried directly via a Virtual Private Network, or VPN, or directly across the Internet, thus offsetting communication costs for distant offices and remote facilities.

MH4 & MH16 MEDIA HUBs -- Terminal adapters and media hubs are customer premise equipment that adapt conventional telephony equipment, such as analog telephones and fax machines, for IP service. Centile's MH4 and MH16 media hub products support four and sixteen analog lines, or ports, respectively. Centile currently uses its MH4 and MH16 products, along with certain IP phones and terminal adapters developed by third parties, in its hosted iPBX and MultiPBX business communication service deployments.

Each media hub supports as many simultaneous connections as it has analog lines, and multiple media hubs can be used in an IP telephony system to provide as many lines as required. Because it uses a standard touch-tone telephone as both its audio and user interface, media hub-based systems are both reliable and cost-effective, especially when compared to proprietary digital PBX telephones.

MH4 and MH16 media hubs support the MGCP IP telephony standard with Centile extensions for auto-discovery and configuration. All media hubs deployed by Centile incorporate FLASH memory for remote upgrade capability so that the Centile iPBX server software can, as required, upgrade media hubs automatically via the network.

IPBX USER INTERFACE SOFTWARE -- Centile has announced three user interface applications for its hosted iPBX solution: ComCenter, Switchboard, and Administrator. All of these applications are designed to harness the graphical capabilities of personal computers and workstations to make the hosted iPBX easy to use.

The Centile ComCenter software with Call Announcer is designed for the end users of the iPBX. It provides Caller ID, call transfers, conference call setup, on-screen directories, contact management, and call logging. It also lets users set up and control their voicemail, listen to messages, set call forwarding numbers and filters, and set up personal speed dial numbers.

The Centile Switchboard software, or Switchboard, is the attendant interface for the iPBX. Switchboard runs on a personal computer or workstation to allow attendants to route incoming calls to an enterprise with a point-and-click interface. Switchboard provides caller ID for multiple incoming calls, extension status, two-click call transfers, corporate voice mailbox management, and multi-attendant support. Its graphical interface minimizes training and improves attendant productivity.

With the iPBX, customers control their own moves, adds, and changes using the Centile Administrator, or Administrator. To add additional lines, the customer simply connects an additional media hub to the IP network. The Centile Auto Discovery mechanism automatically configures the media hub. The customer then uses Administrator to assign extension numbers, associate user names, and create a voicemail account for each line. Administrator also allows the customer to define hunt groups, set user permissions, define phone button functions, and set voicemail parameters, all with a point-and-click interface.

COMMUNICATION SERVICES -- In order to scale IP communication networks to large numbers of customers, the software that controls the communication network needs to incorporate the same infrastructure and switching components that have enabled the Internet to scale to its current level of deployment. Whereas the Centile iPBX system incorporates all of the configuration, network management, dial plans, and messaging facilities needed to operate the system in a single coherent package appropriate for a PBX system, an IP communication network that scales to millions and millions of users should use standard, open services that are widely deployed today. Such services include the Internet Message Access Protocol, or IMAP, a messaging interface that is used by e-mail clients; Domain Name Server, or DNS, for resolving names and addresses; and Lightweight Directory Access Protocol, or LDAP, for directory functions.

8x8 is developing a distributed service platform for IP communication networks called Packet8. Packet8 ties together these standard Internet services with a collection of multimedia endpoints, including Windows XP messenger clients, SIP phones, SIP-based 3G mobile phones, set-top boxes, and legacy video devices such as H.323 and H.324 video endpoints. Packet8 is built on Linux servers that run 8x8's eSLEE software and is composed of a collection of software packages running on the eSLEE that serve as proxies for linking Internet network resources together to form an IP communications network. These proxies are based on the Session Initiation Protocol, or SIP, and include functions for call routing, registration, messaging, firewall/network address translation, or NAT, traversal, 911 call handling, billing, and media and gateway services. This distributed architecture also has the advantage that the software proxies can manage the signaling traffic between endpoints or the Internet infrastructure and enable endpoints that would otherwise be unable to communicate with each other to be interoperable. The distributed proxy structure also allows signaling and media traffic that would otherwise be blocked by NAT or firewall configurations to traverse those obstructions without requiring any changes to the physical NAT or firewall mechanisms. Thus, a consumer broadband subscriber with a home gateway, who would otherwise be unable to access VoIP or video telephony media without constructing a Virtual Private Network, or VPN, to encapsulate the home network private IP addresses, can now connect an IP phone to the home network without any special configuration and immediately access media services via the translation services of 8x8's proxy architecture. Packet8 is being designed to comply with applicable emergency (911), eavesdropping (CALEA), and other regulatory requirements needed by any broad-based communications network.

