COMMITMENTS AND CONTINGENCIES - Note 9

3 Months Ended

Jun. 30, 2011

COMMITMENTS AND CONTINGENCIES - Note 9

9. COMMITMENTS AND CONTINGENCIES

Guarantees

Indemnifications

In the normal course of business, the Company indemnifies other parties, including customers, lessors and parties to other transactions with the Company, with respect to certain matters. Under these arrangements, the Company typically agrees to hold the other party harmless against losses arising from a breach of representations or covenants, intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors.

It is not possible to determine the maximum potential amount of the Company's exposure under these indemnification agreements due to the limited history of indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on the Company's operating results, financial position or cash flows. Under some of these agreements, however, the Company's potential indemnification liability might not have a contractual limit.

Product Warranties

The Company accrues for the estimated costs that may be incurred under its product warranties upon revenue recognition. Changes in the Company's product warranty liability, which is included in cost of product revenue in the condensed consolidated statements of income, during the three months ended June 30, 2011 and 2010 were as follows (in thousands):

		Three Months Ended
		June 30,
		2011		2010
Balance at beginning of period	$	362	$	331
Accruals for warranties		138		144
Settlements		(122)		(119)
Balance at end of period	$	378	$	356

Leases

In May 2009, the Company entered into a three-year lease for its primary facility in Sunnyvale, California that expires in fiscal 2013. The Company has the option to accelerate the termination date of the lease to the 12^th, 18^th, 24^th, or 30^th full calendar month of the lease term by providing six months advance notice. In the event the Company exercises this early termination option, the Company will be required to pay a fee to the landlord equal to the unamortized portion of any leasing commission and the unamortized portion of the initial alteration expenses incurred by the landlord as summarized in a current report on Form 8-K filed by the Company with the SEC on May 7, 2009. At June 30, 2011, future minimum annual lease payments under current operating leases were as follows (in thousands):

Year ending March 31:
Remaining 2012	$	501
2013		284
Total minimum payments	$	785

In each of March 2007 and August 2009, the Company entered into a series of noncancelable capital lease agreements for office equipment bearing interest at various rates. At June 30, 2011, future minimum annual lease payments under noncancelable capital leases were as follows (in thousands):

Year ending March 31:
Remaining 2012	$	30
2013		7
Total minimum payments		37
Less: Amount representing interest		(2)
		35
Less: Short-term portion of capital lease obligations		(33)
Long-term portion of capital lease obligations	$	2

Capital leases included in office equipment were $156,000 at June 30, 2011. Total accumulated depreciation was $123,000 at June 30, 2011. Amortization expense for assets recorded under capital leases is included in depreciation expense.

Minimum Third Party Customer Support Commitments

In the third quarter of fiscal 2010, the Company amended a contract with one of its third party customer support vendors containing a minimum monthly commitment of approximately $430,000. The agreement requires a 150-day notice to terminate. The total remaining obligation under the amended contract is $2.2 million.

Minimum Third Party Network Service Provider Commitments

The Company entered into contracts with multiple vendors for third party network services that expire on various dates in fiscal 2012 and 2013. At June 30, 2011, future minimum annual payments under these third party network service contracts were $365,000 in 2012 and $23,000 in 2013.

Legal Proceedings

From time to time, the Company may become involved in various legal claims and litigation that arise in the normal course of its operations. While the results of such claims and litigation cannot be predicted with certainty, the Company is not currently aware of any such matters that it believes would have a material adverse effect on its financial position, results of operations or cash flows.

On October 6, 2010, the Company was named a defendant in a lawsuit, Ceres Communications Technologies, LLC ("Ceres"), v. 8x8, Inc. et al., filed by a patent holder. On November 24, 2010, the Company filed a lawsuit in the Southern District of Texas against Adaptive Networks and Ceres (“Texas Suit”) alleging false patent marking under Title 35, Section 292, of the United States Code relating to the patent that Ceres is asserting against the Company. On June 8, 2011, the Ceres suit against 8x8 and OfficeMax was settled and the Texas Suit was dismissed after 8x8 acquired license rights for this patent from a licensor of third party intellectual property.

On March 15, 2011, the Company was named a defendant in a lawsuit, Bear Creek Technologies, Inc. v. 8x8, Inc. et al., along with more than 20 other defendants, including AT&T, Inc., Cablevision Systems Corporation, Comcast Corporation, Cox Communications, Qwest Communications International, Inc., T-Mobile USA, Inc. and Vonage Holdings Corporation in the United States District Court for the Eastern District of Virginia (Norfolk Division). The plaintiff believes the Company has infringed one or more claims of United States Patent No. 7,889,722. On April 26, 2011, Bear Creek Technologies, Inc. amended its initial complaint against the defendants to allege induced infringement. The Company believes it has factual and legal defenses to these claims and is presenting a vigorous defense. The plaintiff has not made a specific monetary demand and the Company cannot estimate potential liability in this case at this early stage of litigation.

State and Municipal Taxes

From time to time, the Company has received inquiries from a number of state and municipal taxing agencies with respect to the remittance of taxes. The Company collects or has accrued for taxes that it believes are required to be remitted. The amounts that have been remitted have historically been within the accruals established by the Company.