ALTIGEN COMMUNICATIONS INC, 10-K405, 2000-12-22

ALTIGEN COMMUNICATIONS INC
10-K405, 2000-12-22
TELEPHONE & TELEGRAPH APPARATUS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

(Mark One)
[X] Report pursuant to Section 13 OR 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended: September 30, 2000

[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________ to
______________

Commission File Number 000-27427

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ALTIGEN COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 94-3204299
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

47427 Fremont Boulevard
Fremont, CA 94538
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(address of principal executive offices) (zip code)

Registrant's telephone number, including area code: (510) 252-9712
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(Title of Class)

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes [X] No[_]

Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $14,783,303 as of December 20, 2000 based on the
closing price of the Common Stock as reported on The Nasdaq Stock Market for
that date. There were 13,515,545 shares of the Registrant's Common Stock
issued and outstanding on December 20, 2000

DOCUMENT INCORPORATED BY REFERENCE

Certain sections of AltiGen Communications, Inc.'s definitive Proxy
Statement for the 2001 Annual Meeting of Shareholders to be held of February 9,
2001 are incorporated by reference in Part III of this Form 10 K to the extent
stated herein.

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TABLE OF CONTENTS

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Page
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PART I.............................................................................................................. 3

Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 12
Item 3. Legal Proceedings............................................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........................................... 12

PART II............................................................................................................. 13

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 13
Item 6. Selected Financial Data....................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 15
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.................................... 27
Item 8. Financial Statements and Supplementary Data................................................... 27
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.......... 27

PART III............................................................................................................ 28

Item 10. Directors and Executive Officers of the Registrant............................................ 28
Item 11. Executive Compensation........................................................................ 28
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 28
Item 13. Certain Relationships and Related Transactions................................................ 28

PART IV............................................................................................................. 29

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 29
SIGNATURES.......................................................................................................... 31
</TABLE>

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PART I.

This Annual Report on Form 10-K 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)
that involve risks and uncertainties. Actual results and the timing of certain
events could differ materially from those projected in the forward-looking
statements as a result of certain known and unknown factors, including the those
set forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Factors Affecting Business, Operating Results,
and Financial Condition" and other factors discussed elsewhere in this Annual
Report on Form 10-K. In this Annual Report on Form 10-K, the "Company,"
"AltiGen," "we," "us," and "our" refer to AltiGen Communications, Inc.

Item 1. Business

INTRODUCTION

AltiGen designs, manufactures and markets integrated, multifunction
telecommunications systems that allow businesses to use data networks, such as
the Internet, and the traditional telephone network interchangeably and
seamlessly to carry voice and data communications.

The Company's principal executive offices are located at 47427 Fremont
Blvd., Fremont, California 94538. The telephone number at that address is (510)
252-9712. The Company was incorporated in May 1994 and reincorporated by merger
in Delaware in June 1999.

BACKGROUND AND GENERAL DEVELOPMENT OF BUSINESS

INDUSTRY BACKGROUND

The Growth of the Internet

The Internet is experiencing tremendous growth and is emerging as a global
medium for communications and commerce. Many factors are driving the growth of
the Internet, including:

. improvements in the design and construction of computer systems and
networks;

. the emergence of technologies which facilitate the buying and selling
of goods and services on the Internet, which is referred to as online
commerce or e-commerce; and

. easier, faster and cheaper Internet access through a large and growing
base of personal computers and other devices.

Convergence of Voice and Data

Traditionally, businesses have supported two separate, incompatible
networks to handle their communications needs. The first has been the
traditional telephone network, which relies on a technology called
"circuit-switching." A circuit-switched network establishes and maintains a
dedicated (i.e. not shared) line between calling parties for the duration of a
call. The second type of network on which businesses have traditionally relied
is a data or "packet-switched" network, such as the Internet. In packet-switched
networks, voice, video, images or data is divided into small packets of signals
that are simultaneously routed over different paths to a final destination where
they are recombined. Packet-switched networks are more efficient than the
traditional telephone network because network paths are not dedicated to a
single user, but instead are available to be shared by all users. In contrast to
a circuit-switched network, network capacity is allocated only during
transmission, and messages can be compressed and stored more efficiently.

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The Internet is accelerating the convergence of voice and data to a single
integrated packet-based network that can support both voice and data using
Internet Protocol.

A growing number of businesses have recognized data networks such as the
Internet as a valuable and economical medium for internal and public
communications. These businesses seek to reduce their telecommunications costs
by moving their voice communications to packet-switched networks, such as
corporate intranets and the Internet. Although packet-switched networks can
offer more efficiency and value to businesses, the traditional telephone network
remains the standard for voice communications today. As a result, businesses
that wish to take advantage of packet-switched networks for voice communications
must nevertheless be able to place and receive calls over the traditional
telephone network with customers, suppliers and others who rely solely on the
traditional telephone network for voice communications. Consequently, there is a
need for one common switching system that can interface with both
packet-switched networks and the traditional telephone network.

Evolution Begins in Small to Medium Sized Businesses

Small to medium sized businesses of up to 150 employees are likely to be
the first to use converged voice and data networks because, unlike large
organizations, they may not be heavily invested in outdated systems that
continue to be used because the costs of replacing them outweigh their
shortcomings, and can more quickly take advantage of new technological trends.
Most of these businesses today use a traditional private telephone network as
the backbone of their connection to the voice network, and maintain a separate
data network.

Today's traditional private telephone network remains an expensive,
proprietary solution. These systems require skilled personnel to physically
prepare the installation site and to install the equipment and can be difficult
to install, upgrade and maintain. For example, adding voice mail to a
traditional private telephone network system requires personnel to configure and
connect a separate server to the system. Thus, after adding a number of features
such as voice mail, a traditional private telephone network may be difficult to
maintain because of the diversity of its hardware components, as well as the
number and complexity of connections between those components. Administering
this system thus may become prohibitively expensive for small- to medium-sized
businesses with limited resources.

Most existing telecommunications systems do not address the needs of
businesses that wish to transmit voice communications over both the traditional
telephone network and data networks. For example, businesses may wish to route
internal calls over their existing voice network and route calls between offices
over data networks, such as the Internet, all using the same telecommunications
system. We believe a significant opportunity exists to provide small to medium
sized businesses with an integrated solution that delivers the benefits of
integrated, multifunction telecommunications systems using the Internet as well
as the traditional telephone network.

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THE ALTIGEN SOLUTION

We design, manufacture and market next generation, integrated,
multifunction telecommunications systems that use both data networks, such as
the Internet, and the traditional telephone network to provide new services to
end users that were unavailable with traditional private telephone systems.
AltiServ, our Windows NT-based system, interfaces with the traditional telephone
network and data networks, permitting our customers to take advantage of the
converging communications infrastructure. Our systems integrate voice and data
communications with fewer components than traditional systems and other
multifunction telecommunications systems.

Key benefits of our solution include:

. Ability to use both Data Networks, such as the Internet, and the
Traditional Telephone Network. Our systems provide the benefits of the
converging communications infrastructure by enabling businesses to
route voice calls over the Internet and other data networks or the
traditional telephone network. Our system design integrates seamlessly
with both types of networks, providing flexibility for businesses to
configure their telecommunications systems to suit their needs.

. Lower Telecommunications Costs. By routing voice over data networks,
including the Internet, our systems eliminate toll charges associated
with long-distance calls. Using our products, businesses can send and
receive voice communications over the Internet or existing data lines
that constitute their intranets.

. Innovative Features. Our systems provide integrated voice and data
capability, allowing numerous features previously available only with a
combination of multiple systems, typically from different vendors.
AltiGen's AltiServ system has typical call handling and routing
functions, as well as specialized functions such as Zoomerang, which
enables users to retrieve a voice mail message, automatically place a
call to respond and return to the voice mail system to continue
reviewing messages.

. Ease of Installation, Use and Maintenance. The configuration of the
AltiServ system and its use of industry-standard hardware and software
platforms allow for easy installation and system maintenance. AltiServ
enables system administrators to manage the voice, voice messaging,
e-mail and Internet features of our products through a single
consistent user interface.

. Reduced Administration Costs. Our user interface allows end users to
administer their system internally. With traditional private telephone
systems, businesses frequently require a third-party service provider
to perform tasks as simple as changing a phone extension or adding a
phone line. These expenses can be significant for installation, system
upgrades and modifications. Using AltiServ, system administrators can
perform many of these tasks and reduce additional expenditures.

PRODUCTS AND CORE TECHNOLOGIES

We design and develop hardware (circuit boards) and related software for
integration by our distributors and dealers into general purpose computer
platforms for use by small to medium sized business. AltiGen's AltiServ system
is a complete communications system capable of coordinating different types of
communications, including e-mail and voice mail. The AltiServ system answers
incoming phone calls, transfers calls to individual extensions or to groups of
company representatives and tracks the call activity for future performance
improvements. An auto attendant feature allows incoming callers the opportunity
to select choices in the kind of service they need or to answer calls when no
attendants are available. Our software is designed for easy installation and
maintenance.

The AltiServ system functions over packet-switched networks including
corporate intranets and the Internet. AltiServ supports combining multiple forms
of communication such as voice mail and data files into a single e-mail

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message. The AltiServ system forwards e-mail and voice mail messages over data
networks to other mail service systems. The AltiServ system also provides remote
employees access to their voice mail messages over the Internet.

The AltiServ system allows a business to connect multiple branch offices
using AltiServ systems such that calls between these locations can be carried
over low-cost data network connections as opposed to the traditional telephone
network.

The main features of our products are as follows:

Product Description
------- -----------

Software
--------

AltiWare IP Enables people to place and receive telephone calls
over data networks supporting the same communication
format as the Internet.

AltiView A personal computer program that allows users to receive
and place calls, listen to voice mail messages and
identify the phone number of the caller.

AltiWare OE A graphical user interface program that provides telephone
services to users through their computers.

AltiWare CE Provides the same services as AltiWare OE but does not
support some desktop program messaging capabilities
offered by AltiWare OE.

Hardware
--------

Triton IP A circuit board that allows calls to be carried over
public and private data networks that support the Internet
Protocol.

Triton T1/ PRI A circuit board that allows calls to be carried over
digital telecommunications lines.

Quantum A circuit board that allows calls to be carried over
traditional analog telephone lines.

Hardware and Firmware

AltiGen developed a single base circuit board with powerful digital signal
processing technology. Digital signal processing is a computer built on to the
circuit board which can run special, high-speed software programs, called
firmware. The firmware can receive, send and modify digital information for
communications with network services. AltiGen's basic Triton DSP board can be
used to create different circuit boards to meet many communication requirements
by simply adding a few hardware and/or software components to the basic board.
For example, AltiGen's Triton DSP series circuit board becomes a T1 or ISDN
communication circuit board or a circuit board supporting the same communication
format as the Internet with simple changes in on-board software and, in some
cases, new circuits.

This modular design not only allows AltiGen to provide new capabilities,
but also allows AltiGen's products to achieve a high degree of reliability since
the underlying technology is the same and hence receives our full attention to
any material and processing improvements that can or need to be made.

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Software

AltiGen's software products are based on modular software components
similar to the concept discussed for our hardware and firmware above. The
service provider layer of software is composed of separate software components,
each of which communicates with a hardware circuit board within the AltiServ
system. The middleware layer interacts with all the service providers in the
system and manages their resources. This layer hides the complexity of the
hardware from application programs wanting to provide specific features. The
application program layer consists of components that implement the application
logic such as voice mail and auto attendant. These applications do not need to
know about the hardware or how to communicate with the hardware.

The layered architecture of AltiServ provides important benefits:

. A shorter time is required to develop new features;

. Development times are more predictable, thus saving money ;

. New hardware and software features can be added easily and rapidly;
and

. Changing one component in the system does not mean that other
components have to be changed.

MARKETING, SALES AND CUSTOMER SUPPORT

Marketing

Our marketing efforts currently focus on increasing demand for our products
in North America, South East Asia, Europe and Latin America. We work to increase
market awareness of our technology and demand for our products in the small to
medium sized business market through cooperative marketing, print, radio and Web
advertising and direct mail campaigns. We have a customer referral program
through which our AltiServ customers can refer potential buyers to us through
our Web site.

To assist our distributors, dealers, original equipment manufacturers and
strategic partners, we provide market development funds and technical and sales
training developed specifically for our products. In return, these companies
must provide us with point-of-sale reports that allow us to develop a profile of
end users of our systems and evaluate the effectiveness of our marketing
efforts.

We have recently formed marketing alliances with Compaq. Specifically, we
have signed a Compaq Solutions Alliance Agreement, under which Compaq will
market and bundle our products to its channel members and to customers. To date
we have not recognized any significant revenue as a result of these alliances.

Sales

We currently have sales and support staff in: New York, New York; Chicago,
Illinois; Denver, Colorado; Dallas, Texas; Los Angeles, California and Fremont,
California. Our network of distributors and 356 dealers sell our systems to end
users. Our sales force answers incoming calls from end users and refers new
leads to a qualified dealer near each end user's location.