The Packet8 architecture is designed to enable the use of video media in addition to VoIP traffic and includes a video voicemail function built into the SIP proxy that can process video messages left by video-enabled endpoints.

CONSUMER SYSTEMS -- 8x8 is reselling private-branded analog videophones and is planning to resell IP phones, some of which are manufactured by some of Netergy's OEM semiconductor customers. These phones incorporate certain unique software modifications to the protocol and application code that enable them to take advantage of 8x8's Packet8 distributed IP services platform. The original design of the videophone and IP phone systems is based on some of Netergy's semiconductor reference designs.

8x8 has also developed a motion detection peripheral, the Behind-U workstation alert system, that can be used to signal a personal computer or other device to detect movement and convey that information to the computing device. The Behind-U system does not use any of Netergy's semiconductor products.

DV324 DESKTOP VIDEOPHONE -- 8x8's DV324 product is a videophone with an integrated display and camera that is compatible with the H.324 standard, and therefore works over standard analog phone lines. The videophone can also be used to make a normal audio PSTN call. Controls on the videophone and the on-screen menu system enable the user to adjust the quality of the video that is sent and received, electronically pan/tilt/zoom the near-end and far-end cameras, take a high-resolution snapshot image, and turn on privacy mode to block outgoing video. The phone supports two sets of audio/video inputs (for connecting external cameras, camcorders or digital cameras) and one audio/video output port (for connecting an external TV or other display device) and supports caller-ID, auto-answer (so the phone can be used as a monitoring device), and 10 configurable speed-dial numbers.

BEHIND-U WORKSTATION ALERT SYSTEM -- The Behind-U system consists of an infrared motion sensor that plugs into the keyboard port on a personal computer and associated software. The Behind-U monitors an area for motion and relays the motion information to the software application running on the PC. The software can be configured to notify the PC user that motion has been detected, or can be used to temporarily hide the information currently displayed on the computer screen.

SIP IP PHONE -- 8x8 is working with several partners to private-label an IP phone that is intended to be sold in conjunction with the Packet8 IP voice telephony services offering. The phone specifications include features to support multiple "virtual" lines of IP telephony, an integrated Ethernet interface, speakerphone capability, programmable feature buttons and on-hook dialing. The phone is designed to be compatible with other SIP protocol devices.

PACKET8 IP VOICE TELEPHONY SERVICE OFFERING -- 8x8 is planning to conduct initial trials of its Packet8 voice telephony service offering, with plans to integrate video capabilities into the service at a later date.

SEMICONDUCTORS AND EMBEDDED SOFTWARE

Netergy sells its IP telephony semiconductors, embedded software, and reference designs to OEMs of VoIP and VoDSL products, such as Alcatel Microelectronics, D-Link, Ericsson and Telsey. Netergy has also separately licensed a VoIP semiconductor core and embedded VoIP software to STMicroelectronics.

Netergy sells its video semiconductors and reference board designs to OEMs of videoconferencing systems for the business, consumer, and video monitoring markets, such as GE Interlogix, Leadtek Research, Mitsubishi, Polycom, Sony, and VCON Telecommunications. Leadtek Research and GE Interlogix represented 13% and 12% of the Company's fiscal 2002 revenues, respectively.

Netergy markets its semiconductor, embedded software, and reference design products through its own direct sales force and third-party sales representatives. Netergy supports its domestic and international direct sales efforts from its headquarters in Santa Clara, California and a European office in Marlow, United Kingdom. Netergy's sales and marketing personnel typically provide support to OEM customers through its application engineering team and periodic training sessions. Netergy sells its products to customers on an order-to-order basis and has long-term agreements with only a limited number of customers. As such, order backlog at any given time generally is not significant and may not be a reliable indicator of future revenues.

