The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." below. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this report. See "Forward-Looking Statements," above.

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: SmartVoice™ and Digital Phone Service. SmartVoice™ 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 Presence TM 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 Presence TM 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.

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:

· 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. In addition, Costco Wholesale selected our Voice Solution as its "Service of the Month" in March, 2009

· Consolidated business units and reduced operating expenses

· Secured $6.5 million of additional working capital through three financings in March 2008, August 2008 and December 2008.

· Restructured short term debt and preferred stock to six year interest only convertible debenture.

Business Developments

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 2008, 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 sold as a complete cutting-edge phone system; we bundle our VoIP applications and network services with third party equipment, including all necessary phones. 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.

Recent Financings

On March 27, 2008, we entered into a securities purchase agreement with two of the institutional investors that invested in the previous private placements, pursuant to which we issued original issue discount 6.0% senior secured convertible debentures in the aggregate principal amount of $3.4 million (issued at an original issue discount of 12.5%), along with five year warrants to purchase 814,285 shares of common stock at a price of $1.92 per share, subject to adjustment, including full-ratchet anti-dilution protection. We refer to this transaction as the March 2008 Private Placement. The March 2008 Private Placement resulted in net proceeds of $2.8 million, after deducting fees and expenses of $0.2 million which were capitalized as deferred financing costs. In addition to the fees and expenses related to the transaction, we issued our investment banking firm a warrant to purchase 78,125 shares of common stock at $1.92 per share. The warrant is exercisable immediately and expires in March 2013. The value of the warrant, $67,734, was capitalized as deferred financing costs.

The debentures we issued in March 2008 were originally set to mature on April 30, 2010 and monthly redemption payments were to begin on October 1, 2008. The terms of these debentures were amended and restated in June 2008. See "June 2008 Financing," below.

The holders of the debentures issued in March 2008 converted $3.4 million of principal value into the debentures issued in June 2008.

June 2008 Financing

On June 30, 2008, we entered into a securities exchange agreement with the investors in our previous debenture and preferred stock financings and issued six-year, interest only debentures due June 30, 2014 in exchange for all of the then outstanding debentures and shares of our preferred stock. The debentures issued in June 2008 amend and restate the terms of the previously outstanding debentures. The debentures issued in this transaction (an aggregate principal amount of $26.1 million) were exchanged for all of the then outstanding debentures held by the investors (an aggregate principal amount of $10.7 million), accrued interest on the outstanding debentures of $0.1 million, all of the then outstanding shares of preferred stock held by the investors (stated value of $14.9 million), and accrued dividends on such preferred stock of $0.4 million. Also in conjunction with the transaction, the exercise prices of the outstanding warrants issued in the previous debenture and preferred stock financings were reduced from $1.25 per share to $1.00, which was subsequently reduced to $0.40 per share in connection with our December 2008 financing, discussed below. The number of common shares underlying these warrants was not adjusted in connection with this change in exercise price.

In December 2008, we amended certain terms of the debentures issued in June 2008 which are discussed below under the heading "Amendment of Outstanding Debentures and Warrants."

The following summarizes the terms of the debentures issued in June 2008, as amended:

Term. The debentures are due and payable on June 30, 2014.

Interest. Interest accrued at the rate of 12.0% per annum and was payable monthly, commencing on August 1, 2008. In December 2008, the parties agreed to amend the interest payment provisions to eliminate monthly interest payments at the rate of 12% per annum. As amended, interest is payable quarterly at the rate of (i) 0% per annum from October 1, 2008 until September 30, 2009, (ii) 13.5% per annum from October 1, 2009 until September 30, 2012 and (c) 18% per annum from October 1, 2012 until maturity.

Principal Payment. The principal amount of the debenture, if not paid earlier, is due and payable on June 30, 2014.

Payments of Interest. Interest payments are due quarterly on January 1, April 1, July 1 and October 1, commencing with a payment on January 1, 2010. We have the right to make interest payments in cash, or upon notice to the holders and compliance with certain equity conditions, we can pay all or a portion of any such payment in common stock valued at a price equal to the lesser of the then effective conversion price (amended to $0.40) or 85% of the average of the VWAP per share of the common stock for the 10 consecutive trading days immediately prior to the applicable payment date.

Early Redemption. We have the right to redeem the debentures before their maturity by payment in cash of 120% of the then outstanding principal amount plus (i) accrued but unpaid interest, (ii) an amount equal to all interest that would have accrued if the principal amount subject to such redemption had remained outstanding through the maturity date and (iv) all liquidated damages and other amounts due in respect of the debenture. To redeem the debentures we must meet certain equity conditions. The payment of the debentures would occur on the 10th day following the date we gave the holders notice of our intent to redeem the debentures. We agreed to honor any notices of conversion received from a holder before the pay off date of the debentures.

Voluntary Conversion by Holder. The debentures, as amended, are convertible at anytime at the discretion of the holder at a conversion price per share of $0.40, subject to adjustment including full-ratchet, anti-dilution protection.

