The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation, the disclosures made under "Item 1A. "Risk Factors" included in Part II of this report and in our audited consolidated financial statements and related notes included in our Annual Report on Form 10-KSB for the year ended December 31, 2007, previously filed with the SEC.

Overview

Business

We are an IP communications company, offering a range of communications solutions from hosted IP voice and conferencing products, to text and data collaboration, to telepresence videoconferencing products.

Our subsidiary, AccessLine, Inc., provides customers with a range of business phone services and applications. At the core of AccessLine's business phone services are their software components, all of which are developed internally and loaded on standard commercial grade servers. AccessLine's phone service can be delivered with a variety of hosted features configured to meet the application needs of the customer. By delivering business phone service to the market in this manner, AccessLine offers flexibility to customers and can serve a variety of business sizes.

AccessLine offers two business dialtone products: SmartVoiceTM and Digital Phone Service. SmartVoiceTM replaces a customer's existing telephone lines with a VoIP alternative, but allows the customer to keep using its current phone equipment. This product is targeted at the mid-size business market. The customer has the ability to select the number of office locations, number of phone lines and types of phone numbers. Digital Phone Service is a combined package of a digital phone system and accompanying service, geared for small companies with 20 or fewer employees at a single location. The customer selects how many phone lines and how many stations, and selects optional features such as Automated Attendant, conference calling or fax numbers. AccessLine then preconfigures the phone system to the customer's specifications, and ships it directly to the customer.

In addition, AccessLine offers a host of other phone services, including, conferencing calling services, toll-free service plans, a virtual phone system with after hours answering service that routes calls based on specific business needs, find-me and follow-me services, a full featured voice mail system that instantly contacts a customer via an email or cell phone text message the moment such customer receives a new voice mail or fax, and the ability to manage faxes from virtually anywhere.

Through our Digital PresenceTM product line we provide our customers with a complete system for telepresence video conferencing. The core of our system is our software components-video and audio encoder and decoders, call signaling and bandwidth management-all of which are developed internally and pre-loaded on a standard Linux server. Our telepresence solutions are based on next generation IP standards. A Digital PresenceTM system also includes the monitors, cameras and audio components to optimize the user experience, as well as the equipment necessary to enable a "hotspot" in the conference room for the wireless operation of the system controls and data-sharing. Our systems can be matched with a wide range of off-the-shelf monitors, cameras and audio components to meet certain room configuration or performance requirements. Our channel partners and our subsidiary, AVS, act as the system integrators to design, build-out and install the complete telepresence system including components and peripheral equipment to meet the application needs of the customer. By delivering Digital Presence™ to the market in this manner, we offer flexibility to customers and can support conference rooms for both small and large audiences.

History

We were a development stage company through 2005 working on our Digital PresenceTM product line. We completed the development of our initial telepresence solution and commenced sales of that product in 2005. In 2006 we focused our business efforts on developing our channel partner relationships and we secured our first significant telepresence customer accounts. In April 2007, we acquired AVS, which at the time was one of our channel partners who distributed our telepresence systems and related solutions in New York, New Jersey and nearby regions of the United States. With this acquisition, we expanded our business to provide integration, consultation and implementation solutions for customers desiring telepresence and audio-visual systems and products. We entered the VOIP voice and network services market in September 2007, with our acquisition of AccessLine, Inc.

Recent Developments

Currently, our overriding objective is to achieve operating profitability. To that end, during the second and third quarters of our current fiscal year, we undertook substantial initiatives to increase sales, increase market share with new product offerings, reduce operating expenses, secure additional working capital, and recapitalize our short term debt. These initiatives included the following:

· Retained former Accord Networks executive to manage telepresence sales and distribution and added three veteran telepresence sales leaders to our sales team
· Launched a new upgrade program, dubbed "Represence," to layer full telepresence functionality into existing video conferencing rooms regardless of existing hardware solutions
· Partnered with Costco Wholesale® (a national and international operator of membership warehouses) to provide new Digital Phone and service to small office/home office (SOHO) customers
· Established Anew Communication Technology as telepresence distributor in 12 western states
· Consolidated business units and reduced operating expenses
· Secured $4.8 million of additional working capital through two financings in March 2008 and August 2008.
· Restructured short term debt and preferred stock to six year interest only convertible debenture.

Business Developments

Mr. J.D. Vaughn, a senior telepresence industry executive, joined us recently as our Vice President of Worldwide Video Sales. Prior to joining us, Mr. Vaughn served in leadership roles at companies including Accord Networks, Polycom, AT&T, and PictureTel. Also recently joining our video sales team were Brice Drogosch, Steve Parrish and Linda Bickelman, each of whom previously worked with Mr. Vaughn at Accord Networks.

Mr. Drogosch, our Western Region Vice President of Video Sales, has more than 18 years of industry experience, and previously served as Vice President of Sales at Radvision and was a Sales Director responsible for Western Region Sales at Accord Networks and Polycom.

Mr. Parrish, our Eastern Region Vice President of Video Sales, has more than 20 years of industry experience, and previously held positions as Vice President for Channels for Polycom and as Regional Vice President for Accord Networks and ViewTech that is now WireOne.

Ms. Bickelman, our Director of Channel Development-Video, has actively supported videoconferencing channels for over 18 years. She began her career at Rolm and was instrumental in helping build and support channels at PictureTel, Viewcast, Accord Networks, Trapeze Networks and Polycom.

In September 2008, we launched a new upgrade program to layer full telepresence functionality into existing video conferencing rooms regardless of existing hardware solution. Dubbed "Represence", the program includes HD telepresence codecs, dual monitor support, five-way multi-point with continuous presence, one button touch panel control and can be upgraded to include the multipoint immersive gateway (MIG) which allows interoperability to legacy video conferencing systems. The program will extend the life expectancy and reduce the overall expense for a company wishing to deploy full telepresence solutions to replace narrower bandwidth videoconferencing systems in integrated meeting rooms. Represence allows companies to extend and upgrade their videoconferencing rooms without investing another $300,000.

In September 2008, we appointed Douglas N. Johnson, our chief executive officer, as chairman of our board of directors. Mr. Johnson succeeded Thomas A. Szabo in this role, who resigned from our board of directors on September 5, 2008.

During the second quarter of our current fiscal year, we partnered with Costco Wholesale®, a national and international operator of membership warehouses, to launch a new VOIP product. Under this arrangement we are offering a combined business phone service and business phone system package to Costco's Membership, targeted at members running small businesses with five or fewer employees. This segment represents over 60% of all registered businesses in the U.S. To simplify the purchase process for Costco Members, AccessLine Digital Phone Service is a complete package; it comes with a cutting-edge phone system, complete with all necessary phones, bundled with the phone service itself. The package is packed with features that make the whole purchase and installation process easy for the Costco business member, such as an equipment installment purchase plan rather than a large upfront charge, one point of contact rather than dealing with a service provider and an equipment provider, plug and play installation, and service quality monitoring.

Also during the second quarter, we entered into an agreement with Anew Communications Technology, Inc., a sales and marketing manufacturer representative firm concentrating on the Commercial Audio Visual Market and Digital Signage Applications. Under the terms of the agreement, Anew will provide sales representation for our telepresence video products in California, Oregon, Washington, Arizona, Nevada, New Mexico, Colorado, Wyoming, Utah, Montana, Idaho and Alaska.

We are aggressively evaluating and reducing our operating expenses at all levels of the organization. We've consolidated certain of our business units and reduced headcount throughout our organization, including executive and mid level management. We incurred $1.8 million in severance and termination expenses during the second quarter associated with these reductions.

Financing Developments

In August 2008, we sold senior secured convertible debentures in the aggregate principal amount of $2.0 million, along with a warrant to purchase 608,000 shares of our common stock with an exercise price of $1.00 per share, resulting in net proceeds to us of $2.0 million. See "Recent Financings," below.

In June 2008, we restructured all $10.8 million of our outstanding convertible promissory notes and all $15.3 million of our preferred stock into six year, interest only, non-amortizing debentures in an aggregate principal amount of $26.1 million. The restructure significantly lowers debt service requirements for the next six years, by extending the term for payment, securing a fixed interest rate, and removing the ratchet provision for monthly payments made in common stock. See "Recent Financings," below.

In March 2008, we completed a convertible debenture financing transaction that resulted in net proceeds to us of $2.8 million.

Critical Accounting Policies Involving Management Estimates and Assumptions

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to the allowance for doubtful accounts; valuation of inventories; valuation of goodwill, intangible assets and property and equipment; valuation of stock based compensation expense under SFAS No. 123(R), the valuation of warrants and conversion features; and other contingencies. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.

The following is a discussion of certain of the accounting policies that require management to make estimates and assumptions.

Inventories:

Inventories, which consist primarily of finished goods, are valued at the lower of cost or market with cost computed on a first-in, first-out (FIFO) basis. Consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value. The Company records write downs for excess and obsolete inventory equal to the difference between the cost of inventory and the estimated fair value based upon assumptions about future product life-cycles, product demand and market conditions.

Property and Equipment:

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are two to seven years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the assets. Disposals of capital equipment are recorded by removing the costs and accumulated depreciation from the accounts and gains or losses on disposals are included in operating expenses in the Consolidated Statement of Operations.

Goodwill:

Goodwill is not amortized but is regularly reviewed for potential impairment. The identification and measurement of goodwill impairment involves the estimation of the fair value of the Company's reporting units. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment, which primarily incorporate management assumptions about expected future cash flows. Future cash flows can be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized with newly acquired entities.

Impairment of Long-Lived Assets:

Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from five to ten years. Purchased intangible assets determined to have indefinite useful lives are not amortized. Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Revenue Recognition:

Video Solutions Revenue

The Company recognizes revenue when persuasive evidence of an arrangement exists, title has transferred, product payment is not contingent upon performance of installation or service obligations, the price is fixed or determinable, and collectability is reasonably assured. In instances where final acceptance of the product or service is specified by the customer, revenue is deferred until all acceptance criteria have been met. Additionally, the Company recognizes extended service revenue on our hardware and software products ratably over the service period, generally one year.

The Company's telepresence products are integrated with software that is essential to the functionality of the equipment. Additionally, the Company provides unspecified software upgrades and enhancements related to most of these products through maintenance contracts. Accordingly, the Company accounts for revenue for these products in accordance with Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition," and all related interpretations.

The Company generally recognizes revenue generated by AVS for integration, consultation and implementation solutions on a percentage completion basis based on direct labor costs in accordance with SOP No. 81-1, Accounting for Performance of Construction Type and Certain Production Type Contracts.

Voice and Network Solutions Revenue

Voice and network revenues are derived primarily from monthly recurring fees, which are recognized over the month the service is provided, activation fees, which are deferred and recognized over the estimated life of the customer relationship, and fees from usage which are recognized as the service is provided.

Income Taxes:

The Company accounts for income taxes under the liability method, which recognizes deferred tax assets and liabilities determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets when, based on available objective evidence, it is more likely than not that the benefit of such assets will not be realized.

On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in income tax positions. This interpretation requires the Company to recognize in the consolidated financial statements only those tax positions determined to be more likely than not of being sustained.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.

The Company reviews the terms of convertible debt and equity instruments it issues to determine whether there are embedded derivative instruments, including the embedded conversion option, that are required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where the convertible instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.

Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as charges or credits to income. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face amount.

The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income, using the effective interest method.

Stock Based Compensation:

On January 1, 2006, the Company adopted SFAS No. 123(R) "Share-Based Payments", which requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized in the Consolidated Statement of Operations over the period during which the employee is required to provide service in exchange for the award - the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments is estimated using option-pricing models adjusted for the unique characteristics of those instruments.

Limited Operating History

We have limited historical financial information upon which to base an evaluation of our future performance. We cannot guarantee that we will be successful in our business. We are subject to risks inherent to a company in our stage of development, including limited capital resources, possible delays in product development and manufacturing, and possible cost overruns due to price and cost increases. There is no assurance that future financing will be available to our company on acceptable terms. Additional equity financing will likely result in substantial dilution to existing stockholders.

Results of Operations

Third Quarter of Fiscal 2008 Compared to Third Quarter of Fiscal 2007

Our business operates in two segments: Video Solutions and Voice and Network Solutions. Our Video Solutions segment includes our Digital PresenceTM telepresence solutions and other supporting audio-visual applications and services. Our Voice and Network Solutions segment includes our SmartVoice™ and Digital Phone Service and other VoIP communications offerings including a variety of voice and messaging solutions as well as telepresence network services.

Revenues, Cost of Revenues and Gross Profit

                   Three months ended September 30, 2008                   Three months ended September 30, 2007                           Increase (decrease)
                                                                                            Voice and                                             Voice and
                                Voice and Network                                            Network                                               Network
            Video Solutions         Solutions           Total        Video Solutions        Solutions          Total        Video Solutions       Solutions          Total
Net revenues:
Product      $    1,654,038       $          -      $ 1,654,038       $    1,185,941       $         -     $ 1,185,941      $      468,097       $         -     $   468,097
Services             56,835          6,786,712        6,843,547               40,750         1,035,024       1,075,774              16,085         5,751,688       5,767,773
                  1,710,873          6,786,712        8,497,585            1,226,691         1,035,024       2,261,715             484,182         5,751,688       6,235,870

Cost of revenues:
Product           1,122,393                  -        1,122,393            1,158,750                 -       1,158,750            (36,357)                 -        (36,357)
Services             77,311          2,759,247        2,836,558               69,161           506,113         575,274               8,150         2,253,134       2,261,284
                  1,199,704          2,759,247        3,958,951            1,227,911           506,113       1,734,024            (28,207)         2,253,134       2,224,927

Gross
profit       $      511,169       $  4,027,465      $ 4,538,634       $      (1,220)       $   528,911     $   527,691      $      512,389       $ 3,498,554     $ 4,010,943

Gross
profit %              29.88 %            59.34  %         53.41 %            (0.10%)            51.10%          23.33%

Net revenues for the three months ended September 30, 2008 were $8.5 million, an increase of $6.2 million, or 276%, over the same period in 2007. Net revenues in our Video Solutions segment increased $0.5 million. Net revenues in our Voice and Network Solutions segment increased $5.8 million. The increase in Voice and Network Solutions revenue is attributable to the fact that we acquired AccessLine on September 14, 2007 and its results are included in our results of operations only from the date of acquisition, or approximately half of a month for the three months ended September 30, 2007, as compared to all three months for the three months ended September 30, 2008.

For the three months ended September 30, 2008, two customers accounted for 23% of our Video Solutions segment net revenues, and one customer accounted for 14% of our Voice and Network Solutions segment net revenues. For the three months ended September 30, 2007, three customers accounted for 61% of our Video Solutions segment net revenues.

Cost of revenues for the three months ended September 30, 2008 were $4.0 million, an increase of $2.2 million, or 128%, over the same period in 2007. Cost of revenues in our Video Solutions segment decreased by less than $0.1 million due primarily to an improved mix of product and services sold. Cost of revenues in our Voice and Network Solutions segment increased $2.3 million consistent with the increase in revenues attributable to the operation of our Accessline subsidiary for a full quarter.

Gross profit for the three months ended September 30, 2008 was $4.5 million, an increase of $4.0 million, or 760%, over the same period in 2007. Gross profit in our Video Solutions segment increased $0.5 million primarily as a result of increased margin on product sales during the period. Gross profit in our Voice and Network Solutions segment increased $3.5 million consistent with the increase in revenues attributable to the operation of our Accessline subsidiary for a full quarter.

Gross profit percentage was 53.41% for the three months ended September 30, 2008 compared to 23.33% in the same period in 2007. Gross profit percentage for our Video Solutions segment was 29.88% for the three months ended September 30, 2008 compared to nil in the same period in 2007, and the increase is a result of a more profitable mix of products sold. Gross profit percentage for our Voice and Network Solutions segment was 59.34% for the three months ended September 30, 2008 compared to 51.10% in the same period in 2007, and the increase is a result of improved purchasing power from network infrastructure providers allowing us to purchase network access at lower rates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2008 were $4.4 million, an increase of $2.5 million or 130%, over . . .