Netergy competes with both manufacturers of digital signal processing semiconductors and software products developed for the OEM VoIP marketplace. Netergy also competes with manufacturers of videoconferencing semiconductors and related firmware. Intense competition, declining average selling prices, and rapid technological changes characterize the markets for Netergy's products. The principal competitive factors in the market for IP telephony and videoconferencing semiconductors and embedded software include product definition, product design, system integration, chip size, code size, functionality, time-to-market, adherence to industry standards, price, and reliability. Netergy has a number of competitors in this market including: Agere Systems, Analog Devices, Atmel, Broadcom, DSP Group, Motorola, Radvision, Texas Instruments/Telogy Networks, TriMedia Technologies, Winbond, and Zarlink Semiconductor.

At the beginning of 2001, we decided that the long trials and time-to-market constraints of the CLEC and service provider market, as well as the decreasing availability of cash to certain competitive local exchange carriers, or CLECs, in the North American market, required that we provide a hosted business communication service offering to PBX resellers in addition to its existing service provider offering. In March 2001, Centile was formed to conduct the operations of the hosted iPBX business and initiated the service in conjunction with Dialink, a CLEC based in the San Francisco Bay Area. Centile is still actively marketing the product to service providers in Europe, Asia and North America. Centile has announced licensing agreements with Song Networks AB, formerly Tele1 Europe Holding AB, and Oy Datatie AB, an ELISA group company.

Centile markets the hosted iPBX software product through a direct sales force. In addition, Centile intends to establish relationships with PBX and other system integrators that can serve as resellers. The sales force operates from the Company's headquarters in Santa Clara, California and from its European office in Sophia-Antipolis, France.

Centile currently competes with suppliers of traditional PBXs, Centrex equipment, and newer generation IP-based PBX or Centrex solutions that seek to sell such products to telecommunication service providers or to the small and medium-size enterprise marketplace. The main competition includes Avaya, Commworks Corporation, Mitel, Nortel Networks, and several other providers of traditional and newer generation IP-based solutions, such as Broadsoft, Inc., Cisco Systems, Shoreline Communications, Syndeo Corporation, Sylantro, VocalData, Inc., Vocaltec Communications, and Vertical Networks.

As an IP-based solution, the hosted iPBX product competes by leveraging the innate efficiencies of IP architectures and combining those efficiencies with certain required features from competitive legacy products. The principal competitive factors in the market for hosted iPBX solutions include product reliability, product feature parity, interface design, scalability, time-to-market, adherence to standards, price, functionality, and IP network delivery/design.

In May 2001, 8x8 announced the first customer license of its service creation technologies to Lucent. In January 2002, 8x8 introduced the DV324 Desktop Videophone and Behind-U products and announced that these products would be sold direct to end-users from 8x8's website. 8x8 has also announced that Michigan State University has ordered DV324 Desktop Videophones for its mental health and hospice patients. 8x8 plans to engage in early trials of its Packet8 IP communication software platform and services offering for which no customers have been announced.

8x8 markets its consumer systems through its direct sales force and third-party resellers. Sales of the products to end-users are also conducted from the 8x8's website. 8x8 plans to market its Packet8 IP communication services offering via its own direct sales force and through third-party resellers.

8x8's consumer systems products compete with other providers of videophones and videoconferencing systems, including Innomedia, MotionMedia, and various software offerings that implement videophone functionality on a personal computer, such as CU-SeeMe and Intel's videophone software that is bundled with their webcam offerings. The main competitors for the Company's eSLEE and Communication Services product line are deltaThree, Dynamicsoft, Inc., GoBeam, Nortel Networks, Pagoo, Sylantro Systems, Tekelec, Telcordia, Telsis, Ubiquity Software and Vonage. This market is characterized by rapid technological change, intense competition, and first-mover advantage. Principal competitive factors in the market for 8x8's products include product feature parity, interface design, product reliability, performance, time-to-market, adherence to standards, price, functionality, and IP network delivery/design.

Netergy outsources the manufacturing of its semiconductors to independent foundries, and its primary semiconductor wafer supplier is Taiwan Semiconductor Manufacturing Corporation, or TSMC. Netergy also relies on various independent third party companies for the assembly and testing of its semiconductors. Our reliance on overseas wafer fabrication, sort, assembly and test contractors and our maintenance of inventories at contractors' facilities entails certain political and economic risks, including political instability and expropriation, currency controls and exchange fluctuations, and changes in tariff and freight rates. Furthermore, in the event overseas wafer fabrication, sort, assembly or test operations, or air transportation to or from foreign foundries or contractors, were disrupted for any reason, our operations could be severely harmed.