Forced Conversion. Subject to compliance with certain equity conditions, we also have the right to force conversion if the VWAP for its common stock exceeds 200% of the then effective conversion price for 20 trading days out of a consecutive 30 trading day period. Any forced conversion is subject to our meeting certain equity conditions and is subject to a 4.99% cap on the beneficial ownership of our common stock by the holder and its affiliates following such conversion, which cap may increase to 9.99% by the holder upon not less than 61 days notice.

Covenants. The debentures impose certain covenants on us, including restrictions against incurring additional indebtedness, creating any liens on our property, amending our certificate of incorporation or bylaws, redeeming or paying dividends on shares of our outstanding common stock, and entering into certain related party transactions. The debentures define certain events of default, including without limitation failure to make a payment obligation, failure to observe other covenants of the debenture or related agreements (subject to applicable cure periods), breach of representation or warranty, bankruptcy, default under another significant contract or credit obligation, delisting of our common stock, a change in control, failure to secure and maintain an effective registration statement covering the resale of the common stock underlying the debentures and the warrants, or failure to deliver share certificates in a timely manner. In the event of default, the holders of the debentures have the right to accelerate all amounts outstanding under the debenture and demand payment of a mandatory default amount equal to 130% of the amount outstanding plus accrued interest and expenses.

Security. The debentures we issued are secured by all of our assets under the terms of the amended and restated security agreement we and our subsidiaries entered into with the holders of the June 2008 debentures, which amends and restates the security agreement we and the holders entered into in connection with our August 2007 financing. Each of our subsidiaries also entered into guarantees in favor of the Investors, pursuant to which each subsidiary guaranteed the complete payment and performance by us of our obligations under the debentures and related agreements.

August 2008 Financing

On August 13, 2008, we entered into a separate debenture and warrant purchase agreement with one of the institutional investors that invested in the previous private placements, pursuant to which we issued a senior secured convertible debenture with a principal amount of $2.0 million, along with a five year warrant to purchase 608,000 shares of our common stock at a price of $1.00 per share, subject to adjustment, including full-ratchet anti-dilution protection. In December 2008, we amended certain terms of the debentures issued in June 2008 and August 2008. The rights and obligations of the investor and of us with respect to the debenture we issued in this financing are identical to the rights and obligations of the debentures we issued in June 2008, as amended. The rights and obligations of the investor and of us with respect to the warrant and the underlying common shares are identical to the warrants and underlying common shares issued pursuant to the Securities Purchase Agreement dated March 27, 2008 among the Company and the purchasers' signatory thereto.

December 2008 Financing

On December 11, 2008, we entered into a debenture and warrant purchase agreement with an institutional investor and a holder of our June 2008 Debentures and August 2008 Debentures pursuant to which we issued a senior secured convertible debenture in the principal amount of $1.5 million, along with a warrant to purchase 456,000 shares of our common stock with an exercise price of $0.40 per share. This financing transaction resulted in net proceeds to us of $1.5 million. We may refer to this financing as our December 2008 financing in this report.

The terms of debentures issued in December 2008 are substantially similar to the terms of the debentures issued in June 2008 and August 2008, except as follows:
interest is payable quarterly at the rate of (i) 0% per annum from the original issue date until the one year anniversary of the original issue date, (ii) 12% per annum from the one year anniversary of the original issue date until the four year anniversary of the original issue date, and (iii) 18% per annum from the four year anniversary of the original issue date until the maturity date.

Amendment of Outstanding Debentures and Warrants

In connection with our December 2008 financing, we entered into an amendment agreement with the holders of the debentures we issued in June 2008 and August 2008, or, together, the "2008 Debentures," and the warrants we issued in December 2006, February 2007, March 2008 and August 2008, or, collectively, the "2006-2008 Warrants."

With respect to the 2008 Debentures, the parties agreed to amend the interest payment provisions to eliminate monthly interest payments at the rate of 12% per annum. As amended, interest is payable quarterly at the rate of (i) 0% per annum from October 1, 2008 until September 30, 2009, (ii) 13.5% per annum from October 1, 2009 until September 30, 2012 and (c) 18% per annum from October 1, 2012 until maturity.

As a result of the issuance of the debenture and warrant in the December 2008 financing discussed below, the conversion price and exercise price of the 2008 Debentures and 2006-2008 Warrants was reduced to $0.40. However, under the amendment agreement, the parties agreed to waive the adjustment provision of the 2006-2008 Warrants that would have increased the number of shares subject to the 2006-2008 Warrants as a result of the issuance of the debentures and warrants in the December 2008 financing.

Outlook

We are entering 2009 with a solid product line of both voice and video solutions, including our Digital Phone Service. We experienced growth in revenues and gross margins for each of our Video Solutions and Voice and Network Solutions segments in 2008 compared to 2007. We have aggressively reduced operating expenses in 2008 and expect that the benefits of those reductions, together with additional planned cost savings, will positively impact our operating results for 2009. If we can continue to generate revenue and gross margin improvements consistent with our growth in 2008 and maintain control of our operating expenses, we believe that our existing capital will be sufficient to finance our operations for 2009.

However, the uncertainties related to the global economic slowdown and the disruption in the financial markets has impacted our visibility on our business outlook. Weakening economic conditions may result in decreased demand for our products. We have witnessed some slow down on our Video Solutions segment. In addition, we have limited financial resources. Unforeseen decreases in revenues, or increases in operating costs could impact our ability to fund our operations. We do not currently have any sources of credit available to us. See "Liquidity and Capital Resources" below.

Based on currently available information, management believes 2009 revenues will show double digit increases in growth over 2008 numbers. We are committed to achieving positive cash flow in 2009 and are working to put the Company in a position to make interest payments in cash under our debentures when such payments commence in 2010.

Going Concern

We remain dependent on outside sources of funding until our results of operations provide positive cash flows. Our independent registered auditors issued a going concern uncertainty in their report dated March 27, 2009, since there is substantial doubt about our ability to continue as a going concern.

During the years ended December 31, 2008 and 2007, we have been unable to generate cash flows sufficient to support our operations and have been dependent on debt and equity raised from qualified individual investors. We experienced negative financial results as follows:

                                                      2008             2007
     Net loss                                     $ (9,683,630 )   $ (10,633,026 )
     Negative cash flow from operating activities   (5,447,148 )      (5,582,487 )
     Working capital deficit                        (7,967,417 )     (13,585,737 )
     Stockholders' equity                              944,324        18,377,773

These factors raise substantial doubt about our ability to continue as a going concern. The financial statements contained herein do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence. Our ability to continue as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations. However, there is no assurance that profitable operations or sufficient cash flows will occur in the future.

We have supported current operations by raising additional operating cash through the private sale of our preferred stock and convertible debentures. This has provided us with the cash flows to continue our business plan, but have not resulted in significant improvement in our financial position. We are considering alternatives to address our cash flow situation that include: (1) reducing cash operating expenses to levels that are in line with current revenues and (2) raising capital through additional sale of equity or debt securities.

The second alternative could result in substantial dilution of existing stockholders. There can be no assurance that our current financial position can be improved, that we can raise additional working capital or that we can achieve positive cash flows from operations. Our long-term viability as a going concern is dependent upon our ability to:

• achieve profitability and ultimately generate sufficient cash flow from operations to sustain our continuing operations; and
• locate sources of debt or equity funding to meet current commitments and near-term future requirements.

Results of Operations

Fluctuations in Operating Results

We are in the early stages of our operations, and made two acquisitions during the year ended December 31, 2007. Our results of operations are likely to fluctuate from period to period. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including the timing and volume of sales of our communications products, realization of "synergies" or management of integration from our recent acquisitions, and the potential impact of future acquisitions. Due to these factors, each of which will have a substantial impact on our future operations, we believe that the period-to-period comparisons of our operating results are not a good indication of our future performance.

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

Our business operates in two segments: Video Solutions and Voice and Network Solutions. Our Video Solutions segment includes our telepresence solutions and integration, consultation and implementation solutions. Our Voice and Network Solutions segment includes our VoIP communications offerings which include a variety of voice and messaging solutions.

Revenues, Cost of Revenues and Gross Profit

                              Year ended December 31, 2008                            Year ended December 31, 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          $      6,155,571     $            -     $  6,155,571     $      4,791,687     $           -     $  4,791,687     $      1,363,884     $            -     $  1,363,884
Services                  376,860         26,093,551       26,470,411              106,426         7,279,575        7,386,001              270,434         18,813,976       19,084,410
                        6,532,431         26,093,551       32,625,982            4,898,113         7,279,575       12,177,688            1,634,318         18,813,976       20,448,294

Cost of revenues:
Product                 4,946,258                  -        4,946,258            3,683,274                 -        3,683,274            1,262,984                  -        1,262,984
Services                  382,027         11,360,629       11,742,656              135,190         3,385,660        3,520,850              246,837          7,974,969        8,221,806
                        5,328,285         11,360,629       16,688,914            3,818,464         3,385,660        7,204,124            1,509,821          7,974,969        9,484,790

Gross profit     $      1,204,146     $   14,732,922     $ 15,937,068     $      1,079,649     $   3,893,915     $  4,973,564     $        124,497     $   10,839,007     $ 10,963,504

Gross profit %              18.43 %            56.46 %          48.85 %              22.04 %           53.49 %          40.84 %

Net revenues for 2008 were $32.6 million, an increase of $20.4 million, or 168%, over 2007. Net revenues in our Video Solutions segment increased $1.6 million primarily as a result of our full year 2008 results of the acquisition of AVS in April 2007. Net revenues in our Voice and Network Solutions segment increased . . .