Customers

Our customers are primarily distributors and dealers who sell and resell
our products to end users. We have distribution agreements with AltiSys, Avnet,
Ingram Micro, Synnex, Tech Data Corporation and Terra Consortium in the United
States and Kanematsu Semiconductor Corporation and Nitsuko Corporation abroad.
Sales through Tech Data, AltiSys, Ingram Micro and Synnex accounted for
approximately 21%, 19%, 16% and 12% respectively, of our revenues in fiscal year
2000, and approximately 27%, 7%, 19%, and 0% respectively, of our revenues in
fiscal 1999. We also have 356 authorized dealers, who sell our products
directly to end users. We continually seek to identify and authorize new
dealers. We review our dealers quarterly and de-authorize those who do not
meet our standards.

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Customer Support

We believe that consistent, high-quality service and support are key
factors in attracting and retaining customers. Our customer support groups,
located in California, New York and Texas, coordinates service and technical
support of our products and provides service 24 hours a day, seven days a week.
These personnel assist our distributors and dealers in resolving installation
and support issues that arise from their sales to end users and also provides
limited support to end users to supplement their dealer support. Customers can
also access technical information and receive technical support through our Web
site.

RESEARCH AND DEVELOPMENT

The market for our products is characterized by rapidly changing
technology, evolving industry standards and frequent product introductions. We
believe that our future success depends in large part upon our ability to
continue to enhance the functionality and uses of our core technology. We intend
to extend the functionality and uses of our hardware and software technology by
continuing to invest in research and development.

We currently conduct the majority of our product development in-house. We
also use a small number of independent contractors to assist with certain
product development and testing activities. We intend to continue working with
our strategic partners to enhance our products. As of September 30, 2000, we
employed 36 individuals in engineering, research and development and support.

During fiscal 2000, 1999 and 1998, our research and development expense was
approximately $4,334,000, $3,658,000 and $1,927,000, respectively.

COMPETITION

The markets for our products are intensely competitive, continually
evolving and subject to changing technologies. We currently compete with
companies providing traditional telephone systems, principally Lucent
Technologies and Nortel Networks. We also compete against companies providing
multifunction telecommunications systems, including, Praxon, Inc. and Artisoft,
Inc. We face potential competition from companies such as Shoreline Teleworks,
Inc., NBX Corporation, acquired by 3Com Corporation, Selsius Systems, acquired
by Cisco Systems, Inc., as well as any number of future competitors. Many of our
competitors are substantially larger than we are and have significantly greater
name recognition, financial, sales and marketing, technical, customer support,
manufacturing and other resources. These competitors may also have more
established distribution channels and stronger relationships with local, long
distance and Internet service providers. These competitors may be able to
respond more rapidly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sale
of their products. These competitors may enter our existing or future markets
with solutions that may be less expensive, that may provide higher performance
or additional features or that may be introduced earlier than our solutions.

We believe the principal competitive factors in our market include, or are
likely to include:

. product performance and features such as the ability to integrate
voice and data;

. price;

. reliability;

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. ease of use;

. size of customer base;

. quality of service and technical support;

. sales and distribution capabilities; and

. strength of brand name.

We believe that our principal competitive advantages include:

. established brand-name recognition;

. a well-developed and trained distribution channel; and

. a considerable lead in product development and marketing.

We cannot be certain that we will be able to compete successfully with
existing or new competitors. If we fail to compete successfully against current
or future competitors, our business could suffer.

SEASONALITY

Typically, the Server-Based PBX industry experiences some seasonal
variations in demand, with weaker sales in the winter months because of holidays
and customers' planned shutdowns. This seasonality is particularly evident in
the North American market.

INTELLECTUAL PROPERTY

We generally rely upon patent, copyright, trademark and trade secret laws
to protect and maintain our proprietary rights for our technology and products.
AltiGen is a registered trademark, and Zoomerang is a trademark pending
registration by AltiGen in the United States and other jurisdictions. In
addition, the AltiGen logo is a trademark of AltiGen in the United States and
other jurisdictions.

We have filed several U.S. patent applications relating to various aspects
of our client and server software, mixed-media communications and computer
telephony. We expect to file patent applications as we deem appropriate to
protect our technology and products. We cannot be sure that our patent
applications will result in the issuance of patents, or that any issued patents
will provide commercially significant protection to our technology.

To help protect our intellectual property rights, our employees,
consultants and strategic partners enter into confidentiality agreements that
prohibit disclosure of our proprietary information. We also currently require
employees and consultants to assign to us their ideas, developments, discoveries
and inventions.

We attempt to avoid infringing known proprietary rights of third parties in
our product and service development efforts. We have not, however, conducted and
do not conduct comprehensive patent searches to determine whether the technology
used in our products infringes patents held by third parties. In addition, it is
difficult to proceed with certainty in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies. If we
were to discover that our products violate third-party proprietary rights, we
might not be able to obtain licenses to continue offering these products without
substantial reengineering. Efforts to undertake this reengineering might not be
successful, licenses might be unavailable on commercially reasonable terms, if
at all, and litigation might not be avoided or settled without substantial
expense and damage awards (See Part I, Item 3, Legal Proceedings).

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MANUFACTURING AND ASSEMBLY

Our manufacturing operations consist of purchasing, receiving, inspecting,
testing, packaging and shipping. We depend on three suppliers who provided us
with about 58% of our hardware product components during 2000. We put these
components into kits and send them to a sub-contractor or external manufacturing
facility for assembly. The final hardware assembly, software installation and
testing of our products is performed in-house at our 11,000 square-foot
manufacturing floor, located at our corporate headquarters in Fremont,
California. Our manufacturing and assembly processes enable us to configure our
products to adapt to different customer specifications at the final assembly
stage. This flexibility is designed to reduce both our assembly cycle time and
our need to maintain a large inventory of finished goods. We believe that the
efficiency of our assembly process to date is largely due to our product
architecture and our commitment to assembly process design.

We test our products both during and after the assembly process using
internally developed product assurance testing procedures, which include initial
visual inspection and functional testing and final systems testing. Although we
generally use standard components for our products and try to maintain
alternative sources of supply, we purchase some key components from sole-source
suppliers for which alternative sources are not currently available. We
incorporate the following sole-sourced components in our products:

. A Mitel Corporation chip is included in all of our boards and is
particularly important because it is the means by which our boards
communicate with each other to enable our products to function
correctly.

. Texas Instruments' digital signal processor ("DSP") chip is included in
our Triton family of boards. The DSP chip is designed to perform the
mathematics, data compression and other tasks that are needed to
manipulate voice communications that are routed through our products.
The DSP chip is also used in our Integrated Services Digital Network
Basic Rate Interface board. This board enables our products to work with
communications networks used in Japan. We expect that sales of these
boards will represent an increasing percentage of our revenues in the
future.

. Xilinx, Inc.'s chip for our Triton product line board allows our board
to work with digital communications lines. We expect that sales of our
Triton product line board will represent an increasing percentage of our
revenues in the future.

. Loss of any key component supplier would adversely impact our business.

EMPLOYEES

As of September 30, 2000, we had 108 full-time employees, including 36 in
research and development, 46 in marketing, sales and support, 12 in operations,
and 14 in finance and administration. Our future success will depend, in part,
on our ability to continue to attract, retain and motivate highly qualified
technical, marketing, engineering and management personnel, who are in great
demand.

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EXECUTIVE OFFICERS

The following sets forth certain information with regard to the executive
officers of the Company and their ages as of September 30, 2000:

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Name Age Position
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Gilbert Hu (1)........................ 43 President, Chief Executive Officer, Director
Philip M. McDermott................... 54 Chief Financial Officer
Simon Chouldjian...................... 47 Vice President of Manufacturing
Tricia Chu............................ 46 Vice President of Finance and Administration
Sherman Silverman..................... 60 Vice President of Business Development
Tsyr-Yi (Shirley) Sun................. 40 Vice President of Research and Development
</TABLE>

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(1) Member of the Compensation Committee

Gilbert Hu founded AltiGen and has served as our President and Chief
Executive Officer and a Director since May 1994. Before founding AltiGen, Mr. Hu
was a founder, President and Chief Executive Officer of Centrum Communications,
Inc., a networking company acquired by 3Com Corporation in early 1994. Mr. Hu
has also served in technical and managerial roles at Vitalink Communication
Corporation, an internetworking equipment manufacturer. He received a Bachelor
of Science degree in Electrical Engineering from National Chiao-Tung University
in Taiwan and a Masters of Science degree in Electrical Engineering from Arizona
State University. Mr. Hu is a brother-in- law of director Wen-Huang (Simon)
Chang.

Philip M. McDermott has served as our Chief Financial Officer since June
1999. From October 1995 to May 1999, Mr. McDermott served as Director of Finance
Americas Sales for 3Com Corporation, a networking equipment company. From
October 1994 to October 1995, Mr. McDermott served as Vice President of Finance,
Operations and Administration for DAVID Systems, a division of Chipcom
Corporation, a public networking company. Chipcom was subsequently acquired by
3Com Corp. Mr. McDermott received Certified Management Accountant accreditation
from The Society of Management Accounting in Montreal, Canada.

Simon Chouldjian has served as our Vice President of Manufacturing since
June 1997. From July 1984 to June 1997, Mr. Chouldjian was the founder and Vice
President of Engineering of Luxcom, Inc., a manufacturer of communication hub
equipment. Mr. Chouldjian has held supervisory and project leader positions in
engineering at the Hewlett-Packard Company and TRW, Inc. He received a Bachelor
of Science degree in Electrical Engineering from the University of California,
Berkeley and a Masters of Science degree in Electrical Engineering from Stanford
University.

Tricia Chu has served as our Vice President of Finance and Administration
since June 1999. From March 1999 to June 1999, Ms. Chu served as our Senior
Director of Finance and Administration. From February 1994 to March 1999, Ms.
Chu worked for 3Com Corporation, first as Controller of 3Com's Remote Access
Division, then as Controller of Americas Sales. Ms. Chu has also held finance
and accounting positions with Centrum Communications, Inc., a networking company
acquired by 3Com Corporation in early 1994, Integrated Silicon Solutions, Inc.,
a designer and manufacturer of memory devices, and Rugged Digital Systems Inc.,
a producer of computer systems. Ms. Chu received a Bachelor of Science degree in
Finance and International Trade from Tankung University in Taiwan and a Masters
in Business Administration from Central State University in Oklahoma.

Sherman Silverman has served as our Vice President of Business Development
since May 2000. From March 1999 to March 2000, Mr. Silverman worked as Senior
Vice President of Sales and Marketing at Digital Link. From May 1994 to October
1998, Mr. Silverman served as a Vice President of Sales and Marketing for Store
Media, Inc.

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Tsyr-Yi (Shirley) has served as our Vice President of Research and
Development since Mr. Lung's resignation on October 1999, and has served as our
Director of IP Telephony from April 1998 to October 1999. From February 1994 to
March 1998, Ms. Sun worked for 3Com Corporation as an Engineering Manager. From
August 1991 to February 1994, Ms. Sun was a founder and an Engineering Manager
with Centrum Communications, Inc., a networking company acquired by 3Com
Corporation in early 1994. Ms. Sun received a Bachelor of Science degree in
Mechanical Engineering from National Central University in Taiwan and a Master
of Science degree in computer science from Utah State University.

Item 2. Properties

Our headquarters for corporate administration, research and development and
sales and marketing occupies approximately 35,000 square feet of space in
Fremont, California, which we lease at an annual rental of approximately
$600,000. We also conduct research and development in a 2,919 square foot
facility in Shanghai, China, which we lease at an annual rate of approximately
$30,000. We believe that our existing facilities are adequate for our needs
through at least the end of year 2003. We believe that any additional space we
may need in the future will be available on commercially reasonable terms.

Item 3. Legal Proceedings

Generally, litigation, which could be costly and time consuming, may be
necessary to determine the scope and validity of others' proprietary rights, or
to enforce any patent issued to us, in either case, in judicial or
administrative proceedings. For example, we are currently engaged in litigation
with NetPhone, Inc. On June 30, 1999, we filed a complaint for declaratory
judgment against NetPhone, Inc. seeking a judgment that we do not infringe any
valid claims of U.S. Patent No. 5,875,234 patent ("the `234 patent") allegedly
owned by NetPhone. NetPhone answered our complaint on July 13, 1999 and asserted
a counterclaim against us, alleging that we infringe the `234 patent and seeking
to preliminarily and permanently enjoin us from making, importing, using,
offering to sell or selling what NetPhone refers to as the Quantum Device. On
August 11, 1999, AltiGen received NetPhone's motion for preliminary injunction.
On February 11, 2000, the district court issued an order denying NetPhone's
motion for preliminary injunction, finding that "AltiGen has raised substantial
questions as to whether the '234 patent will survive attacks on its validity at
trial." NetPhone was subsequently acquired by Sonoma Systems, Inc. ("SSI"), and
SSI has been added as a party to the lawsuit. The parties are currently engaging
in discovery, and trial has been set for April 23, 2001. We intend to continue
to vigorously defend the Company against the allegations made by NetPhone and
SSI. Any litigation is subject to inherent uncertainties and, therefore, we
cannot assure you that we will prevail in this litigation, or that an adverse
outcome would not adversely affect our business or financial condition.

An adverse outcome in the NetPhone litigation or any other litigation could
subject us to significant liabilities to third parties, require us to obtain
licenses from third parties, or require us to cease product sales and possibly
alter the design of our products. Not all licenses to third-party patents or
proprietary rights may be available on acceptable terms. In addition, the laws
of certain countries may not protect our intellectual property.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

12
<PAGE>

PART II.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

The effective date of AltiGen's initial public offering was on October 4,
1999. The principal market for Company's common stock is The Nasdaq Stock
Market. On September 30, 1999, AltiGen was a privately-held company.

As of September 30, 2000, the Company had approximately 172 shareholders of
record. We have never declared or paid any cash dividends on our capital stock.
We currently expect to retain future earnings, if any, to support operations and
to finance the growth and development of our business. Therefore, we do not
expect to pay cash dividends in the foreseeable future.

USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES

On October 8, 1999, the Company completed an initial public offering (the
"Offering") of its Common Stock, $.001 par value. The managing underwriters in
the Offering were CIBC World Markets Corp., Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated, and FAC/Equities, a division of First Albany
Corporation (the "Underwriters"). The shares of Common Stock sold in the
Offering were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (the "Registration Statement") (Reg. No.
333-80037) that was declared effective by the SEC on October 4, 1999. The
Offering commenced on October 5, 1999. All 3,737,500 shares of Common Stock
registered under the Registration Statement (including 487,500 shares sold
pursuant to the exercise of the Underwriters' over-allotment option) were sold
at a price of $10.00 per share. The aggregate price of the Offering amount
registered was $37.4 million. In connection with the Offering, the Company paid
an aggregate of $2.6 million in underwriting discounts and commissions to the
Underwriters and $1.5 million of professional and other offering expenses
associated with the offering.

After deducting the underwriting discounts and commissions and the Offering
expenses described above, the Company received net proceeds from the Offering of
approximately $33.3 million. The Company intends to use the proceeds for general
corporate purposes as described in the prospectus for the Offering. None of the
Company's net proceeds of the Offering were paid directly or indirectly to any
director, officer, general partner of the Company or their associates, persons
owning 10% or more of any class of equity securities of the Company, or an
affiliate of the Company.

13
<PAGE>

Item 6. Selected Financial Data

This section presents selected historical financial data of AltiGen as a
Delaware corporation. You should read carefully the consolidated financial
statements included in this Form 10-K, including the notes to the consolidated
financial statements. The selected data in this section are not intended to
replace the Company's consolidated financial statements.

<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues, net............................. $ 12,410 $ 6,599 $ 3,890 $ 1,379 $ 229
Cost of revenues.......................... 5,747 3,300 2,520 1,040 238
---------- ---------- ---------- ---------- ----------
Gross profit (loss)....................... 6,663 3,299 1,370 339 (9)
Operating expenses:
Research and development.................. 4,334 3,658 1,927 1,498 753
Sales and marketing....................... 9,691 4,319 2,770 1,448 446
General and administrative................ 3,092 1,807 675 718 547
Deferred stock compensation............... 466 770 164 - -
---------- ---------- ---------- ---------- ----------
Total operating expenses.................. 17,583 10,554 5,536 3,664 1,746
---------- ----------- ---------- ------------ ----------
Loss from operations...................... (10,920) (7,255) (4,166) (3,325) (1,755)
---------- ---------- ---------- ------------- ----------
Interest and other income, net............ 2,094 360 246 206 124
---------- ---------- ---------- ---------- ----------
Net loss.................................. $ (8,826) $ (6,895) $ (3,920) $ (3,119) $ (1,631)
========== ========== ========== ========== ==========
Basic and diluted net loss per share...... $ (0.66) $ (5.76) $ (4.75) $ (3.91) $ (2.14)
=========== ========== ========== ========== ==========
Shares used in computing basic and diluted
net loss per share (1)................. 13,287 1,197 825 797 762
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments............................ $ 29,223 $ 5,934 $ 8,057 $ 3,093 $ 3,152
Working capital........................... 32,738 8,426 8,698 3,535 3,501
Total assets.............................. 38,645 12,687 11,102 4,714 3,762
Convertible preferred stock............... - 8 8 6 5
Accumulated deficit....................... (25,548) (16,721) (9,826) (5,906) (2,787)
Total stockholders' equity................ 34,492 9,341 9,251 3,787 3,579
</TABLE>

(1) Basic and diluted net loss per share are the same for all periods as
the impact of any potentially dilutive securities would be anti-dilutive.

14
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

OVERVIEW

We are a leading provider of integrated, multifunction telecommunications
systems. We were incorporated in May 1994 and began operations in July 1994.
From inception through July 1996, we were a development-stage company and had no
revenues. During this period, our operating activities consisted primarily of
developing our initial product, recruiting personnel, raising capital and
building our corporate infrastructure. We first recognized revenues from product
sales of our Quantum board and AltiWare software in July 1996. We generated net
revenues of $12.4 million in fiscal year 2000, $6.6 million in fiscal year 1999
and $3.9 million in fiscal year 1998. As of September 30, 2000, we had an
accumulated deficit of $25.5 million.

We derive our revenues from sales of our AltiServ system, which includes
Quantum boards, Triton boards and AltiWare software. Software sales currently
make up approximately 10% of our net revenues. Product revenues consist of sales
to end users (including dealers) and to distributors. Revenues from product
sales to end users are recognized upon shipment. We defer recognition of sales
to distributors until they resell our products to their customers. 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 afford distributors
protection from subsequent price reductions.

Our cost of revenues consists of component and material costs, direct labor
costs, provisions for excess and obsolete inventory, warranty costs and overhead
related to manufacturing our products. Software sales typically carry a higher
gross margin than hardware sales.

We have experienced operating losses and negative cash flows from operations
in each quarterly and annual period since our inception and we currently expect
to continue to incur losses for the foreseeable future. We have not recognized
any future tax benefits of our cumulative net operating losses due to
uncertainty as to future realizability.

Results of Operations

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

<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues, net............................................. 100.0% 100.0% 100.0%
Cost of revenues.......................................... 46.3 50.0 64.8
------------ ------------ -----------
Gross profit.............................................. 53.7 50.0 35.2
------------ ------------ -----------
Operating expenses:
Research and development.................................. 34.9 55.4 49.6
Sales and marketing....................................... 78.1 65.4 71.2
General and administrative................................ 24.9 27.4 17.3
Deferred stock compensation............................... 3.8 11.7 4.2
------------ ------------ -----------

Total operating expenses.................................. 141.7 159.9 142.3
------------ ------------ -----------

Loss from operations...................................... (88.0) (109.9) (107.1)
Interest and other income, net............................ 16.9 5.4 6.3
------------ ------------ -----------
Net loss.................................................. (71.1%) (104.5%) (100.8%)
============ ============ ===========
</TABLE>

15
<PAGE>

Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended September 30,
1999

Revenues, net. Revenues consist of sales to end users (including dealers) and
to distributors. Net revenues increased from $6.6 million in fiscal year 1999 to
$12.4 million in fiscal year 2000, representing an increase of 87.9%. This
change was primarily from increased market acceptance of our products through
our main distributors. Sales through Tech Data, AltiSys, Ingram Micro, and
Synnex and accounted for approximately 21%, 19%, 16%, and 12% respectively, of
our revenues in fiscal year 2000, and approximately 27%, 7%, 19% and 0.0%
respectively, of our revenues in fiscal 1999.

Cost of revenues. Cost of revenues in fiscal year 2000 increased to $5.7
million from approximately $3.3 million in fiscal year 1999. Cost of revenues
decreased as a percentage of net revenues in fiscal year 2000 compared to fiscal
year 1999. This decrease was primarily a result of production efficiencies as
well as lower component and overhead costs due to increased production. In
addition, the cost of revenues of fiscal year 2000 includes a provision for
excess and obsolete inventory of $266,000 related primarily to the impact of
design changes to our Quantum product. As a result of higher sales and lower
costs, gross profit increased to $6.7 million in fiscal year 2000 from $3.3
million in fiscal year 1999. Although gross profit as a percentage of revenue
has increased each fiscal year, there can be no assurance that this trend will
continue in the future.

Research and development expenses. Research and development expenses
increased to $4.3 million in fiscal year 2000 from $3.7 million in fiscal year
1999. The increase was primarily due to hiring of additional engineers, and
increased resources dedicated to release of new products. Additionally, the
Company expanded research and development facilities in China, resulting in
increased depreciation and spending on design and simulation of software. We
currently intend to increase research and development expenses in absolute
dollars in the foreseeable future to allow us to develop new products, features,
and expand into new markets in Asia Pacific.

Sales and marketing expenses. Sales and marketing expenses increased to $9.7
million in fiscal year 2000 from $4.3 million in fiscal year 1999, representing
an increase of 125.6%. This increase was primarily due to hiring additional
sales and marketing personnel, increasing advertising and promotional activities
and increasing training to identify and educate new qualified authorized
dealers. In addition we are in the process of reorganizing our sales
infrastructure. We intend to complete the restructuring our sales team, increase
our marketing campaign in absolute dollars for our new product releases, and
continue to pursue new channels and markets and to promote customer and end user
awareness of the features and benefits of our products. We expect these
increased expenses will increase the amount of our net losses (or reduce the
amount of any net profits that we may have).

General and administrative expenses. General and administrative expenses
increased to $3.1 million in fiscal year 2000 from $1.8 million in fiscal year
1999. The increase was primarily due to legal fees related to the NetPhone
litigation (see Part I, Item 3, Legal Proceedings), hiring of additional
personnel in our finance and accounting, management information systems and
administrative functions, and an increase in related facilities expenses and
professional services expense. We currently intend to increase general and
administrative expenses in absolute dollars, as we add personnel and incur
additional costs resulting from the growth of our business. We expect these
increased expenses to increase the amount of our net losses (or reduce the
amount of any net profits that we may have).

Deferred stock compensation expense. Deferred stock compensation expense was
$466,000 in fiscal year 2000 as compared to $770,000 for fiscal year 1999. The
aggregate deferred stock compensation charge was reduced during fiscal year 2000
by approximately $1.2 million due to the cancellation of approximately 493,000
options. Deferred stock compensation expense reflects the amortization of
stock compensation charges resulting from granting stock options at exercise
prices below the deemed fair value of our common stock on the dates the options
were granted. We are amortizing these amounts using the straight-line method
over the vesting period of the related stock options. We expect to amortize
approximately $681,000 of this deferred stock compensation in fiscal year 2001,
$540,000 in fiscal year 2002, and $121,000 in fiscal year 2003 and doing so will
increase our loss (or reduce any profits that we may have).

16
<PAGE>

Interest and other income, net. Net interest and other income increased to
$2.1 million in fiscal year 2000 from $360,000 in fiscal year 1999. This
increase was due primarily to higher average cash and cash equivalents balances
between periods due to funds received from our initial public offering.

Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September 30,
1998

Revenues, net. Revenues consist of sales to end users (including dealers) and
to distributors. Net revenues increased from $3.9 million in fiscal year 1998 to
$6.6 million in fiscal year 1999, representing an increase of 69.7%. This change
was primarily from increased market acceptance of our products through our main
distributors. Sales through Ingram Micro and Tech Data accounted for
approximately 19% and 27%, respectively, of our revenues in fiscal year 1999,
and approximately 3% and 24%, respectively, of our revenues in fiscal year 1998.

Cost of revenues. Cost of revenues in fiscal year 1999 increased to $3.3
million from approximately $2.5 million in fiscal year 1998. Cost of revenues
consists primarily of component and material costs, direct labor costs,
provisions for excess and obsolete inventory, warranty costs and overhead
related to manufacturing our products. Cost of revenues decreased as a
percentage of net revenues in fiscal year 1999 compared to fiscal year 1998.
This decrease was primarily a result of production efficiencies as well as lower
component and overhead costs due to increased production. In addition, the cost
of revenues of fiscal year 1998 includes a provision for excess and obsolete
inventory of $418,000 related primarily to the impact of design changes to our
Quantum product. As a result of higher sales and lower costs, gross profit
increased to $3.3 million in fiscal year 1999 from $1.4 million in fiscal year
1998. Although gross profit as a percentage of revenue has increased each fiscal
year, there can be no assurance that this trend will continue in the future.

Research and development expenses. Research and development expenses
increased to $3.7 million in fiscal year 1999 from $1.9 million in fiscal year
1998. Research and development expenses consist principally of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development and testing of our products. We expense our research and
development costs as incurred. The increase was primarily due to our hiring
additional engineers, as well as opening of a research and development office in
China and increases in depreciation and other related charges due to increases
in capital spending on design and simulation software. We currently intend to
increase research and development expenses in absolute dollars in the
foreseeable future to allow us to develop new products and features. Until these
new products and features are introduced, we expect this increase in expenses to
increase our net loss (or to reduce any net profits that we may have).

Sales and marketing expenses. Sales and marketing expenses increased to $4.3
million in fiscal year 1999 from $2.8 million in fiscal year 1998, representing
an increase of 55.9%. Sales and marketing expenses consist of compensation,
commissions and related costs for personnel engaged in sales and marketing
functions, trade show expenses, selling and promotional programs, marketing
programs and related expenses. This increase was primarily due to hiring
additional sales and marketing personnel, increasing advertising and promotional
activities and increasing training to identify and educate new qualified
authorized dealers. We currently intend to increase sales and marketing expenses
in absolute dollars as we continue to pursue new channels and markets and to
promote customer and end user awareness of the features and benefits of our
products. We expect these increased expenses to increase the amount of our net
losses (or reduce the amount of any net profits that we may have).

General and administrative expenses. General and administrative expenses
increased to $1.8 million in fiscal year 1999 from $675,000 in fiscal year 1998.
General and administrative expenses consist primarily of salaries and related
expenses for executive, finance and administrative personnel, recruiting
expenses, professional fees and other general corporate expenses.

The increase was primarily due to legal fees related to the NetPhone
litigation (see Part I, Item 3, Legal Proceedings), hiring of additional
personnel in our finance and accounting, management information systems and
administrative groups, and an increase in related facilities expenses and
professional services expenses. We currently intend to increase general and
administrative expenses in absolute dollars, as we add personnel and incur
additional costs resulting from the growth of our business. We expect these
increased expenses to increase the amount of our net losses (or reduce the
amount of any net profits that we may have).

17
<PAGE>

Deferred stock compensation expense. Deferred stock compensation expense was
$770,000 in fiscal year 1999 as compared to $164,000 for fiscal year 1998.
Deferred stock compensation expense reflects the amortization of stock
compensation charges resulting from granting stock options at exercise prices
below the deemed fair value of our common stock on the dates the options were
granted. We are amortizing these amounts using the straight-line method over the
vesting period of the related stock options.

Interest and other income, net. Net interest and other income increased to
$360,000 in fiscal year 1999 from $246,000 in fiscal year 1998. This increase
was due primarily to higher average cash and cash equivalents balances between
periods.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily from the sale of
equity securities. We have raised an aggregate of $24.7 million, net of offering
expenses, through the sale of preferred stock. On October 8, 1999 AltiGen
received cash proceeds, net of underwriters' discounts and commissions, and
expenses previously paid of $1.5 million totaling approximately $33.3 million
upon the closing of its initial public offering. As of September 30, 2000, we
had cash and cash equivalents of $15.1 million, which consist of cash deposited
in checking and money market accounts with original maturities of less than
three months.

Net cash used in our operating activities was $9.3 million for fiscal year
2000, $5.8 million for fiscal year 1999 and $3.8 million for fiscal year 1998.
Net cash used in operating activities primarily reflected the impact of the net
loss for each of the periods.

Net cash used in investing activities was $15.4 million for fiscal year 2000,
which was primarily a result of short and long term investments. Cash provided
by investing activities for fiscal year 1999 was $335,000 and cash used in
investing activities was $388,000 for fiscal year 1998. The relative increase in
cash provided by investing activities in fiscal year 1999 as compared to the
prior year was primarily a result of redemption of short-term investments. The
relative decrease in cash used for investing activities in the fiscal year 1998
as compared to the prior year was primarily due to decreases in net cash being
invested in the year.

Net cash provided by financing activities was $33.9 million for fiscal year
2000. Cash provided by financing activities was $4.4 million for fiscal year
1999 and $9.2 million in fiscal year 1998. The increase in cash provided by
financing activities from fiscal year 2000 as compared to the prior period was
primarily due to $33.3 million in net proceeds from the initial public offering
of 3,737,500 shares of Common Stock on October 9, 1999. The decrease in cash
provided by financing activities from fiscal year 1999 as compared to the prior
period was primarily due to lower proceeds from the issuance of series D
preferred stock as well as $1.5 million of costs related to the initial public
offering of our common stock.

We currently believe that existing cash and cash equivalents balances, will
provide us with sufficient funds to finance our operations for at least the next
12 months. Our management intends to invest our cash in excess of current
operating requirements in short-term, interest-bearing investment-grade
securities. Subsequently, we may need to raise additional funds, and additional
financing may not be available on favorable terms, if at all. We may also
require additional capital to acquire or invest in complementary businesses or
products, or obtain the right to use complementary technologies. If we can not
raise funds, if needed, on acceptable terms, we may not be able to develop or
enhance our products, take advantage of future opportunities, or respond to
competitive pressures or unanticipated requirements, which could seriously harm
our business, financial condition, and results of operations. If additional
funds are raised through the issuance of equity securities, the net tangible
book value per share may decrease, the percentage ownership of then current
stockholders may be diluted, and such equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock.

18
<PAGE>

Year 2000 Compliance

The year 2000 problem refers to the potential for system and processing
failures of date-related data as a result of computer-controlled systems using
two digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date represented as
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions to operations, including among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.

To date, we have not experienced any year 2000 issues with any of our
internal systems or our products, and we do not expect to experience any of
them.

Notwithstanding that the Company did not experience any major problems on the
date change, management has monitored this area and there were no major
disruptions to business occurred related to this matter.

CERTAIN FACTORS AFFECTING BUSINESS, OPERATING RESULTS, AND FINANCIAL CONDITION

Risks Related to AltiGen

We have a history of losses and expect to incur future losses, which may
prevent us from becoming profitable.

We have experienced operating losses since our inception. As of September 30,
2000, we had an accumulated deficit of $25.5 million. We expect to incur
operating losses for the foreseeable future, and these losses may be
substantial. Further, we expect our operating cash flows to be negative for the
foreseeable future. Because we expect increased expenditures for product
development and general and administrative expenses, and substantial increases
in sales and marketing expenses, we will need to increase revenues significantly
to achieve profitability and positive operating cash flows. Even if we do
achieve profitability and positive operating cash flows, we may not be able to
sustain or increase profitability or positive operating cash flows on a
quarterly or annual basis.

We have a limited operating history, which makes it difficult to evaluate our
business and our future prospects.

We shipped our first products in July 1996. As a result of our limited
operating history, we have limited financial data that you can use to evaluate
our business. You must consider our prospects in light of the risks, expenses
and challenges we might encounter because we are at an early stage of
development in a new and rapidly evolving market. To address these risks and
achieve profitability and increased sales levels, we must:

. establish and increase market acceptance of our technology, products and
systems;

. expand our network of distributors, dealers and companies that buy our
products in bulk, customize them for particular applications or customers, and
resell them under their own names;

. introduce products and systems incorporating our technology and enhancements
to our product applications on a timely basis;

. respond effectively to competitive pressures; and

. successfully market and support our products and systems.

We may not successfully meet any of these challenges, and our failure to do
so will seriously harm our business and results of operations. In addition,
because of our limited operating history, we have limited insight into trends
that may emerge and harm our business.

19
<PAGE>

Our operating results vary, making future operating results difficult to
predict.

Our quarterly and annual operating results have varied significantly in the
past and will likely vary significantly in the future. A number of factors, many
of which are beyond our control, may cause our operating results to vary,
including:

. our sales cycle, which may vary substantially from customer to customer;

. unfavorable changes in the prices and delivery of the components we purchase;

. the size and timing of orders for our products, which may vary depending on
the season, and the contractual terms of those orders;

. the size and timing of our expenses, including operating expenses and
expenses of developing new products and product enhancements;

. deferrals of customer orders in anticipation of new products, services or
product enhancements introduced by us or by our competitors; and

. our ability to attain and maintain production volumes and quality levels for
our products.

Our budgets and commitments that we have made for the future are based in
part on our expectations of future sales. If our sales do not meet expectations,
it will be difficult for us to reduce our expenses quickly, and consequently our
operating results may suffer.

Our dealers often require immediate shipment and installation of our
products. As a result, we have historically operated with limited backlog, and
our sales and operating results in any quarter depend primarily on orders booked
and shipped during that quarter.

Any of the above factors could harm our business, financial condition and
results of operations. We believe that period-to-period comparisons of our
results of operations are not meaningful, and you should not rely upon them as
indicators of our future performance.

Our market is highly competitive, and we may not have the resources to
compete adequately.

The market for our integrated, multifunction telecommunications systems is
new, rapidly evolving and highly competitive. We expect competition to intensify
in the future as existing competitors develop new products and new competitors
enter the market. We believe that a critical component to success in this market
is the ability to establish and maintain strong partner and customer
relationships with a wide variety of domestic and international providers. If we
fail to establish or maintain these relationships, we will be at a serious
competitive disadvantage.

We face competition from companies providing traditional private telephone
systems. Our principal competitors that produce traditional private telephone
systems are Lucent Technologies and Nortel Networks. We also compete against
providers of multifunction telecommunications systems, including Picasso
Communications, Inc. and Artisoft, Inc. We potentially face competition from
companies such as Shoreline Teleworks, Inc., NBX Corporation, acquired by 3Com
Corporation, Selsius Systems, acquired by Cisco Systems, Inc., as well as any
number of future competitors. Many of our competitors are substantially larger
than we are and have significantly greater name recognition, financial, sales
and marketing, technical, customer support, manufacturing and other resources.
These competitors may also have more established distribution channels and
stronger relationships with service providers. These competitors may be able to
respond more rapidly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sale
of their products. These competitors may enter our existing or future markets
with solutions that may be less expensive, provide higher performance or
additional features or be introduced earlier than our solutions. We also expect
that other companies may enter our market with better products and technologies.
If any technology that is competing with ours is more reliable, faster, less
expensive or has other advantages over our technology, then the demand for our
products and services could decrease and harm our business.

20
<PAGE>

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

Losing any of our key distributors would harm our business. We also need to
establish and maintain relationships with additional distributors and original
equipment manufacturers.

Sales through our two key distributors, Ingram Micro Inc. and Tech Data
Corporation, accounted for 37% of our net revenues in the fiscal year ended
September 30, 2000. Our business and operating results will suffer if either of
these distributors does not continue distributing our products, fails to
distribute the volume of our products that it currently distributes or fails to
expand our customer base. We also need to establish and maintain relationships
with additional distributors and original equipment manufacturers. We may not be
able to establish, or successfully manage, relationships with additional
distribution partners. In addition, our agreements with distributors typically
provide for termination by either party upon written notice to the other party.
For example, our agreement with Tech Data provides for termination, with or
without cause, by either party upon 30 days' written notice to the other party,
or upon insolvency or bankruptcy. Generally, these agreements are non-exclusive
and distributors sell products that compete with ours. If we fail to establish
or maintain relationships with distributors and original equipment
manufacturers, our ability to increase or maintain our sales and our customer
base will be substantially harmed.

We sell our products through dealers and distributors, which limits our
ability to control the timing of our sales, and this makes it more difficult to
predict our revenues.

We do not recognize revenue from the sale of our products to our distributors
until these products are sold to either dealers or end users. We have little
control over the timing of product sales to dealers and end users. Our lack of
control over the revenue which we recognize from our distributors' sales to
dealers and end users limits our ability to predict revenue for any given
period. Our budgets and commitments that we have made for the future are based
in part on our expectations of future sales. If our sales do not meet
expectations, it will be difficult for us to reduce our expenses quickly, and
consequently our operating results may suffer.

We rely on sole-sourced components and third-party technology and products;
if these components are not available, our business may suffer.

We purchase technology from third parties that is incorporated into our
products, including virtually all of our hardware products. We order
sole-sourced components using purchase orders and do not have supply contracts
for them. One sole-sourced component, a Mitel Corporation chip, is particularly
important to our business because it is included in virtually all of our
hardware products. If we were unable to purchase an adequate supply of these
sole-sourced components on a timely basis, we would be required to develop
alternative solutions. This could entail qualifying an alternative source or
redesigning our products based on different components. Our inability to obtain
these sole-sourced components, especially the Mitel Corporation chip, could
significantly delay shipment of our products, which could have a negative effect
on our business, financial condition and results of operations. See "Business--
Manufacturing and Assembly."

21
<PAGE>

We rely on dealers to promote, sell, install and support our products, and
their failure to do so may substantially reduce our sales and thus seriously
harm our business.

We rely on dealers who can provide high quality sales and support services.
As with our distributors, we compete with other telecommunications systems
providers for our dealers' business, as our dealers generally market competing
products. If a dealer promotes a competitor's products to the detriment of our
products or otherwise fails to market our products and services effectively, we
could lose market share. In addition, the loss of a key dealer or the failure of
dealers to provide adequate customer service could cause our business to suffer.
If we do not properly train our dealers to sell, install and service our
products, our business will suffer.

Software or hardware errors may seriously harm our business and damage our
reputation, causing loss of customers and revenues.

Users expect telephone systems to provide a high level of reliability. Our
products are inherently complex and may have undetected software or hardware
errors. We have detected and may continue to detect errors and product defects
in our installed base of products, new product releases and product upgrades.
For example, a small number of our boards failed and were returned. We have
replaced these boards and made certain design changes. We cannot be sure that
the problem has been fully addressed and that similar or different problems may
not occur in existing or new boards in the future. In addition, end users may
install, maintain and use our products improperly or for purposes for which they
were not designed. These problems may degrade or terminate the operation of our
products, which could cause end users to lose telephone service, cause us to
incur significant warranty and repair costs, damage our reputation and cause
significant customer relations problems. Any significant delay in the commercial
introduction of our products due to errors or defects, any design modifications
required to correct these errors or defects or any negative effect on customer
satisfaction as a result of errors or defects could seriously harm our business,
financial condition and results of operations.

Any claims brought because of problems with our products or services could
seriously harm our business, financial condition and results of operations. We
currently offer a one-year hardware guarantee to end users. If our products fail
within the first year, we face replacement costs. Our insurance policies may not
provide sufficient or any coverage should a claim be asserted. In addition, our
introduction of products and systems with reliability, quality or compatibility
problems could result in reduced revenues, uncollectible accounts receivable,
delays in collecting accounts receivable, warranties and additional costs. Our
customers, end users or employees could find errors in our products and systems
after we have begun to sell them, resulting in product redevelopment costs and
loss of, or delay in, their acceptance by the markets in which we compete.
Further, we may experience significant product returns in the future. Any of
these events could have a material adverse effect on our business, financial
condition and results of operations.

We may face infringement issues that could harm our business by requiring us
to license technology on unfavorable terms or temporarily or permanently cease
sales of key products.

<PAGE>

This litigation could be costly and time consuming. An adverse outcome could
require us to obtain a license from NetPhone or require us to cease sales of
what NetPhone calls the "Quantum device" and possibly alter the design of some
of our products. For the fiscal year 2000, sales of our Quantum board
constituted 82% of our revenues. Accordingly, an adverse outcome could
materially harm our business. See "Legal Proceedings."

More generally, litigation related to these types of claims may require us to
acquire licenses under third-party patents which may not be available on
acceptable terms, if at all. We believe that an increasing portion of our
revenues in the future will come from sales of software applications for our
hardware products. The software market has traditionally experienced widespread
unauthorized reproduction of products in violation of developers' intellectual
property rights. This activity is difficult to detect, and legal proceedings to
enforce developers' intellectual property rights are often burdensome and
involve a high degree of uncertainty and substantial costs.

Any failure by us to protect our intellectual property could harm our
business and competitive position.

Our success depends, to a certain extent, upon our proprietary technology. We
currently rely on a combination of patent, trade secret, copyright and trademark
law, together with non-disclosure and invention assignment agreements, to
establish and protect the proprietary rights in the technology used in our
products.

Although we have filed patent applications, we are not certain that our
patent applications will result in the issuance of patents, or that any patents
issued will provide commercially significant protection to our technology. In
addition, others may independently develop substantially equivalent proprietary
information not covered by patents to which we own rights, may obtain access to
our know-how or may claim to have issued patents that prevent the sale of one or
more of our products. Also, it may be possible for third parties to obtain and
use our proprietary information without our authorization. Further, the laws of
some countries, such as those in Japan, one of our target markets, may not
adequately protect our intellectual property or may be uncertain. Our success
also depends on trade secrets that cannot be patented and are difficult to
protect. If we fail to protect our proprietary information effectively, or if
third parties use our proprietary technology without authorization, our
competitive position and business will suffer. A description of our dependence
on proprietary technology is discussed in greater detail in "Business--
Intellectual Property."

Our products may not meet the legal standards required for their sale in some
countries; if we cannot sell our products in these countries, our results of
operations may be seriously harmed.

The United States and other countries in which we intend to sell our products
have standards for safety and other certifications that must be met for our
products to be legally sold in those countries. We have tried to design our
products to meet the requirements of the countries in which we sell or plan to
sell them. We have also obtained or are trying to obtain the certifications that
we believe are required to sell our products in these countries. However, we
cannot guarantee that our products meet all of these standards or that we will
be able to obtain any certifications required. In addition, there is, and will
likely continue to be, an increasing number of laws and regulations pertaining
to the products we offer and may offer in the future. These laws or regulations
may include, for example, more stringent safety standards, requirements for
additional or more burdensome certifications or more stringent consumer
protection laws.

If our products do not meet a country's standards or we do not receive the
certifications required by a country's laws or regulations, then we may not be
able to sell those products in that country. This may seriously harm our results
of operation by reducing our sales or requiring us to invest significant
resources to conform our products to these standards.

Our market is subject to changing preferences; failure to keep up with these
changes would result in our losing market share, thus seriously harming our
business, financial condition and results of operations.

23
<PAGE>

Our customers and end users expect frequent product introductions and have
changing requirements for new products and features. Therefore, to be
competitive, we will need to develop and market new products and product
enhancements that respond to these changing requirements on a timely and
cost-effective basis. Our failure to do so promptly and cost-effectively would
seriously harm our business, financial condition and results of operations.
Also, introducing new products could require us to write off existing inventory
as obsolete, which could harm our results of operations.

If we do not manage our growth effectively, our business will suffer.

We may not be successful in managing any future growth. We have expanded our
operations rapidly since our inception. In order to manage this expansion and to
grow in the future, we will need to expand or enhance our management,
manufacturing, research and development and sales and marketing capabilities. We
may not be able to hire the management, staff or other personnel required to do
so.

We may not be able to install adequate control systems in an efficient and
timely manner, and our current or planned operational systems, procedures and
controls may not be adequate to support our future operations. Difficulties in
installing and implementing new systems, procedures and controls may
significantly burden our management and our internal resources. Delays in the
implementation of new systems or operational disruptions when we transition to
new systems would impair our ability to accurately forecast sales demand, manage
our product inventory and record and report financial and management information
on a timely and accurate basis.

Lead times for materials and components used in the assembly of our products
vary significantly, and depend on factors such as the supplier, contract terms
and demand for a component at a given time. If orders do not match forecasts, we
may have excess or inadequate inventory of certain materials and components,
which may seriously harm our business, financial condition and results of
operations.

Our planned expansion in international markets will involve new risks that
our previous domestic operations have not prepared us to address; our failure to
address these risks could harm our business, financial condition and results of
operations.

For the fiscal year ended September 30, 2000, approximately 7.0% of our net
revenues came from customers outside of the United States. We intend to expand
our international sales and marketing efforts. Our efforts are subject to a
variety of risks associated with conducting business internationally, any of
which could seriously harm our business, financial condition and results of
operations. These risks include:

. tariffs, duties, price controls or other restrictions on foreign currencies
or trade barriers, such as import or export licensing imposed by foreign
countries, especially on technology;

. potential adverse tax consequences, including restrictions on repatriation
of earnings;

. fluctuations in foreign currency exchange rates, which could make our
products relatively more expensive in foreign markets; and

. conflicting regulatory requirements in different countries that may require
us to invest significant resources customizing our products for each country.

We need additional qualified personnel to maintain and expand our business;
our failure to promptly attract and retain qualified personnel may seriously
harm our business, financial condition and results of operations.

We depend, in large part, on our ability to attract and retain highly skilled
personnel, particularly engineers and sales and marketing personnel. We need
highly trained technical personnel to design and support our server-based
telecommunications systems. In addition, we need highly trained sales and
marketing personnel to expand our marketing and sales operations in order to
increase market awareness of our products and generate increased revenues.
Competition for highly trained personnel is intense, especially in the San
Francisco Bay Area where most of our operations are located. We cannot be
certain that we will be successful in our recruitment and retention efforts. If
we fail to attract or retain qualified personnel or suffer from delays in hiring
required personnel, our business, financial condition and results of operations
may be seriously harmed.

24
<PAGE>

Our facility is vulnerable to damage from earthquakes and other natural
disasters; any such damage could seriously or completely impair our business.

We perform final assembly, software installation and testing of our products
at our facility in Fremont, California. Our facility is located on or near known
earthquake fault zones and is vulnerable to damage from fire, floods,
earthquakes, power loss, telecommunications failures and similar events. If such
a disaster occurs, our ability to perform final assembly, software installation
and testing of our products at our facility would be seriously, if not
completely, impaired. If we were unable to obtain an alternative place or way to
perform these functions, our business, financial condition and results of
operations would suffer. The insurance we maintain may not be adequate to cover
our losses against fires, floods, earthquakes and general business
interruptions.

Our strategy to outsource assembly and test functions in the future could
delay delivery of products, decrease quality or increase costs.

Based on volume or customer requirements, we may begin outsourcing some
assembly and test functions. In addition, we may determine that we need to
establish assembly and test operations overseas to better serve our
international customers. Establishing overseas assembly and test operations may
be more difficult or take longer than we anticipate. This outsourcing strategy
involves certain risks, including the potential lack of adequate capacity and
reduced control over delivery schedules, manufacturing yield, quality and costs.
In the event that any significant subcontractor were to become unable or
unwilling to continue to manufacture or test our products in the required
volumes, we would have to identify and qualify acceptable replacements. Finding
replacements could take time, and we cannot be sure that additional sources
would be available to us on a timely basis. Any delay or increase in costs in
the assembly and testing of products by third-party subcontractors could
seriously harm our business, financial condition and results of operations. Our
manufacturing and assembly operations are discussed in greater detail in
"Business--Manufacturing and Assembly."

Risks Related to the Industry

Integrated, multifunction telecommunications systems may not achieve
widespread acceptance, and our fixed costs in the short run could cause our
operating results and business to suffer.

The market for integrated, multifunction telecommunications systems is
relatively new and rapidly evolving. Businesses have invested substantial
resources in the existing telecommunications infrastructure, including
traditional private telephone systems, and may be unwilling to replace these
systems in the near term or at all. Businesses may also be reluctant to adopt
integrated, multifunction telecommunications systems because of their concern
about the current limitations of data networks, including the Internet. For
example, end users sometimes experience delays in receiving calls and reduced
voice quality during calls when routing calls over data networks. Moreover,
businesses that begin to route calls over the same networks that currently carry
only their data may also experience these problems if the networks do not have
sufficient capacity to carry all of these communications at the same time. We
incur many fixed costs in anticipation of a certain level of revenues. If
businesses defer purchasing or decide not to purchase integrated, multifunction
telecommunications systems and the market for our products does not grow or
grows substantially more slowly than we anticipate, our operating results will
suffer and our business will be harmed because we will be unable to reduce fixed
costs in the short term to offset the reduced revenues.

25
<PAGE>

Future regulation or legislation could harm our business or increase our cost
of doing business.

In April 1998, the Federal Communications Commission submitted a report to
Congress stating that it may regulate certain Internet services if it determines
that such Internet services are functionally equivalent to conventional
telecommunications services. The increasing growth of the voice over data
network market and the popularity of supporting products and services, however,
heighten the risk that national governments will seek to regulate the
transmission of voice communications over networks such as the Internet. In
addition, large telecommunications companies may devote substantial lobbying
efforts to influence the regulation of this market so as to benefit their
interests, which may be contrary to our interests. These regulations may
include, for example, assessing access or settlement charges, imposing tariffs
or imposing regulations based on encryption concerns or the characteristics and
quality of products and services. Future laws, legal decisions or regulations,
as well as changes in interpretations of existing laws and regulations, could
require us to expend significant resources to comply with them. In addition,
these future events or changes may create uncertainty in our market that could
reduce demand for our products.

Evolving standards may delay our product introductions, increase our product
development costs or cause end users to defer or cancel plans to purchase our
products, any of which could adversely affect our business.

The standards in our market are still evolving. These standards are designed
to ensure that integrated, multifunction telecommunications products from
different manufacturers can operate together. Some of these standards are
proposed by other participants in our market, including some of our competitors,
and include proprietary technology. In recent years, these standards have
changed, and new standards have been proposed, in response to developments in
our market. Our failure to conform our products to existing or future standards
may limit their acceptance by market participants. We may not anticipate which
standards will achieve the broadest acceptance in our market in the future, and
we may take a significant amount of time and expense to adapt our products to
these standards. We may also have to pay additional royalties to developers of
proprietary technologies that become standards in our market. These delays and
expenses may seriously harm our results of operations. In addition, customers
and users may defer or cancel plans to purchase our products due to concerns
about the ability of our products to conform to existing standards or to adapt
to new or changed standards, and this could seriously harm our results of
operations.

FORWARD-LOOKING STATEMENTS

Some of the information in this Annual Report on Form 10-K contains
forward-looking statements within the meaning of the federal securities laws.
These statements include, among others, statements regarding the following:
expected product revenues as a percentage of sales, expense levels, use of
proceeds, liquidity and expansion strategy and possible effects of changes in
government regulation. Forward-looking statements typically are identified by
use of terms such as "may", "will", "expect", "anticipate", "intend", "estimate"
and similar words, although some forward-looking statements are expressed
differently. You should be aware that our actual results could differ materially
from those contained in the forward-looking statements due to a number of
factors, including insufficient capital resources, inability to integrate
acquired businesses successfully, adverse economic conditions and unanticipated
difficulties in product development. You should also consider carefully the
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Certain Factors Affecting Business, Operating
Results, and Financial Condition" and other sections of this Form 10-K, which
address additional factors that could cause our actual results to differ from
those set forth in the forward-looking statements.

26
<PAGE>

Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.

Market Risk. Our interest income is sensitive to changes in the general level
of U.S. interest rates, particularly since the majority of our investments are
in cash equivalents and short-term instruments. Due to the short-term nature of
our cash equivalents and investments, we have concluded that there is no
material market risk exposure. Therefore, no quantitative tabular disclosures
are required.

Item 8. Financial Statements and Supplementary Data.

The financial statements required by this item are incorporated by reference
from Part IV Item 14(a) 1 and 2 hereof. The selected annual supplementary data
is included as part of Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

None.

27
<PAGE>

PART III.

Item 10. Directors and Executive Officers of the Registrant

Information with respect to directors of AltiGen is incorporated by reference
from the information under the caption: "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held on February 9,
2001 (the "Proxy Statement"). Information with respect to the executive officers
of AltiGen is included in Part I of this Form 10-K under the heading "Executive
Officers."

Item 11. Executive Compensation

Incorporated by reference from the information under the caption: "Executive
Compensation and Other Matters" in the Company's Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Incorporated by reference from the information under the caption: "Security
Ownership of Management; Principal Stockholders" in the Company's proxy
statement.

Item 13. Certain Relationships and Related Transactions

Incorporated by reference from the information under the caption: "Certain
Relationships and Related Transactions" in the Company's Proxy Statement.

28
<PAGE>

PART IV.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) The following documents are filed as a part of this Annual Report on Form
10-K.

1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants...................................................................... 32
Consolidated Balance Sheets as of September 30, 2000 and 1999................................................. 33
Consolidated Statements of Operations for the years ended September 30, 2000, 1999,
and 1998................................................................................................... 34
Consolidated Statements of Stockholders' Equity for the years ended September 30, 2000, 1999, and 1998........ 35
Consolidated Statements of Cash Flows for the years ended September 30, 2000, 1999, and 1998.................. 36
Notes to Consolidated Financial Statements.................................................................... 37

2. FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule is submitted here with:

Schedule II Valuation and Qualifying Accounts................................................................. 48

</TABLE>

(All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or notes thereto.)

3. EXHIBITS

The following exhibits are included in this Annual Report on Form 10-K
(numbered in accordance with Item 601 of Regulation S-K):

29
<PAGE>

Exhibit
Number Description
------------ ----------------------------------------------------------------
3.1*+ Certificate of Incorporation.
3.2*+ Form of Amended and Restated Certificate of Incorporation.
3.3* Bylaws.
3.4* Form of Amended and Restated Bylaws, to be filed and effective
upon completion of this offering.
4.1 See exhibit 3.1, 3.2, 3.3, and 3.4 for provisions of the
Certificate of Incorporation and Bylaws defining the rights
of holders of Common Stock.
4.2* Specimen Common Stock Certificates.
4.3* Third Amended and Restated Rights Agreement dated May 7, 1999
by and among AltiGen Communications, Inc. and the Investors
and Founder named therein.
10.1* Form of Indemnification Agreement.
10.2* 1994 Stock Option Plan, as amended, and form of stock option
agreement.
10.3* 1998 Stock Purchase Plan.
10.4* 1999 Stock Option Plan, as amended, and form of stock option
agreement.
10.5* 1999 Employee Stock Purchase Plan and form of subscription
agreement.
10.6* Sublease and Consent to Sublease Agreement: 47427 Fremont
Boulevard, Fremont, California between Hitachi America,
Ltd. and Phase Metrics, Inc. dated April 1, 1997.
10.7* Sub-Sublease and Consents to Sub-Sublease: 47427 Fremont
Boulevard, Fremont, California between Phase Metrics, Inc.
and AltiGen Communications, Inc. dated December 11, 1998.
10.8*+ Dealer Agreement and Addendum between Teleco Inc. and AltiGen
Communications, Inc., dated September 9, 1996.

10.9*+ Distributor Agreement between Kanematsu Semiconductor
Corporation and AltiGen Communications, Inc., dated April
21, 1997 and Modification dated May 13, 1997.
10.10*+ Distribution Agreement between Tech Data Product Management,
Inc. and AltiGen Communications, Inc., dated July 21, 1997.
10.11*+ Distribution Agreement between TerraComSortium and AltiGen
Communications, Inc., dated November 3, 1997.
10.12*+ OEM Private Label License Agreement between Renaissance Network
Technology Corporation and AltiGen Communications, Inc..
dated May 1998.
10.13* Services Agreement between Sumitronics, Inc. and AltiGen
Communications, Inc., dated June 2, 1998 and related
Commission Agreement dated March 1999.
10.14*+ Distribution Agreement between Ingram Micro Inc. and AltiGen
Communications, Inc. dated June 12, 1998.
10.15* Contract Purchase Agreement between RadiSys Corporation and
AltiGen Communications Inc., dated July 31, 1998.

10.16* Software License and Binary Distribution Agreement between
Lucent Technologies Inc. and AltiGen Communications, Inc.,
dated as of September 23, 1998.
10.17* Consulting and Development Agreement between Sollecon, Inc. and
AltiGen Communications, Ltd., dated as of October 27, 1998.
10.18* Employment Agreement by and Between the Registrant and Tricia
Chu, dated April 26, 1999.
10.19* Employment Agreement by and Between the Registrant and Philip
McDermott, dated
10.20* Compaq Solutions Alliance Agreement between Compaq Computer
Corporation and AltiGen Communications, Inc., dated as of
January 18, 1999.
10.21* Memorandum of Understanding between Hewlett-Packard Covision
Internet Solutions Program and AltiGen Communications,
Inc., dated as of November 9, 1998.
10.22*+ Original Equipment Manufacture Private Label Agreement between
Nitsuko Corporation and AltiGen Communications, Inc., dated
as of February 2, 1999.
10.23*+ Joint Development Agreement between Nitsuko Corporation,
Sumisho Electronics Co., Ltd. and AltiGen Communications,
Inc., dated as of July 14, 1998.
21.1* Subsidiaries of the Registrant.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.

--------------------------------
* Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-1 (No. 333-80037) declared effective on
October 4, 1999.
+ Confidential treatment has been requested for certain portions of this
exhibit pursuant to Rule 406 under the Securities Act. In accordance with
Rule 406, these confidential portions have been omitted from this exhibit
and filed separately with the Commission.

30
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, as amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Fremont, State of California, on the 21st day of December, 2000.

ALTIGEN COMMUNICATIONS, INC.

By: /s/ Gilbert Hu
-------------------------------------------------
Gilbert Hu
President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Gilbert Hu and Philip McDermott, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report of Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons in the capacities and on the dates
indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------------------------- ---------------------------------------- -----------------
<S> <C> <C>
/s/ Gilbert Hu Chief Executive Officer (principal December 21, 2000
---------------------------
Gilbert Hu executive officer) and Director

/s/ Philip McDermott Chief Financial (principal executive and December 21, 2000
---------------------------
Philip McDermott accounting officer)

/s/ Wen-Huang Chang Director December 21, 2000
---------------------------
Wen-Huang Chang

/s/ Thomas Shao Director December 21, 2000
---------------------------
Thomas Shao

/s/ Masaharu Shinya Director December 21, 2000
---------------------------
Masaharu Shinya

/s/ Kenneth Tai Director December 21, 2000
---------------------------
Kenneth Tai

/s/ Richard Black Director December 21, 2000
---------------------------
Richard Black
</TABLE>

31
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To AltiGen Communications, Inc.:

We have audited the accompanying consolidated balance sheets of AltiGen
Communications, Inc. (a Delaware corporation) and its subsidiary as of September
30, 2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 2000. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of AltiGen
Communications, Inc. and its subsidiary as of September 30, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a) 2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

San Jose, California
November 2, 2000

32
<PAGE>

ALTIGEN COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
September 30,
------------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 15,141,380 $ 5,934,070
Short-term investments........................................ 14,082,129 --
Accounts receivable, net of allowances of $423,296 and
$226,481, respectively...................................... 2,041,395 1,684,032
Inventories, net.............................................. 4,268,152 2,200,796
Prepaid expenses and other current assets..................... 358,094 1,953,621
Promissory note to officer / stockholder (Note 3)............. 1,000,000 --
--------------- ---------------
Total current assets..................................... 36,891,150 11,772,519
--------------- ---------------
Property and equipment:
Furniture and equipment....................................... 1,313,004 992,351
Computer software............................................. 632,638 523,875
--------------- ---------------
1,945,642 1,516,226
Less: Accumulated depreciation................................... (1,097,003) (601,903)
--------------- ---------------
Net property and equipment.................................... 848,639 914,323
--------------- ---------------

Long-term investments 905,626 --
--------------- ----------------
$ 38,645,415 $ 12,686,842
=============== ================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 1,105,295 $ 1,485,672
Accrued liabilities:
Payroll and related benefits.................................. 521,420 252,361
Warranty...................................................... 719,889 828,551
Marketing..................................................... 275,683 --
Other......................................................... 921,208 185,683
Deferred revenue................................................. 610,018 593,955
--------------- ---------------
Total current liabilities................................ 4,153,513 3,346,222
--------------- ---------------

Commitments and contingencies (Note 4)

Stockholders' equity:
Convertible preferred stock, $.001 par value; Authorized -
10,316,616 shares: Outstanding - none at September 30,
2000 and 8,146,156 shares at September 30, 1999............... -- 8,146
Common stock, $.001 par value; Authorized -- 23,957,117
shares; Outstanding -- 13,507,162 shares at September 30,
2000 and 1,503,633 shares at September 30, 1999............... 13,507 1,503
Additional paid-in capital....................................... 61,368,011 29,010,033
Deferred stock compensation...................................... (1,341,974) (2,957,645)
Accumulated deficit.............................................. (25,547,642) (16,721,417)
--------------- ---------------
Total stockholders' equity....................................... 34,491,902 9,340,620
--------------- ---------------
$ 38,645,415 $ 12,686,842
=============== ===============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

33
<PAGE>

ALTIGEN COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Fiscal Years Ended
September 30,
---------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues, net.................................................... $ 12,409,788 $ 6,598,631 $ 3,889,336
Cost of revenues................................................. 5,747,181 3,299,547 2,519,794
-------------- -------------- --------------
Gross profit..................................................... 6,662,607 3,299,084 1,369,542
-------------- -------------- --------------
Operating expenses:
Research and development...................................... 4,334,314 3,658,238 1,927,433
Sales and marketing........................................... 9,691,422 4,319,393 2,770,090
General and administrative.................................... 3,091,840 1,806,380 674,626
Deferred stock compensation................................... 465,967 770,359 163,858
-------------- -------------- --------------
Total operating expenses................................... 17,583,543 10,554,370 5,536,007
-------------- -------------- --------------
Loss from operations............................................. (10,920,936) (7,255,286) (4,166,465)
Interest and other income, net................................... 2,094,711 360,337 246,406
-------------- -------------- --------------
Net loss ........................................................ $ (8,826,225) $ (6,894,949) $ (3,920,059)
============== ============== ==============
Basic and diluted net loss per share.......................... $ (0.66) $ (5.76) $ (4.75)
============== ============== ==============
Shares used in computing basic and diluted net loss per share. 13,287,024 1,196,960 825,334
============== ============== ==============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

34
<PAGE>

ALTIGEN COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Convertible Additional Total
Preferred Stock Common Stock Paid-In Deferred Stock Accumulated Stockholders'
------------------ -------------------
Shares Amount Shares Amount Capital Compensation Deficit Equity
-------- --------- ------------------- ------------ --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
SEPTEMBER 30, 1997....... 6,478,923 $ 6,479 801,827 $ 802 $ 9,685,673 $ -- $ (5,906,409) $ 3,786,545
--------- -------- --------- ------ ------------- ------------- ------------ -----------
Issuances of Series C
convertible preferred
stock.................... 244,039 244 -- -- 1,425,879 -- -- 1,426,123
Issuances of Series D
convertible preferred
stock.................... 926,695 927 -- -- 7,783,906 -- -- 7,784,833
Exercise of stock options... -- -- 69,498 69 9,519 -- -- 9,588
Deferred stock
compensation............. -- -- -- -- 1,452,191 (1,452,191) -- --
Amortization of deferred
stock compensation....... -- -- -- -- -- 163,858 -- 163,858
Net loss for the year....... -- -- -- -- -- -- (3,920,059) (3,920,059)
--------- -------- --------- ------ ------------- ------------- ------------ -----------

BALANCE,
SEPTEMBER 30, 1998....... 7,649,657 7,650 871,325 871 20,357,168 (1,288,333) (9,826,468) 9,250,888

Issuances of Series D
convertible preferred
stock.................... 496,499 496 -- -- 5,771,840 -- -- 5,772,336
Issuances cost of Series
D convertible
preferred stock.......... -- -- -- -- (14,457) -- -- (14,457)
Exercise of stock options... -- -- 435,282 435 77,523 -- -- 77,958
Issuances of common stock
as payment on notes
payable.................. -- -- 197,026 197 378,288 -- -- 378,485
Deferred stock
compensation............. -- -- -- -- 2,439,671 (2,439,671) -- --
Amortization of deferred
stock compensation....... -- -- -- -- -- 770,359 -- 770,359
Net loss for the year....... -- -- -- -- -- -- (6,894,949) (6,894,949)
--------- -------- --------- ------ ------------- ------------- ------------ -----------

BALANCE,
SEPTEMBER 30, 1999....... 8,146,156 8,146 1,503,633 1,503 29,010,033 (2,957,645) (16,721,417) 9,340,620

Issuances of common stock
in connection with
initial public
offering, net of
issuance cost............ -- -- 3,737,500 3,738 33,248,602 -- -- 33,252,340
Conversion of preferred
stock into common stock.. (8,146,156) (8,146) 8,146,156 8,146 -- -- -- --
Exercise of stock options... -- -- 97,391 97 64,178 -- -- 64,275
Issuance of common stock
in connection with Employee
Stock Purchase Plan........ -- -- 22,482 23 168,538 -- -- 168,561
Issuance of stock
options to consultants.. -- -- -- -- 26,364 -- -- 26,364
Amortization of deferred
stock.................... -- -- -- -- -- 465,967 -- 465,967
Cancellation of employee
stock options............ -- -- -- -- (1,149,704) 1,149,704 -- --
Net loss for the year....... -- -- -- -- -- -- (8,826,225) (8,826,225)
--------- -------- ---------- ------- ------------ ------------- ------------ -----------

BALANCE,
SEPTEMBER 30, 2000....... -- $ -- 13,507,162 $13,507 $ 61,368,011 $ (1,341,974) $(25,547,642) $34,491,902
========= ======== ========== ======= ============ ============= ============ ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

35
<PAGE>

ALTIGEN COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Fiscal Years Ended
September 30,
---------------------------------------------------
2000 1999 1998
---------------- ---------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................... $ (8,826,225) $ (6,894,949) $ (3,920,059)
Adjustments to reconcile net loss to net cash used in
operating activities:.....................................
Depreciation.............................................. 495,100 356,922 139,411
Amortization of deferred stock compensation............... 465,967 770,359 163,858
Issuance of stock options to consultants.................. 26,364 -- --
Provision for accounts receivable allowances.............. 196,815 279,497 169,908
Provision for excess and obsolete inventories............. 266,000 90,000 418,000
Changes in operating assets and liabilities:
Accounts receivable.......................................... (554,178) (940,538) (754,884)
Inventories............................................... (2,333,356) (996,716) (865,902)
Prepaid expenses and other current assets................. 134,062 (316,908) (90,049)
Accounts payable.......................................... (380,377) 1,044,215 253,441
Notes payable............................................. -- 12,798 87,114
Accrued liabilities....................................... 1,171,605 513,303 474,123
Deferred revenue.......................................... 16,063 303,177 108,610
------------ ------------ ------------
Net cash used in operating activities................. (9,322,160) (5,778,840) (3,816,429)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of long-term investments........................ (905,626) -- --
Purchases of short-term investments....................... (14,082,129) -- --
Proceeds from sale of short-term investments.............. -- 1,053,060 52,478
Proceeds from sale of property and equipment.............. -- 33,000 --
Purchases of property and equipment....................... (429,416) (751,091) (440,893)
------------ ------------ ------------
Net cash provided by (used in) investing
activities........................................... (15,417,171) 334,969 (388,415)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of convertible preferred
stock.................................................... -- 5,757,879 9,210,956
Proceeds from issuances of common stock................... 37,607,835 77,958 9,588
Promissory note to officer / stockholder.................. (1,000,000) -- --
Issuance costs related to initial public offering of
common stock ......................................... (2,661,194) (1,461,465) --
--------------- --------------- --------------
Net cash provided by financing activities............. 33,946,641 4,374,372 9,220,544
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. 9,207,310 (1,069,499) 5,015,700
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................... 5,934,070 7,003,569 1,987,869
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................... 15,141,380 5,934,070 7,003,569
============== ============== ==============
NONCASH FINANCING ACTIVITIES:
Issuance of common stock as payment on notes payable......... $ -- $ 378,485 $ --
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

36
<PAGE>

ALTIGEN COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS September 30, 2000

1. ORGANIZATION OF THE COMPANY:

AltiGen Communications, Inc. (the "Company") was incorporated in California
on May 18, 1994 and began operations in July of that year. In June 1999, the
Company reincorporated in Delaware. The Company designs, manufactures, and
markets server-based telecommunications systems that allow businesses to use
data networks such as the Internet and the traditional telephone network
interchangeably to carry voice and data communications.

The Company is subject to the risks associated with early stage technology
companies. These risks include, but are not limited to: history of losses,
limited operating history, dependence on a smaller number of key individuals,
customers and suppliers, competition from larger, more established companies,
the continued need for additional financing, the impact of rapid technological
changes and changes in customer demand/requirements. There is no assurance that
the Company's efforts will be successful.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The Company's consolidated financial statements reflect the operations of
the Company and its wholly-owned subsidiary. The subsidiary is located in
Shanghai, China and was incorporated in November 1998. As of September 30 2000,
the Company had approximately $58,000 in long lived assets in China. All
significant intercompany transactions and balances have been eliminated. The
Company's fiscal year end is September 30. Unless otherwise stated, all
references to 2000, 1999 and 1998 refer to the twelve months ended September 30
of that year.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Concentration of Risk

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company performs ongoing credit evaluations of its customers' financial
condition and requires letters of credit whenever deemed necessary to help
reduce its credit risk. Additionally, the Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends related to past losses and other information. As of
September 30, 2000 and 1999, approximately 89% and 87%, respectively, of
accounts receivable were concentrated with ten customers.

The Company's purchases are concentrated with three suppliers and certain
key components of the Company's products are sole sourced. For fiscal years 2000
and 1999 these three suppliers provided 58% and 76%, respectively, of all raw
materials purchased. Loss of one of these suppliers could adversely impact the
Company's operations.

Cash and Cash Equivalents and Short-term Investments

The Company considers all highly liquid investments with an original
maturity of three months or less from the date of purchase to be cash
equivalents. Short term investments are in highly liquid financial instruments
with original maturities greater than three months but less than one year and
are classified as "available - for - sale" investments.

37
<PAGE>

As of September 30, 2000, the Company's cash and cash equivalents consisted of
commercial paper and cash deposited in checking and money market accounts. For
fiscal years 2000 and 1999, the Company did not make any cash payments for
interest or income taxes.

Inventories

Inventories (which include costs associated with components assembled by
third- party assembly manufacturers, as well as internal labor and overhead) are
stated at the lower of cost (first-in, first-out) or market. Provisions, when
required, are made to reduce excess and obsolete inventories to their estimated
net realizable values. Provisions for excess and obsolete inventory totaled
approximately $266,000 and $90,000 for fiscal years 2000 and 1999, respectively.
The components of inventories include:

September 30,
----------------------------------------
2000 1999
------------ -------------
Raw materials $ 1,315,988 $ 1,078,577
Work-in-progress 1,414,121 451,453
Finished goods 1,538,043 670,766
------------ -------------
$ 4,268,152 $ 2,200,796
============ =============

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets, which is
three years. Depreciation expense for fiscal years 2000 and 1999 was
approximately $495,000 and $357,000, respectively. All repairs and maintenance
costs are expensed as incurred.

Long Term Investments

As of September 30, 2000, the Company held an investment in the common
stock of a China based telecommunications company of approximately $398,000
accounted for using the cost method. The Company also held as of September 30,
2000, medium term treasury notes maturing in November 2001 of approximately
$508,000, which are classified as available for sale.

Software Development Costs

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," the Company capitalizes eligible computer software
development costs upon the establishment of technological feasibility, which it
has defined as completion of a working model. The amount of costs eligible for
capitalization, after consideration of factors such as realizable value, were
not material and, accordingly, all software development costs have been charged
to research and development expense in the accompanying consolidated statements
of operations.

38
<PAGE>

Stock-Based Compensation

The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," which establishes a fair value method
of accounting for stock-based compensation plans. As allowed under the
provisions of SFAS No. 123, the Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock option plans (see Note 6
for a discussion of compensation cost recorded related to certain employee stock
options granted). The Company follows the provisions of SFAS No. 123 for options
granted to consultants and non-employees.

In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25" (FIN No. 44). FIN No. 44
addresses the application of APB No. 25 to clarify, among other issues: (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 is effective as of
July 1, 2000, but certain conclusions cover specific events that occur after
either December 15, 1998 or January 12, 2000. To the extent FIN 44 covers events
occurring during the period after December 15, 1998 or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying the
interpretation will be recognized on a prospective basis from July 1, 2000. The
Company does not expect that FIN 44 will have a material effect on its financial
position or results of operations.

Revenue Recognition

Revenues consist of sales to end users, including dealers, and to
distributors. Revenues from sales to end users are recognized upon shipment. The
Company provides for estimated sales returns and allowances and warranty costs
related to such sales at the time of shipment. Net revenues consist of product
revenues 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 the Company's products held by
its distributors. Upon termination, any unsold products may be returned by the
distributor for a full refund. These agreements may be canceled by either party
based on a specified notice. As a result of the above provisions, the Company
defers recognition of revenues and the proportionate costs of revenues derived
from sales to distributors until such distributors resell the Company's products
to their customers. The amounts deferred as a result of this policy are
reflected as "deferred revenue" in the accompanying consolidated balance sheets.

Software components are generally not sold separately from the Company's
hardware components. Accordingly, the Company allocates revenues between the
hardware and software components of its products based on management's best
estimate of their relative fair market values. The Company then accounts for the
recognition of software revenues in accordance with Statement of Position (SOP)
97-2, "Software Revenue Recognition". Software revenues consist of license
revenues that are recognized upon the delivery of application products. The
Company provides limited post-contract customer support (PCS), consisting
primarily of technical support and "bug" fixes. In accordance with SOP 97-2,
revenue earned on software arrangements involving multiple elements is allocated
to each element based upon the relative fair values of the elements. Although
the Company provides PCS, the revenue allocated to this element is recognized
together with the initial licensing fee on delivery of the software because: (1)
the PCS fee is included with the initial licensing fee; (2) the PCS included
with the initial license fee is for one year or less; (3) the estimated cost of
providing PCS during the arrangement is insignificant; and (4) unspecified
upgrades/enhancements offered for minimal or no cost during PCS arrangements
historically have been and are expected to continue to be minimal and
infrequent. All estimated costs of providing the services, including
upgrades/enhancements are accrued for at the time of delivery.

39
<PAGE>

In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance
on applying generally accepted accounting principles to revenue recognition in
financial statements. Under current SEC guidance, we will be required to adopt
SAB 101 in the fourth quarter of our fiscal 2001. Management has evaluated the
effect of the adoption of SAB 101 and has determined that the Company's current
revenue recognition policies comply with SAB 101.

For fiscal years 2000 and 1999, the following customers accounted for
approximately 68% and 53% of net revenues, respectively:

Fiscal Year Ended
September 30,
---------------------------
2000 1999
---------------------------
Customer A............................ 21% 27%
Customer B............................ 19% 7%
Customer C............................ 16% 19%
Customer D............................ 12% 0%

Revenues derived from sales to customers outside of the United States,
primarily in Japan, accounted for approximately 7% and 8% of the Company's net
revenues for fiscal years 2000 and 1999, respectively.

Computation of Basic and Diluted Net Loss Per Share

Historical net loss per share has been calculated under SFAS No. 128,
"Earnings per Share." SFAS No. 128 requires companies to compute earnings per
share under two methods (basic and diluted). Basic net loss per share is
calculated by dividing net loss by the weighted average shares of common stock
outstanding during the period. No diluted loss per share information has been
presented in the accompanying consolidated statements of operations since
potential common shares from the conversion of preferred stock, stock options
and warrants are antidilutive. The Company evaluated the requirements of the
Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB No.
98"), and concluded that there are no nominal issuances of common stock or
potential common stock which would be required to be shown as outstanding for
all periods presented herein as outlined in SAB No. 98.

Comprehensive Income

In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and presentation of comprehensive income. SFAS No. 130, which was
adopted by the Company in the first quarter of fiscal year 1998, requires
companies to report a new measurement of income. "Comprehensive Income (Loss)"
is to include as other comprehensive income, foreign currency translation gains
and losses and other unrealized gains and losses that have historically been
excluded from net income (loss) and reflected instead in equity. The Company's
other comprehensive income is immaterial for all periods presented.

Segment Reporting

In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 was adopted by
the Company beginning on October 1, 1997. This statement establishes standards
for disclosures about operating segments, products and services, geographic
areas and major customers. The Company is organized and operates as one
operating segment. The Company operates primarily in one geographic area, the
United States.

40
<PAGE>

Accounting for Derivative Instruments and Hedging Activities

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedging accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or October 1, 2000 for AltiGen). This statement
will not have a material impact on the financial condition or results of the
operations of the Company.

Start-up Costs

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-5, "Reporting on the Costs of Start- Up
Activities" ("SOP No. 98-5"). SOP No. 98-5 requires that all start-up costs
related to new operations must be expensed as incurred. In addition, all start-
up costs that were previously capitalized must be written off when SOP No. 98-5
is adopted. The Company adopted SOP No. 98-5 in fiscal 1999. The adoption did
not have a material impact on the Company's financial position or results of
operations.

Stock Split and Reincorporation

In July 1999, the Company's Board of Directors approved a one-for-1.66965
reverse stock split of its convertible preferred and common stock. All
convertible preferred and common share amounts in the accompanying consolidated
financial statements have been adjusted retroactively to give effect to this
split.

In June 1999, the Company's Board of Directors approved the
reincorporation of the Company in Delaware. Upon reincorporation, the Company
issued new shares with a par value of $0.001 per share to all convertible
preferred and common stockholders. All convertible preferred and common share
amounts in the accompanying consolidated financial statements have been adjusted
retroactively to give effect to this change.

3. PROMISSORY NOTE TO OFFICER / STOCKHOLDER:

On August 31, 2000, the Company granted a $1 million loan to its Chief
Executive Officer and stockholder. The promissory note has a one-year term with
an interest rate of 6.88%. The principal for the promissory note is fully
secured by a perfected security interest in the borrower's primary residence.
The interest for the promissory note is secured by the borrower's personal
assets.
41
<PAGE>

4. COMMITMENTS AND CONTINGENCIES

Commitments

The Company leases its facilities under various operating lease agreements
expiring on various dates through November 2003. Rent expense for all operating
leases totaled approximately $402,000 and $361,000 for fiscal years 2000 and
1999, respectively. Minimum future lease payments under all noncancellable
operating leases as of September 30, 2000 are as follows:

Fiscal Year
2001................................................. $ 631,000
2002................................................. 699,000
2003................................................. 693,000
-----------
$ 2,023,000
===========
Contingencies

The Company is currently engaged in litigation with NetPhone, Inc. On June
30, 1999, the Company filed a complaint for declaratory judgment against
NetPhone, Inc. seeking a judgment that the Company does not infringe any valid
claims of U.S. Patent No. 5,875,234 patent ("the `234 patent") allegedly owned
by NetPhone. NetPhone answered the complaint on July 13, 1999 and asserted a
counterclaim, alleging that the Company infringes the `234 patent and seeking
to preliminarily and permanently enjoin the Company from making, importing,
using, offering to sell or selling what NetPhone refers to as the Quantum
Device. On August 11, 1999, the Company received NetPhone's motion for
preliminary injunction. On February 11, 2000, the district court issued an
order denying NetPhone's motion for preliminary injunction, finding that
"AltiGen has raised substantial questions as to whether the '234 patent will
survive attacks on its validity at trial." NetPhone was subsequently acquired
by Sonoma Systems, Inc. ("SSI"), and SSI has been added as a party to the
lawsuit. The parties are currently engaging in discovery, and trial has been
set for April 23, 2001. The Company intends to continue to vigorously defend
itself against the allegations made by NetPhone and SSI. Any litigation is
subject to inherent uncertainties and therefore, there is no assurance that the
Company will prevail in the litigation or that an adverse outcome will not
adversely affect the Company's business or financial condition.

5. INITIAL PUBLIC OFFERING:

On October 4, 1999, the Company completed its initial public offering of
3,737,500 shares of common stock (including the exercise of the underwriters
over-allotment option) and realized net proceeds of $33.3 million. Concurrent
with the closing of the initial public offering, 8,146,156 shares of convertible
preferred stock were converted into 8,146,156 shares of common stock.

42
<PAGE>

6. CAPITAL STOCK:

Convertible Preferred Stock

Preferred stock consists of the following:

<TABLE>
<CAPTION>
September 30,
------------------- -------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Series A, 1,634,987 shares authorized, none and 1,634,972
shares outstanding at September 30, 2000 and 1999,
respectively.................................................. - $ 1,500,914
Series B, 1,494,496 shares authorized, none and 1,494,478 shares
outstanding at September 30, 2000 and 1999, - 1,746,700
respectively..................................................
Series C, 3,593,565 shares authorized, none and 3,593,512
shares outstanding at September 30, 2000 and 1999,
respectively.................................................. - 7,849,751
Series D, 3,593,568 shares authorized, none and 1,423,194
shares outstanding at September 30, 2000 and 1999,
respectively.................................................. - 13,542,712
</TABLE>

Prior to the conversion of all 8,146,156 shares of convertible preferred
stock, the holders of series A, B, C and D preferred shares were entitled to
receive non-cumulative dividends when declared by the Board of Directors, and
were also entitled to standard liquidation preferences and voting rights. Each
share of A, B, C and D preferred stock was converted into one share of the
Company's common stock.

Common Stock

According to the Company's amended Articles of Incorporation, the Company
is authorized to issue 23,957,117 shares of common stock. At September 30, 2000,
the Company had reserved the following shares for future issuance:

<TABLE>
<S> <C>
1994 Stock Option Plan....................................................... 1,428,775
1999 Employee Stock Purchase Plan............................................ 276,982
1999 Stock Option Plan....................................................... 2,551,103
-------------
4,256,860
=============
</TABLE>

Stock Option Plans

In October 1994, the Company adopted the 1994 Stock Option Plan (the "1994
Plan") and authorized the issuance of 2,096,246 shares, as amended, there under
to employees, directors, and consultants. Under the 1994 Plan, the Board of
Directors may grant incentive and nonqualified stock options to employees,
directors, and consultants of the Company. The exercise price per share for an
incentive stock option cannot be less than 100% of the fair market value, as
determined by the Board of Directors, on the date of grant. The exercise price
per share for nonqualified stock options cannot be less than the 85% of the fair
market value, as determined by the Board of Directors, on the date of grant.
Also, the exercise price of options granted to a greater than 10% stockholder
may not be less than 110% of the fair market value on the date of grant. The
value of common stock subject to incentive stock options that become exercisable
by any one employee in any calendar year may not exceed $100,000. Options
generally vest over a four-year period and generally expire ten years after the
date of grant.

43
<PAGE>

In 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Plan")
and authorized the issuance of 2,553,121 shares to employees, directors and
consultants. Under the 1999 Plan, the Board of Directors may grant incentive and
nonqualified stock options to employees, directors and consultants of the
Company. The exercise price per share for an incentive stock option cannot be
less than 100% of the fair market value, as determined by the Board of
Directors, on the date of grant. The exercise price per share for a nonqualified
stock option cannot be less than 85% of the fair market value, as determined by
the Board of Directors, on the date of grant. Also, the exercise price of
options granted to a greater than 10% stockholder may not be less than 110% of
the fair market value on the date of grant. The value of common stock subject to
incentive stock options that become exercisable by any one employee in any
calendar year may not exceed $100,000. Options under this plan generally vest
over a four-year period and generally expire ten years after the date of grant.
Option activity under the 1994 and 1999 Plans ("the Plans") was as follows:

<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
---------------------- ----------------------
<S> <C> <C>
Balance as of September 30, 1997................... 845,734 $ 0.12
Granted......................................... 856,706 0.45
Exercised....................................... (69,498) 0.13
Canceled........................................ (15,346) 0.52
-------------------

Balance as of September 30, 1998................... 1,617,596 $ 0.29
Granted......................................... 688,023 6.08
Exercised....................................... (435,282) 0.18
Canceled........................................ (147,487) 1.74
-------------------

Balance as of September 30, 1999................... 1,722,850 $ 2.51
Granted......................................... 2,053,743 10.07
Exercised....................................... (97,390) 0.66
Canceled........................................ (492,859) 9.33
-------------------

Balance as of September 30, 2000 3,186,344 $ 6.40
==================

Exercisable at September 30, 1998.................. 744,861 $ 0.15

Exercisable at September 30, 1999.................. 646,165 $ 0.25

Exercisable at September 30, 2000.................. 937,331 $ 1.35
</TABLE>

44
<PAGE>

The following table summarizes information concerning outstanding and
exercisable options at September 30, 2000:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------------------------
Weighted Weighted
Weighted Average Average
Number Average Exercise Number Exercise
Exercise Prices Outstanding Remaining Life Price Exercisable Price
--------------------------------- --------------- --------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
$0.08 - $2.30 1,001,627 6.3 $ 0.33 775,205 $ 0.28
2.31 - 4.60 280,595 6.8 3.76 104,749 3.74
4.61 - 6.90 98,000 9.8 5.82 - -
6.91 - 9.20 646,400 8.5 7.93 625 7.00
9.21 -11.50 898,240 8.1 11.35 4,185 10.25
11.51 -13.80 259,982 8.8 11.97 52,567 11.69
13.81 -16.10 1,500 9.2 14.50 - -
----------- -----------
$0.08 -$16.10 3,186,344 7.6 $ 6.40 937,331 $ 1.35
=========== ===========
</TABLE>
The Company accounts for the Plans under APB Opinion No. 25. Had
compensation expense for the Plans been determined consistent with SFAS No. 123,
the Company's net loss and basic net loss per share would have been increased to
the following pro forma amounts:

<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
------------------------------------------------------
2000 1999 1998
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net loss:
As reported..................................... $ (8,826,225) $ (6,894,949) $ (3,920,059)
Pro forma....................................... (11,681,199) (7,140,433) (3,931,305)
Basic and diluted net loss per share:
As reported..................................... $ (0.66) $ (5.76) $ (4.75)
Pro forma....................................... (0.88) (5.97) (4.76)
</TABLE>

45
<PAGE>

The weighted average fair value of options granted during fiscal years 2000,
1999 and 1998 was $7.23, $1.35 and $0.13 respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
2000, 1999 and 1998: risk free interest rates ranging from 4.5%-6.7%; expected
dividend yields of 0.0%; expected lives of 5 years; expected volatility of 0.0 %
to 65.0%.

In connection with the issuance of certain stock options to employees in
fiscal years 1999 and 1998, the Company has recorded deferred stock compensation
in the aggregate amount of approximately $3,892,000, representing the difference
between the deemed fair value of the Company's common stock and the exercise
price of stock options at the date of grant. The aggregate deferred stock
compensation charge was reduced during fiscal year 2000 by approximately
$1,150,000 due to the cancellations of approximately 493,000 options. The
Company is amortizing the deferred stock compensation expense over the vesting
period of four years. For fiscal year 2000 and for fiscal year 1999,
amortization of deferred stock compensation expense was approximately $466,000
and $770,000, respectively.

During fiscal year 2000, the Company issued nonqualified stock options to
purchase 98,000 shares of common stock at exercise prices ranging from $5.88 to
$6.00 per share to various consultants. The options vest over 4 years and expire
10 years from the date of grant. The deemed fair value at September 30, 2000 was
$3.57 per share. The Company has recognized compensation expense of
approximately $26,000 during fiscal 2000, which was estimated using the
Black-Scholes model. This expense was included in research and development
expenses in the accompanying consolidated statement of operations.

1999 Employee Stock Purchase Plan

In June 1999, the Board of Directors adopted the 1999 Employee Stock Purchase
Plan (the "1999 Purchase Plan") under which 299,464 shares of common stock were
reserved for issuance to eligible employees at a price of 85% of the lower of
the fair market value of the common stock on the first day of the offering
period or a specified exercise date (last trading day in January or July). The
number of shares will be increased on the first day of each fiscal year
beginning in 2000 by the lesser of (i) 598,928 shares, (ii) 2% of the
outstanding shares on that date or (iii) a lesser amount determined by the Board
of Directors. Participants under the 1999 Purchase Plan generally may not
purchase shares on any exercise date to the extent that, immediately after the
grant, the participant would own stock totaling 5% or more of the total combined
voting power of all stock of the Company, or greater than $25,000 worth of stock
in any calendar year. In addition, no more than 5,989 shares may be purchased by
any participant during any offering period. In the event of a sale or merger of
the Company, the Board may accelerate the exercise date of the current purchase
period to a date prior to the change of control, or the acquiring company may
assume or replace the outstanding purchase rights under the 1999 Purchase Plan.
The first offering period under the 1999 Purchase Plan commenced on the
effective date of the Company's initial public offering and will terminate on or
before July 31, 2001. In fiscal year 2000, 22,482 shares were purchased by and
distributed to employees at an average price of $7.49 per share. At September
30, 2000, the Company had 276,982 shares of its common stock reserved for future
issuance under the plan.

46
<PAGE>

7. INCOME TAXES:

The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting
for Income Taxes." SFAS No. 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. The following is a summary
of the significant components of the company deferred tax asset as of September
30, 2000 and 1999:

<TABLE>
<CAPTION>
September 30,
--------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Net operating loss carryforwards................... $ 6,972,000 $ 3,534,000
Capitalized start-up costs......................... 66,000 154,000
Reserve and other cumulative temporary differences. 1,705,000 939,000
Research and development credit carryforward....... 745,000 455,000
Net capitalized research and development expenses.. 528,000 390,000
------------- -------------
10,016,000 5,472,000
Valuation allowance................................ (10,016,000) (5,472,000)
------------- -------------
Net deferred tax asset............................. $ -- $ --
============= =============
</TABLE>

As of September 30, 2000, the Company has cumulative net operating loss carry
forwards for federal and state income tax reporting purposes of approximately
$19.5 million and $5.7 million, respectively, which expire in various periods
from 2002 to 2020. Under current tax law, net operating loss carry forwards
available in any given year may be limited upon the occurrence of certain
events, including significant changes in ownership interest.

A valuation allowance has been recorded for the entire deferred tax asset as
a result of uncertainties, regarding realization of the asset, including limited
operating history of the Company, the lack of profitability to date and the
uncertainty over future operating profitability and taxable income. As of
September 30, 2000 and 1999 the Company had no significant deferred tax
liabilities.

47
<PAGE>

ALTIGEN COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Balance at
Classification Period Expenses Deductions End of Period
---------------------------------------------------------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended September 30, 1998............................. $ 40,772 $ 169,908 $ (77,617) $ 133,063
Year ended September 30, 1999............................. $ 133,063 $ 279,497 $ (186,079) $ 226,481
Year ended September 30, 2000............................. $ 226,481 $ 196,815 $ -- $ 423,296
</TABLE>