The principal raw materials utilized in the semiconductor production process are polished silicon wafers, ultra-pure metals, chemicals and gases. Encapsulation materials that enclose the chip and provide the external connecting leads are provided by the independent assembly contractors. Shortages could occur in various essential materials due to interruption of supply or due to increased demand in the industry. Shortages have occurred in our history and order lead times have been extended in the industry on occasion without significantly harming us. However, future shortages, if any, could severely harm our operations. Netergy does not have long-term purchase agreements with its contract manufacturers or its component suppliers.

Centile outsources the manufacturing of its media hubs and 8x8 outsources the manufacturing of its videophones to third-party manufacturers, who are generally also semiconductor customers of Netergy. Neither Centile nor 8x8 have long-term purchase agreements with their contract manufacturers. We may not be able to obtain alternative manufacturing sources if our current subcontractors become unavailable. If we are able to find alternative subcontractors, a switchover to a new supplier would take time and might result in an interruption in sales.

Research and development expenses in the fiscal years ending March 31, 2002, 2001, and 2000 were $11.6 million, $18.7 million, and $11.9 million, respectively. The development of new products and the enhancement of existing products by the Company and its subsidiaries are essential to their success.

The Company's current and future research and development efforts relate primarily to VoIP semiconductors and embedded software, video semiconductors and embedded software, hosted iPBX systems, and telecommunication services technologies, including the development of new endpoints. Areas of emphasis will include: enhanced versions of Netergy's Audacity semiconductor family and architecture to provide higher performance, enhanced functionality, and further integration of certain essential system functions and interfaces; enhanced versions of 8x8's video communication processor technology to provide support for H.26L and other new video compression algorithms; enhanced versions of Centile's hosted iPBX business communication service to include additional call control features, system management capabilities, additional protocol and telephony device support, and new graphical user interface and web-based applications; and enhanced versions of 8x8's eSLEE platform and Packet8 telecommunication services offering. Future developments may also focus on emerging audio and video telephony standards and protocols, quality and performance enhancements to multimedia compression algorithms, and additional features supporting all of the Company's products.

Our ability to compete depends, in part, on our ability to obtain and enforce intellectual property protection for our technology in the United States and internationally. We currently rely primarily on a combination of trade secrets, patents, copyrights, trademarks and licenses to protect our intellectually property. At this time we have forty-nine United States patents and a number of United States and foreign patents pending, none of which we consider critical to our business. Our patents expire on dates ranging from 2012 to 2018. We cannot predict whether our pending patent applications will result in issued patents. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements to existing products are more important than the various legal protections of our technology to establishing and maintaining technology leadership.

To protect our trade secrets and other proprietary information, we require our employees to sign agreements providing for the maintenance of confidentiality and also the assignment of rights to inventions made by them while in our employ. There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate or that competition will not independently develop technologies that are similar or superior to our technology, duplicate our technology or design around any of our patents. We are also subject to the risks of adverse claims and litigation alleging infringement of the intellectual property rights of others. The semiconductor and software industries are subject to frequent litigation regarding patent and other intellectual property rights. In addition, the laws of foreign countries in which our products are or may be sold do not protect our intellectual property rights to the same extent as do the laws of the United States. Our failure to protect our proprietary information could cause our business and operating results to suffer.

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.

The Company has entered into licensing and development arrangements with its customers to promote the design, development, manufacture, and sale of the Company's products.

In order to encourage the use of its semiconductors, Netergy has licensed portions of its systems technology and software object code for its semiconductors to virtually all of its semiconductor customers. Moreover, many of Netergy's OEM customers have licensed portions of the software source code for its semiconductors. Netergy intends to continue to license its semiconductor, software, and systems technology to other companies, many of which are current or potential competitors. Such arrangements may enable these companies to use Netergy's technology to produce products that compete with the Company's IP telephony and video products.

Netergy has also licensed the right to manufacture certain of its videoconferencing and IP telephony semiconductor products to several original equipment manufacturers, or OEMs. These licenses generally provide for the payment of royalties; however, royalty obligations under a license of our video compression technology to ESS Technology, Inc. that provided 13% of our revenues in fiscal 2002 have now expired. Only certain of these OEM licensees may sell semiconductors based on the licensed technology to third parties, including STMicroelectronics, or STM, and Alcatel Microelectronics, while other licensees are limited to sales of such semiconductors as part of multimedia communication systems or sub-systems. Item 13 of this Report provides further information regarding the Company's license and other arrangements with STM.

Centile may, in the future, license its source code for portions or all of the hosted iPBX technology to other companies. Such arrangements may enable these companies to use the technology to produce products that compete with Centile's products.

In March 2002, 8x8 licensed certain Very Long Instruction Word, or VLIW, microprocessor cores, related tools and MPEG4 video compression firmware from STM for use in the Company's Internet protocol, or IP, video communication processor development initiatives. Additionally, 8x8 agreed to license STM certain of its existing and future H.263 and H.26L firmware implementations for use with STM's semiconductor products. The licenses are non- exclusive, non-transferable and non-assignable and provide for the sharing of updates and enhancements to the licensed technology, subject to certain limitations. The agreement includes provisions that allow the Company to manufacture semiconductor devices that contain the ST200 core at STM or at other third-party fabrication facilities. The Company is required to pay STM per-unit royalties based upon shipments of products that incorporate the VLIW technology. In addition, STM is required to pay the Company certain per-unit royalties based upon shipments of STM semiconductor products that contain the Company's H.263 and H.26L video technology.

In addition, 8x8 has licensed source code for its service creation environment, or SCE, product to Lucent. The SCE product was the predecessor of the eSLEE product. Under the agreement, Lucent has licensed the technology for use in its Enhanced Service Authoring Environment (eSAE), which enables carriers and application developers to design innovative new services for converged voice and data networks. The Company may continue to license its communication services platform and video source code to other companies. Such arrangements may enable these companies to use the technology to produce products that compete with the Company's consumer systems and communication services products.

The Company expects to continue licensing its technology to others, many of whom may be located outside of the United States. In addition to licensing its technology to others, the Company from time to time will take a license to technology owned by third parties and currently relies upon certain technology, including hardware and software, licensed from third parties.

Financial information relating to our segments and information on revenues generated in different geographic areas are set forth in Note 11 to our consolidated financial statements contained in Part II, Item 8 of this Report. In addition, information regarding risks attendant to our foreign operations are set forth under the heading "Factors that May Affect Future Results" later in this Report.

As of March 31, 2002, the Company employed 106 persons, including 6 in manufacturing operations, 60 in research and development, 17 in sales and marketing, and 23 in general and administrative capacities. None of the Company's employees are represented by a labor union or are subject to a collective bargaining arrangement. The Company believes that relations with employees are good.

The Company's principal operations are located in an approximately 45,000 square foot facility in Santa Clara, California that is leased through May 2003. Design, limited manufacturing, research and development, sales and marketing, and administrative activities are performed in this facility.

The Company also leases facilities for its sales office and research and development operation in Marlow, United Kingdom and for its research and development operation in Sophia-Antipolis, France. The Company believes that its existing facilities are adequate to meet its current and foreseeable future needs. For additional information regarding the Company's obligations under leases see Note 8 to the consolidated financial statements contained in Part II, Item 8.

The Company is involved in various legal claims and litigation that have arisen in the normal course of the Company's operations. While the results of such claims and litigation cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a significantly adverse effect on the Company's financial position or results of operations. However, should the Company not prevail in any such litigation, its operating results and financial condition could be adversely impacted.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2002.

PART II

The Company completed its initial public offering on July 2, 1997 under the name 8x8, Inc. From that date through April 3, 2000, the Company's common stock, $0.001 par value per share, was traded on the NASDAQ National Market (the NASDAQ) under the symbol "EGHT." From April 4, 2000 through July 18, 2001, the Company's common stock was traded on the NASDAQ under the symbol "NTRG." From July 19, 2001 the Company's common stock has traded under the symbol "EGHT." The Company has never paid cash dividends on its common stock and has no present plans to do so. As of May 13, 2002, there were 272 holders of record of the Company's common stock. The following table sets forth the range of high and low closing prices for each period indicated: