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Article by DailyStocks_admin    (01-27-09 08:55 AM)

The Daily Magic Formula Stock for 01/27/2009 is j2 Global Communications Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is >100%.

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BUSINESS OVERVIEW

Company Overview

j2 Global Communications, Inc. (“j2 Global”, “our”, “us” or “we”) is a Delaware corporation founded in 1995. By leveraging the power of the Internet, we provide outsourced, value-added messaging and communications services to individuals and businesses throughout the world. We offer fax, voicemail, email and call handling services and bundled suites of certain of these services. We market our services principally under the brand names eFax ® , eFax Corporate ® , eFaxDeveloper TM , Fax.com TM , Send2Fax ® , eFax Broadcast TM , jBlast ® , jConnect ® , Onebox ® , Onebox Receptionist TM , RapidFAX TM , eVoice ® , eVoice Receptionist TM , YAC ® and Electric Mail ® .

We deliver many of our services through our global telephony/Internet Protocol (“IP”) network, which spans more than 3,000 cities in 42 countries across five continents. We have created this network, and continuously seek to expand it, through negotiating with U.S. and foreign telecommunications and co-location providers for telephone numbers (also referred to as Direct Inward Dial numbers or “DIDs”), Internet bandwidth and co-location space for our equipment. We maintain and seek to grow an inventory of telephone numbers to be assigned to new customers. Most of these numbers are “local” (as opposed to toll-free), which enables us to provide our paying subscribers telephone numbers with a geographic identity. In addition to growing our business internally, we have used small acquisitions to grow our customer base, enhance our technology and acquire skilled personnel.

Our core services include fax, voicemail, email and call handling, as well as bundled suites of certain of these services. These are business services that make our customers more efficient, more mobile, more cost-effective and more secure than traditional alternatives. We generate substantially all of our revenues from subscribers that pay activation, subscription and usage fees. Activation and subscription fees are referred to as “fixed” revenues, while usage fees are referred to as “variable” revenues. We also generate revenues from patent licensing fees, advertising and revenue share from our customers’ use of premium rate telephone numbers. Of the nearly 12.0 million telephone numbers deployed as of December 31, 2007, more than one million were serving paying subscribers, with the balance deployed to free subscribers, including those with premium rate telephone numbers. We operate in one reportable segment: value-added messaging and communications services, which provides for the delivery of fax, voicemail and email messages and communications via the telephone and/or Internet networks.

During the past three years, we have derived a substantial portion of our revenues from our DID-based services, including eFax , Onebox , Onebox Receptionist, eVoice and eVoice Receptionist . As a result, we believe that paying DIDs and the revenues associated therewith are an important metric for understanding our business. It has been and continues to be our objective to increase the number of paying DIDs through a variety of distribution channels and marketing arrangements and by enhancing our brand awareness. In addition, we seek to increase revenues through a combination of stimulating use by our customers of usage-based services, introducing new services and instituting appropriate price increases to our fixed monthly subscription and other fees.

We market our services to a broad spectrum of prospective customers including individuals, small to medium-sized businesses and large enterprises and government organizations. Our marketing efforts include enhancing brand awareness; utilizing online advertising through Internet portals, Internet service providers (“ISPs”), search engines and affiliate programs; and selling through both a telesales and direct sales force. Currently, we have seven primary methods by which we acquire paying subscribers: (i) selling direct through our Websites such as www.efax.com, www.j2.com, www.onebox.com, www.evoice.com and www.evoicereceptionist.com; (ii) attracting direct paying individual subscribers through various Internet portals, ISPs, search engines and affiliate programs; (iii) promoting our solutions to small to mid-sized businesses through our www.efaxcorporate.com, www.oneboxreceptionist.com and www.evoicereceptionist.com Websites assisted by in-house sales representatives; (iv) converting a portion of our free base of customers to a paid solution; (v) selling our solutions to large enterprises and governmental organizations through our direct sales force; (vi) attracting international individual and business customers through our international Websites and direct sales force; and (vii) offering additional services to our existing customers. We continuously seek to extend the number of distribution channels through which we acquire paying customers and improve the cost and volume of customers obtained through our current channels.

In addition to growing our business organically, we have used small acquisitions to grow our customer base, enhance our technology and acquire skilled personnel. During 2007 we completed two acquisitions: we purchased YAC Limited, an Ireland-based provider of messaging services primarily providing services in the United Kingdom, and we purchased the RapidFAX business of Easylink Services International Corporation, including its customer contracts, the RapidFAX trademark and other related assets. During 2006, we purchased substantially all of the assets and operations of Send2Fax, LLC, a South Carolina provider of Internet fax services.

Through a combination of internal technology development and acquisitions, we have built a patent portfolio consisting of 56 issued U.S. and foreign patents and numerous pending U.S. and foreign patent applications. We generate licensing revenues from some of these patents. We intend to continue to invest in patents, to aggressively protect our patent assets from unauthorized use and to continue to generate patent licensing revenues from authorized users. For more information on our patents and other intellectual property, please refer to the section entitled “Patents and Proprietary Rights” contained in Item 1 of this Annual Report on Form 10-K.

Our Solutions

We believe businesses and individuals are increasingly outsourcing their communication and messaging needs. Their goal is to reduce or eliminate costs while also enhancing the security of transmissions and user efficiency. Our core eFax solution enables users to receive faxes into their email inboxes. Our core eVoice Receptionist and Onebox Receptionist solutions provide customers a virtual receptionist with various available enhancements. These services represent more efficient and less expensive solutions than many existing alternatives, and provide for increased security, privacy and message handling flexibility (e.g., the ability to store messages electronically and forward them by simply forwarding an email).

We currently offer integrated solutions designed to replace or augment individual and corporate messaging and communication services. We tailor our solutions to satisfy the differing needs of our customers. Our paid services allow a subscriber to select a local telephone number from among approximately 3,000 cities around the world. Toll-free U.S. and Canadian telephone numbers are also available, as are premium rate numbers in various countries in Western Europe. Our services also enable our customers to scale up or down, on a variable cost basis, the amount of messaging they may require to accommodate their changing business needs. In addition, our services enhance the ability of businesses to provide messaging services to their remote workforces, increase their level of information security and control and allocate costs more effectively.

We offer the following services and solutions:

Fax Mail

eFax offers desktop faxing services. Various tiers of service provide increasing levels of features and functionality. Our eFax Free ® service is our limited use, advertising-supported “introductory offering,” which assigns the subscriber a unique randomly selected telephone number that enables the user to receive a limited number of faxes into his or her personal email inbox and to access these messages via a Web-based email interface. In exchange, the subscriber agrees to receive and open email advertising, which we distribute on a consistent basis. In various countries in Western Europe, we also offer premium rate telephone numbers at no charge to our subscribers. Our eFax Plus ® and eFax Pro TM services allow a subscriber to choose either a toll-free telephone number that covers both the U.S. and Canada or a local telephone number in one of approximately 3,000 cities worldwide. This service level enables subscribers to receive inbound fax messages in their email inboxes, access these messages via a full-featured Web-based email interface and send digital documents to any fax number in the world directly from their desktops. This service offering is also localized in many international currencies and languages, including Dutch, French, German, Italian, Polish, Portuguese and Spanish.

eFax Corporate offers capabilities similar to those offered by eFax Plus and eFax Pro , but with added features and tools geared towards enterprises and their users. For example, we provide our corporate customers a Web browser-based account administration interface, which enables them to provision telephone numbers to employees, as needed, without contacting our account representatives. eFax Corporate also offers the option of enhanced security features, which are particularly attractive to law firms and companies in regulated industries such as banking, brokerage and healthcare.

eFaxDeveloper offers high-volume, production fax solutions. Designed for quick and simple integration with application environments, eFaxDeveloper provides inbound and outbound fax services through a secure XML interface. Enhanced features such as bar-code recognition, dynamic retries, and high speed transmission are included and accessible 24/7/365. Robust fax capabilities can easily be implemented through simple Java and .NET SDKs, or through a Universal web post solution. It provides the scaling power of an outside fax service with the flexibility of an internal server without requiring additional equipment, supplies or expertise.

Fax.com, RapidFAX and Send2Fax are alternative desktop faxing solutions that are offered under a variety of pricing plans geared primarily toward the individual or small business user.

eFax Broadcast and jBlast offer cost-effective solutions for high-volume outbound faxing. These services enable users to send important documents simultaneously to hundreds or thousands of recipients anywhere in the world. Customers do not need special computer equipment, expensive fax boards or multiple phone lines. These services also enable customers to accurately monitor the status of their faxes and update their database of “Do Not Fax” names and undeliverable fax numbers.

Unified Communications

jConnect ® offers two levels of service. jConnect Free ® is j2 Global’s limited use, advertising-supported “introductory offering,” which assigns each subscriber a unique randomly selected telephone number that enables the user to receive a limited number of faxes and voicemails into his or her personal email inbox and to access these messages via a Web-based email interface. In exchange, the customer agrees to receive and open email advertising,
4
which we distribute on a consistent basis. jConnect Premier ® allows the subscriber to choose either a toll-free U.S. and Canadian telephone number or a local telephone number in one of approximately 3,000 cities worldwide. This service level enables subscribers to receive inbound fax and voicemail messages in their email inboxes, access these messages via a full-featured Web-based email interface and send digital documents to any fax number in the world directly from their desktops. jConnect Premier subscribers also have the ability to access all messages, including email, from any touch-tone telephone and have access to the jConnect telephone or Web-initiated sixteen-party conference calling solution.

Onebox ® is a full-featured suite of unified communications services, including email, voicemail, fax and “find me/follow me.” Onebox offers three levels of service, all paid, ranging from the basic Onebox Unified Messaging suite of services – which provides the subscriber a unique toll-free number and enables him or her to receive voicemail messages or faxes via email or access them by telephone; to send, receive or reply to faxes or voicemail messages online or by telephone; and to store faxes and email messages online – to the Onebox Receptionist suite of services, which provides the subscriber a virtual PBX in addition to the features available under the other service tiers.

Voice

eVoice ® is an Internet voicemail answering service that delivers a subscriber’s voicemail messages to their email inbox. Like eFax Free and jConnect Free, eVoice Free TM is j2 Global’s advertising-supported “introductory offering.” Each subscriber is given a unique randomly assigned telephone number, which enables them to receive a limited number of voicemail messages via email and to access these messages via a Web-based email interface. With eVoice Plus TM , the subscriber may choose either a toll-free U.S. and Canadian telephone number or a local telephone number in one of approximately 3,000 cities worldwide, from which the subscriber can access his or her voicemail messages via a full-featured Web-based email interface or via telephone and receive text message notifications upon receipt of new messages.

eVoice Receptionist TM and Onebox TM Receptionist are virtual PBX solutions that provide small and medium-sized businesses on-demand voice communications services, featuring a toll-free company telephone number, a professionally-produced auto-attendant and menu tree. With these services, a subscriber can also assign departmental and individual extensions that can connect to any U.S. or Canadian telephone number, including traditional land-line telephones as well as mobile and IP networks. These services also include advanced integrated voicemail for each extension, effectively unifying mobile, office and other separate voicemail services.

YAC ® offers on demand, communication solution services to individuals, small and medium-sized businesses, and large enterprises. These services include a range of call management solutions that provide re-direction, customer greeting, call queuing/call waiting and routing functionality.

Email

Electric Mail ® is an outsourced hosted email service we offer to businesses. From its Electric WebMail TM , E-mmunity TM virus scanning and SpamSMART TM SPAM filtering to professional consulting and needs analysis, Electric Mail develops and delivers customized email and perimeter protection solutions that can be hosted offsite or installed at a customer site with seamless integration into a customer's existing email systems. In November 2006, we launched VaultSMART TM and PolicySMART TM , unique new email archiving service, as part of our Electric Mail service offering. VaultSmart delivers the enterprise-class advantages of a secure, scalable email archive and customizable compliance tools to correspond to a company’s records retention policy.

Global Network and Operations

We have multiple physical Points of Presence (“POPS”) worldwide, a central data center in Los Angeles and a remote disaster recovery facility. We connect our POPS to our central data centers via redundant, and often times diverse, Virtual Private Networks (“VPNs”) using the Internet. Our network is designed to deliver value-added user applications, customer support, billing and a local presence in over 3,000 cities in 42 countries on five continents. Our network covers all major metropolitan areas in the U.S., U.K., Canada and Germany and such other major cities as Hong Kong, London, Madrid, Manila, Mexico City, Milan, Paris, Rome, Singapore, Sydney, Taipei, Tokyo and Zurich. For financial information about geographic areas, see Note 14 of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

We obtain telephone numbers from various local carriers throughout the U.S. and internationally. Our ability to continue to acquire additional quantities of telephone numbers in desired locations in the future will depend on our relationships with our local carriers, our ability to pay market prices for such telephone numbers, a continuing growth in alternate providers and the regulatory environment. Please refer to the sections entitled “Government Regulation” and “Risk Factors” contained in Item 1 and 1A, respectively, of this Annual Report on Form 10-K.

Customer Support Services

Our Customer Service organization provides support to our customers through a combination of online self-help, email messages, interactive chat sessions and telephone calls. Our Internet-based online self-help tools enable customers to resolve simple issues on their own, eliminating the need to speak or write to our customer service representatives. We provide email support seven days per week, 24 hours per day to all subscribers. We use internal personnel and contracted third parties (on a dedicated personnel basis) to answer our customer emails and telephone calls and to participate in interactive chat sessions. Paying subscribers have access to live-operator telephone support 15 hours per day on business days. Dedicated telephone support is provided for Corporate customers 24 hours per day, seven days per week.

Competition

Competition in the outsourced, value-added messaging and communications space is fierce and continues to intensify. We face competition from, among others, fax-to-email providers, broadcast fax companies, traditional fax machine or multi-function printer companies, unified messaging/communications providers, telephone companies, voicemail providers, companies offering PBX systems and outsourced PBX solutions and email providers. We believe that the primary competitive factors determining success in the market for value-added messaging and communications services include pricing, reputation for reliability and security of service, intellectual property ownership, effectiveness of customer support, service and software ease-of-use, service scalability, customer messaging and branding, geographic coverage, scope of services and local language sales, messaging and support.

Our most popular solutions relate to faxing, including the ability to deliver faxes to our customers via email and our outbound desktop faxing capabilities. These solutions compete primarily against traditional fax machine manufacturers, which are generally large and well established companies, providers of fax servers and related software, such as Captaris, Inc., as well as publicly traded and privately-held application service providers, such as Premiere Global Services, Inc. (formerly PTEK Holdings Inc.) and Easylink Services International Corporation (formerly Easylink Services Corporation). Some of these companies may have greater financial and other resources than we do. For more information regarding the competition that we face, please refer to the section entitled “Risk Factors” contained in Item 1A of this Annual Report on Form 10-K.

Patents and Proprietary Rights

We regard the protection of our intellectual property rights as important to our success. We aggressively protect these rights by relying on a combination of patents, trademarks, copyrights, trade dress and trade secret laws and by using the domain name dispute resolution system. We also enter into confidentiality and invention assignment agreements with employees and contractors, and nondisclosure agreements with parties with whom we conduct business in order to limit access to and disclosure of our proprietary information.

We have a portfolio of 56 issued U.S. and foreign patents and have numerous pending U.S. and foreign patent applications, all covering components of our technology and in some cases technologies beyond those that we currently offer. We seek patents for inventions that contribute to our business and technology strategy. We have obtained patent licenses for certain technologies where such licenses are necessary or advantageous. Unless and until patents are issued on the pending applications, no patent rights on those applications can be enforced.

Over the past three years we have generated royalties from licensing certain of our patents and have enforced these patents against companies using our patented technology without our permission. We have pending patent infringement lawsuits against several companies. In each case, we are seeking at least a reasonable royalty for the infringement of the patent(s) in suit, a permanent injunction against continued infringement and attorneys’ fees, interest and costs. Some of these cases have been stayed due to pending re-examination proceedings on certain of our U.S. patents with the U.S. Patent and Trademark Office, and others continue to proceed forward.

We own and use a number of trademarks in connection with our products and services, including eFax and the eFax logo, jConnect, j2 and the j2 logo, eFax Corporate, Onebox and the Onebox logo, Onebox Receptionist, Electric Mail and the Electric Mail logo, eVoice and the eVoice logo, eVoice Receptionist, Send2Fax, YAC, PumaOne, RapidFAX, jBlast, PaperMaster and Email-By-Phone, among others. Many of these trademarks are registered in the U.S. and other countries, and numerous trademark applications are pending in the U.S. and several non-U.S. jurisdictions. We hold numerous Internet domain names, including “efax.com”, “jconnect.com”, “fax.com”, “j2.com”, “j2global.com”, “onebox.com”, “electricmail.com”, “efaxcorporate.com” and “evoice.com”, among others. We have in place an active program to continue securing “eFax” and other domain names in non-U.S. jurisdictions. We have filed to protect our rights to the “eFax” and other names in certain new top-level domains such as “.biz”, “.info” and “.us” that have become operational more recently.

Like other technology-based businesses, we face the risk that we will be unable to protect our intellectual property and other proprietary rights, and the risk that we will be found to have infringed the proprietary rights of others. For more information regarding these risks, please refer to the section entitled “Risk Factors” contained in Item 1A of this Annual Report on Form 10-K.

Government Regulation

As our services relate principally to the Internet and telecommunications, we are subject to a number of international, federal, state and local laws and regulations addressing issues such as privacy, data protection, freedom of expression, indecency, obscenity, defamation, libel, pricing, online products and services, taxation, content, advertising, copyrights and other intellectual property, information security and technological convergence. The nature of any related new laws and regulations and the manner in which existing and new laws and regulations may be interpreted and enforced cannot be predicted with certainty.

We provide our services through data transmissions over public telephone lines and other facilities provided by telecommunications companies (“carriers”). These transmissions and carriers are subject to regulation by the U.S. Federal Communications Commission (“FCC”), state public utility commissions and foreign governmental authorities. However, as an Internet messaging services provider, we are generally not subject to direct regulation by any governmental agency in the U.S., other than regulations applicable to businesses generally. This is not the case in some international locations. Nevertheless, as Internet services and telecommunications services converge or the services we offer expand, we may face increased regulation of our business. For example, the FCC has initiated several proceedings to examine regulations regarding the delivery of broadband services in the U.S., the outcomes of which may affect the regulatory requirements for the transmission of services such as those we provide. The FCC is also reviewing the system for inter-carrier compensation that may affect the prices we pay for telephone number acquisition, transmission and switching services, while continued regulation of competition in the telecommunications industry may have an indirect effect on our services.

Continued regulation arising from telephone number administration may also make it more difficult for us to obtain necessary numbering resources. For example, in the U.S., the FCC allows states to petition for authority to adopt specialized area codes, including area codes that would include specific technologies like those we offer. We have sought reconsideration from the FCC of this decision, and the outcome of this proceeding could affect our ability to offer services in competition with incumbents. While our petition has been pending, California and Connecticut have requested authority to adopt special area codes that would include unified messaging. The FCC conditionally granted Connecticut’s petition in 2003, but the state has not yet adopted a specialized code. The FCC granted California’s petition with fewer conditions. We opposed California’s request for this authority and are now participating in the reconsideration stage of the FCC proceeding. Whether other states apply for and implement specialized area codes could affect our ability to compete in those states. Similar regulation has occurred internationally and may continue to be enacted in additional locations in the future.

The FCC is also examining inter-carrier compensation for calls to ISPs, which could affect ISPs’ costs and consequently substantially increase the costs of communicating via the Internet. This increase in costs could slow the growth of Internet use, decrease the demand for our services and increase our costs. However, Internet users are rapidly migrating to other methods of Internet access, such as cable broadband, thereby mitigating the concern that additional costs applied to ISPs will have a significant impact on our services.

In addition, Congress and the FCC have initiated a review of legislation and regulations related to the “Universal Service Fund” (“USF”), which subsidizes the U.S. telecommunications system. Congress and the FCC are considering altering the formula by which entities contribute to the USF and could impose a flat fee per telephone line to support the USF. If adopted without an exemption for our services, this change would alter or eliminate the provision of our non-paid (free advertising-supported) services, and would cause us to raise the price of our paid service. Other changes to the USF may also increase our costs and impact our operations.

The FCC is authorized to take enforcement action against companies that send so-called “junk faxes” and has held numerous fax broadcasters liable for violating the Telephone Consumer Protection Act of 1991 (“TCPA”), the Junk Fax Prevention Act of 2005 (“Junk Fax Act”) and related FCC rules. Individuals may also, under certain circumstances, have a private cause of action for violations and recover monetary damages for such violations. Entities that merely transmit facsimile messages on behalf of others may be found liable if they have a high degree of involvement in transmitting junk faxes or have actual notice of illegal junk fax transmissions and failed to take steps to prevent such transmissions. We take significant steps to ensure that our services are not used to transmit unsolicited faxes on a large scale and we do not believe that we have a high degree of involvement or notice of the use of our service to broadcast junk faxes. However, because fax transmitters do not enjoy an absolute exemption from liability under the rules, we could face FCC inquiry and enforcement, civil litigation, or private causes of action, which could result in financial penalties that could cause material adverse effects to our operations. We are currently involved in litigation involving alleged violations of the TCPA with Protus IP Solutions, Inc. For more information about this lawsuit, see Item 3 of this Annual Report on Form 10-K entitled “Legal Proceedings.”

E.U. Member States have adopted strong protections governing the use of personal data about individuals. For example, the E.U. Privacy Directive requires Member States to adopt legislation that prohibits the transfer of personal data from an E.U. country to a non-E.U. country that lacks “adequate” data protection laws. Because the E.U. has determined that the U.S. lacks adequate data protection laws, persons failing to follow certain alternative procedures risk the interruption of data flows between E.U. countries and the U.S. E.U. Member States have also adopted legislation restricting sending unsolicited communications to individuals via automatic calling machines, fax and email. Generally, companies must obtain “prior explicit” (i.e., opt-in) consent before they can contact users via this type of marketing. E.U. Member States have also adopted consumer protection legislation with respect to electronic commerce. Other non-U.S. legislation dealing with privacy, data protection, marketing and consumer protection could also have a direct impact on business conducted over the Internet.

Future developments in laws that govern online activities might inhibit the growth of the Internet, impose taxes, mandate costly technical requirements, create uncertainty in the market or otherwise have an adverse effect on the Internet. There is also substantial uncertainty as to the applicability to the Internet of laws governing issues such as property ownership, fraud, tort, copyrights and other intellectual property issues, taxation, defamation, obscenity and privacy, which did not contemplate the existence of the Internet. These developments could, in turn, have a material adverse effect on our business, prospects, financial condition and results of operations. Also uncertain is the impact of foreign legal developments regarding jurisdiction and choice of law for cases involving Internet-based activities.

Seasonality and Backlog

Our subscriber revenues are impacted by the number of effective business days in a given period. For example, we believe that we experience fewer subscriber sign-ups and less usage-based revenues during the fourth-quarter holiday season.

We experience no material backlog in sales orders or the provisioning of customer orders.

Research and Development

The markets for our services are evolving rapidly, requiring ongoing expenditures for research and development and timely introduction of new services and service enhancements. Our future success will depend, in part, on our ability to enhance our current services, to respond effectively to technological changes, to sell additional services to our existing customer base and to introduce new services and technologies that address the increasingly sophisticated needs of our customers.

We devote significant resources to the development of enhancements to our existing services and to introduce new services. Our research, development and engineering expenditures were approximately $11.8 million, $8.8 million and $7.1 million for the fiscal years ended December 31, 2007, 2006 and 2005, respectively. For more information regarding the technological risks that we face, please refer to the section entitled “Risk Factors” contained in Item 1A of this Annual Report on Form 10-K.

Employees

As of December 31, 2007, we employed a total of 410 employees, the majority of whom are in the U.S.

Our future success will depend, in part, on our ability to continue to attract, retain and motivate highly qualified technical, marketing and management personnel. Our employees are not represented by any collective bargaining unit or agreement. We have never experienced a work stoppage. We believe our relationship with our employees is good.

Web Availability of Reports

Our corporate information Website is www.j2global.com. The information on our Website is not part of this Annual Report on Form 10-K. However, on the Investor Relations portion of this Website the public can access free of charge our annual, quarterly and current reports, changes in the stock ownership of our directors and executive officers and other documents filed with the Securities and Exchange Commission (“SEC”) as soon as reasonably practicable after the filing dates. Further, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

CEO BACKGROUND

Nominees

The names of the nominees, their ages at the record date and certain other information about them are set forth below:

Name

Age

Principal Occupation

Director Since
Richard S. Ressler (3)

49

President of Orchard Capital Corporation

1997
Douglas Y. Bech (2)(5)

62

Chairman and CEO of Raintree Resorts International, LLC

2000
Robert J. Cresci (1)(2)(3)

64

Managing Director of Pecks Management Partners Ltd.

1998
W. Brian Kretzmer (1)(5)

54

Private Investor

2007
John F. Rieley (4)

64

Entrepreneur

1995
Stephen Ross (1)(4)

59

Senior Vice President – Recreational Enterprises of Warner Bros Entertainment, Inc.

2007
Michael P. Schulhof (2)(3)(5)

65

Private Investor

1997

MANAGEMENT DISCUSSION FROM LATEST 10K

In addition to historical information, the following discussion and analysis of management contains forward-looking statements. These forward-looking statements involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed below, the results of any acquisition we may complete and the factors discussed in Item 1A in this Annual Report on Form 10-K entitled “Risk Factors”. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. j2 Global undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this document as well as in other documents we file from time to time with the SEC, including the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K filed or to be filed by us in 2008.

Overview

j2 Global Communications, Inc. (“j2 Global”, “our”, “us” or “we”) is a Delaware corporation founded in 1995. By leveraging the power of the Internet, we provide outsourced, value-added messaging and communications services to individuals and businesses throughout the world. We offer fax, voicemail, email and call handling services and bundled suites of certain of these services. We market our services principally under the brand names eFax ® , eFax Corporate ® , eFaxDeveloper TM , Fax.com TM , Send2Fax ® , eFax Broadcast TM , jBlast ® , jConnect ® , Onebox ® , Onebox Receptionist TM , RapidFAX TM , eVoice ® , eVoice Receptionist TM , YAC ® and Electric Mail ® .

We deliver many of our services through our global telephony/Internet Protocol (“IP”) network, which spans more than 3,000 cities in 42 countries across five continents. We have created this network, and continuously seek to expand it, through negotiating with U.S. and foreign telecommunications and co-location providers for telephone numbers (also referred to as Direct Inward Dial numbers or “DIDs”), Internet bandwidth and co-location space for our equipment. We maintain and seek to grow an inventory of telephone numbers to be assigned to new customers. Most of these numbers are “local” (as opposed to toll-free), which enables us to provide our paying subscribers telephone numbers with a geographic identity. In addition to growing our business internally, we have used small acquisitions to grow our customer base, enhance our technology and acquire skilled personnel.

Our core services include fax, voicemail, email and call handling, as well as bundled suites of certain of these services. These are business services that make our customers more efficient, more mobile, more cost-effective and more secure than traditional alternatives. We generate substantially all of our revenue from subscribers that pay activation, subscription and usage fees. Activation and subscription fees are referred to as “fixed” revenues, while usage fees are referred to as “variable” revenues. We also generate revenues from patent licensing fees, advertising and revenue share from our customers’ use of premium rate telephone numbers. Of the nearly 12.0 million telephone numbers deployed as of December 31, 2007, more than one million were serving paying subscribers, with the balance deployed to free subscribers, including those with premium rate telephone numbers. We operate in one reportable segment: value-added messaging and communications services, which provides for the delivery of fax, voice and email messages and communications via the telephone and/or Internet networks.

During the past three years, we have derived a substantial portion of our revenues from our DID-based services, including eFax, Onebox, Onebox Receptionist, eVoice and eVoice Receptionist . As a result, we believe that paying DIDs and the revenues associated therewith are an important metric for understanding our business. It has been and continues to be our objective to increase the number of paying DIDs through a variety of distribution channels and marketing arrangements and by enhancing our brand awareness. In addition, we seek to increase revenues through a combination of stimulating use by our customers of usage-based services, introducing new services and instituting appropriate price increases to our fixed monthly subscription and other fees.

For the past three years, 90% or more of our total revenues have been produced by our DID-based services. DID-based revenues have increased to $202 million from $134 million for the three-year period ending December 31, 2005 to December 31, 2007. The primary reason for this increase was a 92% increase in the number of paid DIDs over this period. We expect that DID-based revenues will continue to be a dominant driver of total revenues.

Critical Accounting Policies and Estimates

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue . Our revenue consists substantially of monthly recurring and usage-based subscription fees. In accordance with GAAP and SEC issued Staff Accounting Bulletin No. 104, Revenue Recognition , which clarifies certain existing accounting principles for the timing of revenue recognition and classification of revenues in the financial statements, we defer the portions of monthly recurring and usage-based fees collected in advance and recognize them in the period earned. Additionally, we defer and recognize subscriber activation fees and related direct incremental costs over a subscriber’s estimated useful life.

Investments. We account for investments in equity securities in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”) and Emerging Issues Task Force Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-1”). SFAS 115 requires that certain debt and equity securities be classified into one of three categories; held-to-maturity, available-for-sale or trading securities. We determine the appropriate classification of our investments at the time of acquisition and reevaluate such determination at each balance sheet date. Held-to-maturity securities are those investments in which we have the ability and intent to hold until maturity. Held-to-maturity securities are recorded at amortized cost. Available-for-sale securities are recorded at fair value, with unrealized holdings gains or losses recorded as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity until realized. Trading securities are carried at fair value, with unrealized holding gains and losses included in investment income. None of our investments are held for trading purposes. All securities are accounted for on a specific identification basis. In accordance with EITF 03-1, we assess whether an other-than-temporary impairment loss on an investment has occurred due to declines in fair value or other market conditions.

Stock-Based Compensation Expense. Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”). Accordingly, we measure stock-based compensation expense at the grant date, based on the fair value of the award, and recognize the expense over the employee’s requisite service period using the straight-line method. The measurement of stock-based compensation expense is based on several criteria including, but not limited to, the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest rate and award cancellation rate. These inputs are subjective and are determined using management’s judgment. If differences arise between the assumptions used in determining stock-based compensation expense and the actual factors, which become known over time, we may change the input factors used in determining future stock-based compensation expense. Any such changes could materially impact our results of operations in the period in which the changes are made and in periods thereafter.

In November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (“FSP 123R-3”). We elected to adopt the alternative transition method for calculating the tax effects of share-based compensation pursuant to FSP 123R-3. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool related to the effects of employee stock-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123(R).

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Topic 14: Share-Based Payment (“SAB 107”). SAB 107 provides interpretive guidance regarding the application of SFAS 123(R). The SEC staff believes that SAB 107 will assist registrants in their initial implementation of SFAS 123(R) and enhance the information received by investors and other users of financial statements. The SEC staff recognizes that there is a range of conduct that a reasonable issuer might use to make estimates and valuations and otherwise implement SFAS 123(R). Thus, throughout SAB 107 the use of the terms “reasonable” and “reasonably” is not meant to imply a single conclusion or methodology, but to encompass the full range of potential conduct, conclusions or methodologies upon which a registrant may reasonably base its valuation decisions. In accordance with SAB 107, we have considered the guidance regarding the application of SFAS 123(R) and believe that we have adopted a reasonable methodology for measuring stock-based compensation expense as described above.

In December 2007, the SEC issued Staff Accounting Bulletin No. 110, Certain Assumptions Used in Valuation Methods – Expected Term (“SAB 110”). According to SAB 110, under certain circumstances the SEC staff will continue to accept beyond December 31, 2007 the use of the simplified method in developing an estimate of expected term of share options that possess certain characteristics in accordance with SFAS 123(R) beyond December 31, 2007. We will adopt SAB 110 effective January 1, 2008 and continue to use the simplified method in developing the expected term used for our valuation of stock-based compensation.

Long-lived and Intangible Assets . We account for long-lived assets in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets.

In accordance with SFAS 144, we assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could individually or in combination trigger an impairment review include the following:





significant underperformance relative to expected historical or projected future operating results;





significant changes in the manner of our use of the acquired assets or the strategy for our overall business;





significant negative industry or economic trends;





significant decline in our stock price for a sustained period; and





our market capitalization relative to net book value.

If we determined that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we would record an impairment equal to the excess of the carrying amount of the asset over its estimated fair value.

Consistent with SFAS 144, we have assessed whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. We concluded that there were no such events or changes in circumstances which would trigger an impairment review during 2007, 2006 or 2005.

Goodwill and Purchased Intangible Assets . We evaluate our goodwill and intangible assets for impairment pursuant to SFAS No. 142, Goodwill and Other Intangible Assets , which provides that goodwill and other intangible assets with indefinite lives are not amortized but tested for impairment annually or more frequently if circumstances indicate potential impairment. The impairment test is comprised of two steps: (1) a reporting unit’s fair value is compared to its carrying value; if the fair value is less than its carrying value, impairment is indicated; and (2) if impairment is indicated in the first step, it is measured by comparing the implied fair value of goodwill and intangible assets to their carrying value at the reporting unit level. We completed the required impairment review at the end of 2007, 2006 and 2005 and noted no impairment. Consequently, no impairment charges were recorded.

Income Taxes . We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the net deferred tax assets will not be realized. Our valuation allowance is reviewed quarterly based upon the facts and circumstances known at the time. In assessing this valuation allowance, we review historical and future expected operating results and other factors to determine whether it is more likely than not that deferred tax assets are realizable. We had approximately $7.8 million and $8.0 million in net deferred tax assets at December 31, 2007 and 2006, respectively. Based on our review, we concluded that these net deferred tax assets do not require valuation allowances as of December 31, 2007 and 2006. The net deferred tax assets should be realized through future operating results and the reversal of temporary differences.

Income Tax Contingencies . We calculate current and deferred tax provisions based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the following year. Adjustments based on filed returns are recorded when identified in the subsequent year.

As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. Our estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially to reverse previously recorded tax liabilities. In addition, we are subject to periodic audits by U.S. and foreign taxing authorities. We are currently under audit by the Internal Revenue Service for the 2005 tax year. While it is possible that the 2005 tax audit may conclude in the next 12 months and that the unrecognized tax benefits we have recorded in relation to this audit may change compared to the liabilities recorded for the period, it is not possible to estimate the effect, if any, of any amount of such change during the next 12 months to previously recorded uncertain tax positions. We adequately establish reserves for these tax contingencies when we believe that certain tax positions might be challenged despite our belief that our tax positions are fully supportable. We adjust these reserves when changing events and circumstances arise.

Effective January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 provides guidance on the minimum threshold that an uncertain tax benefit is required to meet before it can be recognized in the financial statements and applies to all tax positions taken by a company. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit will be recorded. Uncertain tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold. We recognized accrued interest and penalties related to unrecognized tax benefits in income tax expense on our consolidated statement of operations. At the adoption date of January 1, 2007, we had $25.0 million in liabilities for uncertain tax position, including $6.1 million recognized under FAS 5 and carried forward from prior years and an additional charge of $18.9 million to retained earnings (see Note 8 of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K).

Non-Income Tax Contingencies . In accordance with the provisions of SFAS No. 5, Accounting for Contingencies , we make judgments regarding the future outcome of contingent events and record loss contingency amounts that are probable and reasonably estimated based upon available information. The amounts recorded may differ from the actual income or expense that occurs when the uncertainty is resolved. The estimates that we make in accounting for contingencies and the gains and losses that we record upon the ultimate resolution of these uncertainties could have a significant effect on the liabilities and expenses in our financial statements. As of December 31, 2007, we had $4.0 million of non-income tax related contingent liabilities.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements. SFAS 157 applies to all accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. For fiscal years beginning after November 15, 2007, companies will be required to implement SFAS 157 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. The FASB did, however, provide a one-year deferral for the implementation of Statement 157 for other nonfinancial assets and liabilities. An exposure draft will be issued for comment in the near future on this partial deferral. Accordingly, we will adopt SFAS 157 for financial assets and liabilities commencing in the first quarter of 2008. We are currently assessing the potential impact of SFAS 157 on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities - Including an Amendment of FASB Statement No. 115 (“SFAS 159”) . SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses, arising subsequent to adoption are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and, accordingly, we will adopt SFAS 159 in the first quarter of 2008. We are currently assessing the impact of SFAS 159 on our consolidated financial statements .

In December 2007, the SEC issued SAB No. 110, Certain Assumptions Used in Valuation Methods – Expected Term (“SAB 110”). According to SAB 110, under certain circumstances the SEC staff will continue to accept beyond December 31, 2007 the use of the simplified method in developing an estimate of expected term of share options that possess certain characteristics in accordance with SFAS 123(R) beyond December 31, 2007. We will adopt SAB 110 effective January 1, 2008 and continue to use the simplified method in developing the expected term used for our valuation of stock-based compensation.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how the acquiror of a business (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and measures in its financial statements the goodwill acquired in the business combination or a gain from a bargain purchase; and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008 and, accordingly, we will apply SFAS 141(R) for acquisitions effected subsequent to the date of adoption.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an Amendment of Accounting Research Bulletin No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective beginning January 1, 2009. We are currently assessing the potential impact of SFAS 160 on our consolidated financial statements.

Cost of Revenues

Cost of revenues is primarily comprised of costs associated with data and voice transmission, telephone numbers, network operations, customer service, online processing fees and equipment depreciation. Cost of revenues was $44.0 million, or 20% of revenues, $36.7 million, or 20% of revenues, and $29.8 million, or 21% of revenues, for the years ended December 31, 2007, 2006 and 2005, respectively. Cost of revenues as a percentage of revenues was consistent from 2006 to 2007 due to enhanced utilization of network capacity offset by costs associated with network expansion. Cost of revenues as a percentage of revenues decreased from 2005 to 2006 primarily due to enhanced utilization of network capacity.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Forward-Looking Information

In addition to historical information, the foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. These forward-looking statements involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed below, the risk factors discussed in Part II, Item 1A - “Risk Factors” of this Quarterly Report on Form 10-Q and in Part I, Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007 (together, the “Risk Factors”), and the factors discussed in the section in this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures About Market Risk”. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the Risk Factors and the risk factors set forth in other documents we file from time to time with the SEC.

Some factors that could cause actual results to differ materially from those anticipated in these forward-looking statements include, but are not limited to, our ability to:

o Sustain growth or profitability, particularly in light of an uncertain U.S. or worldwide economy and the related impact on customer acquisitions, cancelations and credit and debit card payment declines;

o Continue to maintain, expand and retain our customer base;

o Compete with other similar providers with regard to price, service and functionality;

o Cost-effectively procure and retain large quantities of telephone numbers in desired locations in the United States and abroad;

o Achieve business and financial objectives in light of burdensome telecommunications or internet regulation or higher-than-expected tax rates or exposure to additional income tax liabilities;

o Successfully manage our cost structure, including but not limited to our telecommunication- and personnel-related expenses;

o Successfully adapt to technological changes in the messaging, communications and document management industries;

o Successfully protect our intellectual property and avoid infringing upon the proprietary rights of others;

o Adequately manage growth in terms of managerial and operational resources;

o Maintain and upgrade our systems and infrastructure to deliver acceptable levels of service quality and security of customer data and messages;

o Not incur unanticipated tax liabilities and accurately estimate the assumptions underlying our effective worldwide tax rate;

o Introduce new services and achieve acceptable levels of returns-on-investment for those new services;
and

o Recruit and retain key personnel.

In addition, our financial results could be materially impacted by risks associated with new accounting pronouncements and by currency fluctuations.

Recent Accounting Pronouncements

See Note 3: Recent Accounting Pronouncements of our accompanying consolidated financial statements for a full description of recent accounting pronouncements and our expectations of their impact on our consolidated financial position and results of operations.

Results of Operations for the Three and Nine Months Ended September 30, 2008

Revenues

Subscriber Revenues. Subscriber revenues consist of both a fixed monthly or annual recurring subscription component and a variable component which is driven by the actual usage of our service offerings. Over the past three years the fixed portion of our subscriber revenues has contributed an increasing percentage to our subscriber revenues - 71%, 72% and 76% for 2005, 2006 and 2007, respectively. Subscriber revenues were $60.5 million and $54.0 million for the three months ended September 30, 2008 and 2007, respectively. For the nine month ended September 30, 2008 and 2007, subscriber revenues were $177.2 million and $156.9 million, respectively. This increase in subscriber revenues was due to an increase in our number of paying subscribers partially offset by decreased average monthly revenue per subscriber. The increase in our base of paying subscribers primarily resulted from new subscribers coming directly to our websites, free-to-paid subscriber upgrades, small to mid-sized corporate and enterprise sales, direct large enterprise and government sales, international sales, cross-selling of additional services to our existing customers and acquisitions of businesses, in each case net of cancellations.

Other Revenues . Other revenues were $1.1 million and $1.7 million for the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, other revenues were $3.7 million and $6.9 million, respectively. Other revenues consist primarily of patent licensing revenues and advertising revenue generated by delivering email messages to our free customers on behalf of advertisers. The decrease in other revenues for the three months ended September 30, 2008 resulted primarily from lower advertising revenue. The decrease in other revenues for the nine months ended September 30, 2008 resulted primarily from a $2.0 million paid up patent license fee earned during the first quarter of 2007, as well as lower advertising revenue in 2008.

Cost of Revenues

Cost of revenues is primarily comprised of costs associated with data and voice transmission, telephone numbers, network operations, customer service, on-line processing fees and equipment depreciation. Cost of revenues was $11.7 million, or approximately 19.0% of total revenues, and $11.2 million, or approximately 20.0% of total revenues, for the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, cost of revenues was $35.0 million, or approximately 19.4% of total revenues, and $32.4 million, or approximately 19.8% of total revenues, respectively. The increase in cost of revenues for the three and nine months ended September 30, 2008 was primarily due to a larger subscriber base and associated service usage.

Income Taxes

Our effective tax rate is based on pre-tax income, statutory tax rates, tax regulations and different tax rates in the various jurisdictions in which we operate. Income tax expense amounted to approximately $8.1 million and $5.8 million for the three months ended September 30, 2008 and 2007, respectively. Income tax expense for the nine months ended September 30, 2008 and 2007 was $23.0 million and $20.4 million, respectively. Our effective tax rate was approximately 31% and 28% for the nine months ended September 30 2008 and 2007, respectively. The increase is primarily due to decreases in tax-exempt interest income and the expiration of the federal research and development tax credit as of December 31, 2007. As of October 3, 2008, the federal research and development tax credit has been reinstated. Accordingly, in the fourth quarter of 2008 we will reflect the estimated credit amount earned for the full year of 2008 in our tax provision.

Liquidity and Capital Resources

Cash and Cash Equivalents and Investments

At September 30, 2008, we had cash and investments of $151.8 million compared to cash and investments of $229.8 million at December 31, 2007. The decrease in cash and investments resulted primarily from business acquisitions and repurchases of common stock partially offset by cash provided by operations. At September 30, 2008, cash and investments consisted of cash and cash equivalents of $140.7 million, short-term investments of $29,000 and long-term investments of $11.1 million. We typically invest in readily marketable corporate debt securities, debt instruments of the U.S. government and its agencies, certificates of deposits and auction rate debt. We classify our investments primarily as held-to-maturity and report these investments as long-term based upon maturity dates. Short-term investments mature within one year of the date of the financial statements and long-term investments mature after one year from the date of the financial statements. We retain a substantial portion of our cash in foreign jurisdictions for future reinvestment.

We currently anticipate that our existing cash and cash equivalents and short-term investment balances and cash generated from operations will be sufficient to meet our anticipated needs for working capital and capital expenditures, and investment requirements for at least the next 12 months.

Cash Flows

Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents and short-term investments. Net cash provided by operating activities was $66.9 million and $68.4 million for the nine months ended September 30, 2008 and 2007, respectively. Our operating cash flows resulted from cash received from our subscribers. Our cash and cash equivalents and short-term investments were $140.8 million and $229.8 million at September 30, 2008 and 2007, respectively.

Net cash provided by investing activities was approximately $27.1 million and net cash used in investing activities was approximately $28.3 million for the nine months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008, net cash provided by investing activities was primarily attributable to sales of investments, partially offset by acquisition of businesses. For the nine months ended September 30, 2007, net cash used in investing activities was primarily attributable to purchases of investments, purchases of intangible assets and purchases of property and equipment, partially offset by sales of investments.

Net cash used in financing activities was approximately $106.2 million and $5.0 million for the nine months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, net cash used in financing activities was primarily attributable to the repurchase of our common stock, partially offset by proceeds from the exercise of stock options and excess tax benefit from share-based compensation.

Stock Repurchase Program

In February 2008, j2 Global’s Board of Directors approved a common stock repurchase program (the “Repurchase Program”) authorizing the repurchase of up to five million shares of our common stock through the end of December 2010. The Repurchase Program was completed on July 9, 2008; five million shares at an aggregated cost of approximately $108.0 million (including commission fees of approximately $100,000) were repurchased.


CONF CALL

Scott Turicchi

Thank you. Good afternoon and welcome to our investor conference call for Q3 2008. As the operator just mentioned, I'm Scott Turicchi, President of j2 Global and with me today is Hemi Zucker, Chief Executive Officer, and Kathy Griggs, our Chief Financial Officer.

We'll be discussing our Q3 financial results as well as providing an update on operations. We will use the IR presentation as a roadmap for today’s call. A copy of that presentation is available at our web site. In addition, if you have not received a copy of the press release you may access it through the corporate web site at j2global.com/press. You can also access the webcast from this site. In addition, you will also find in PDF file format a copy of the presentation and the metrics, which are available for download and viewing.

After completing the formal presentation, we will be conducting a Question and Answer session. The operator will instruct you at that time regarding the procedures for asking a question. However, at any time you may e-mail questions to us at investor@j2global.com.

Before we begin the prepared remarks, allow me to read the Safe Harbor language. As you know this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include but are not limited to the risk factors that we have disclosed in our various SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings, as well as additional risk factors that we have included as part of the slideshow for the webcast. We refer you to discussions in those documents regarding the Safe Harbor language as well as forward-looking statements.

Turning now to the quarter. We're very pleased with the operational results for Q3, especially in light of the deteriorating economic conditions that occurred during the course of the quarter. Our focus this year, as you know, has been and continues to be, on the improvement of our already excellent margin structure as well as the deployment of our cash balances and free cash flow into higher yielding assets. Consistent with this philosophy, we have remained disciplined on our subscriber acquisition and other operational costs, and focused on improving the overall cost structure of j2.

I'll now turn the presentation over to Kathy, who will give you further detail and further coloring. Kathy.

Kathy Griggs

Thank you, Scott. Good afternoon, ladies and gentlemen. I'd like you to please refer to Slide 9 in the presentation for a recap of our Q3 GAAP-based results. We were able to maintain a subscription revenue growth rate similar to last quarter's, despite the current economy. Our Q3 subscription revenue grew 12% or $6.5 million. Total international revenues grew 18.3% and our domestic revenue grew 9.2%. Total Q3 revenues were $61.6 million, compared to $55.7 million in Q3 of 2007, for an increase of approximately 11%.

Our revenue would have been higher but we were impacted by approximately 200K from the rally in the U.S. dollar versus our foreign currency markets. The weak economy did have a negative impact on our advertising revenue and we expect this trend to continue into Q4. Advertising revenue, which is approximately 7/10ths of 1% of our total revenue is a component of our non-subscription revenue and is primarily display and email based.

In Q3 we added organically over 36,100 DIDs. Similar to Q1 and Q2, our voice brands and corporate fax segments continued to perform the strongest. In fact, compared to a year ago, our voice DIDs had increased by almost 200%. In total, Q3 ending paid DIDs are almost $1.2 million an 18% increase from a year ago. The overall cancel rate remains the same as Q3 2007 at 3%, but somewhat elevated relative to the cancel rate experience before the weakening in the credit sensitive sector in mid-2007.

The recent economic turmoil had a minimal impact on our fax usage. Usage trends in Q3 2008 were consistent with prior quarters. Slide 20 provides you with a summary of usage for credit sensitive and non-credit sensitive industries. We continue to see depressed levels of usage for our credit sensitive customers, but consistent usage since Q4 2007. Our non-credit sensitive customers continue to see modest increases in usage.

Overall, variable revenue continues to remain stable, as the low 20% range of our total DIDs-based revenues. We continue to strive to improve our processes and increase our operating efficiencies. Our success in these endeavors are reflected in our ability to steadily improve both our growth and operating margins. Compared to a year ago, GAAP gross margins have improved by one percentage point, from 80% to 81% in Q3. GAAP operating margins have improved even more. A 2.7 percentage point increase to 40.9%. Overall, expenses as a percent of revenue declined across the board. Q3 GAAP selling expense was 17.5% of revenues. R&D was 4.9% of revenues and G&A was 17.7% of revenues.

The improvement in our margins reflects our continued commitment to smart cost management, which we believe is essential to the continued success of j2. Our diluted GAAP EPS was $0.42 a share, which is an improvement of $0.05 or 14% from the prior quarter. One penny is attributable to a favorable returned provision upon filing our 2007 federal tax return, and approximately a penny more was added by the strengthening of the U.S. dollar which contributed to incremental other income.

When we compare diluted GAAP EPS to Q3 of 2007, our GAAP EPS improved to $0.42 from $0.35, for a 20% increase. In Q4, the lowering of the interest rates by the Federal Reserve will put further pressure on our interest income. Given the economic uncertainty we have kept our cash in investment vehicles that are liquid and safe.

For those folks on our non-GAAP EPS, you will need to adjust for (ph 00:09:33) 123(R) or 2 million pre-tax or 1.4 million after tax. The after-tax impact of 123(R) is approximately $0.03 per diluted share. Excluding 123(R) expense, our non-GAAP EPS was $0.45 a share. Our 10-Q and our press release exhibits will provide additional details by expense category.

Moving on to the balance sheet, in Q3 we provided our investors and shareholders with a return on equity of 32.7% annualized. Free cash flow for the quarter was 12.8 million. This was impacted by higher estimated tax payments due to higher earnings, significantly lower stock compensation deductions from the exercise of stock options, and the elimination of the R&D tax credit which Congress only recently restored as part of the TARP Program.

In addition, we had a reduction in payables of approximately $4 million from Q2. For the nine months ended 9/30/2008 we have had record free cash flows of $63 million. Finally, during the third quarter we completed our stock buy-back program, deploying approximately $11 million to acquire the final 465,000 shares of our 5 million share buy-back. We ended the quarter with $152 million of funds available and no debt.

Now, I'd like to turn the call over to Hemi, who will provide you with an operational update.

Hemi Zucker

Thank you very much Kathy and good afternoon everybody. Here at j2 we are doing well in a weak economy. The company has always been a prudent company that is managing our actions in a most prudent financial way. I would like to tell you that we didn't start panicking last quarter, a quarter ago. We started to manage it as a bad economy already in Q3, Q4 '07 and as you can see, the results are showing off. Let me take you through some of the major expenses when we did a good job. On the marketing stand, we are continuing to manage in our ROI basis. CPA corporate position is managed by each brand. We have integrated also lifetime value of every customer and venues where they are coming from and by brand. This yield efficiency on our marketing expense.

Then let's go on to our network. Our network is spread over 40/50 locations around the world and we are able to move phone numbers or DIDs and other resources from one place to the other maintaining higher reliability and reduced costs. This also is something that you can see in our gross margins. On the income side, we started the year with 400 people, we acquired Phone People which is our largest acquisition. They added approximately 20 people and we are now around the same employee base as we were and we have (inaudible 00:12:37) alongside improvement in our talent pool and will continue to employ our talent pool for next year.

Our contracts with our major vendors, we took the opportunity to renegotiate some of them. As a matter of fact being a financially stable company they are happy to co-operate with us knowing that we are going to be there in the long run.

One of the upsides of a bad economy are M&A opportunities. We have currently two M&A opportunities on advance due diligence. One of them is a combination of voice and fax company. The CO, the management spent the last week here in our Hollywood offices. The other one is an (inaudible 00:13:24) company where our division CFO spent time in their offices last week. Both seem positive and we hope to close them sometime this quarter and report accordingly.

Additional M&A opportunities are on and off. We have an international opportunity, we have local opportunities and believe that all these companies at the end will end up closing a deal with us if we go out over the years expert in the field and we can offer them a smooth transaction with very high likelihood of closing and getting cash in their hands. As you all know, we have $2 million cash in (inaudible 00:14:08) and we are planning to use it for further M&As.

We are focused on the market. We are selling services that are defined as cost saving (inaudible 00:14:21) and we continue to emphasize it to our customers and we are focusing on our core competencies, which is outsourcing fax, outsourcing voice, and outsourcing email.

Let's go to the next page 12. Talk a little bit about our fax services. I know that many of you are focused and interested in our corporate business. Our corporate business had a record month. We signed seven deals larger than thousand DIDs each. And additional smaller deals increased their counter-bid to come up to thousand DIDs. So, now we have additional nine deals of thousand each. This brings us to a record of nine deals, I think the last one or the best one we ever had was six. And we have an additional 66 active deals in our pipeline. Those are both local and international across multiple industries. We keep on seeing how we are replacing old fax infrastructure in a very successful way.

On the eFax field, which is our (inaudible 00:15:36) product, it is sold for 16.95 (ph 00:15:38). This is the highest priced product in the market. We continue to command the price premium versus the other brand that are $10. We continue to increase the value of eFax and one of the things that we are planning to launch on beta this quarter is unique features that I'm keeping at this moment secretive while we are patenting it, but it's going to increase value and the functionality and the experience of fax users to something that nobody here in j2 have seen ever before. Enough said, but I hope to make a press release soon.

On the international field, the economy is eating (ph 00:16:30) Europe as well, but if (ph 00:16:33) the penetration is lower there we continue to grow there in the faster rate than here in the U.S. market.

Our alternative fax brands, as you know, we have several brands that are (inaudible 00:16:45) and competing on the $10 level. They are selling well, this is bad economy, so lower cost products are doing better than higher cost products.

On the Voice, we are declaring ourselves the largest player in the market place. We have now four brands, Onebox, Phone People, and e-Receptionist which is our European product. Why do we believe that we are the largest? We have 180,000 DIDs deployed. We have revenue that is an around rate of $27 million a year. Our growth rate, including acquisitions from Q3 '07 to now is 189 or almost three times larger than we were a year ago. From geographical coverage we are selling mostly into three, maybe even four, large markets which are the U.S., Canada, U.K. and Ireland to certain degrees. And we are covering many, many local cities around the U.S. and Europe.

We are proceeding well with our integration of Phone People. This is the company that we acquired this year. We have consolidated the offices in San Diego. We are consolidating the operations and realigning all the professional people there under ours and planning to move ahead with further consolidations.

We are also now during our budgeting season, talking about our brand strategy. We are going to pick a lead brand and we are going to take leadership position in educating the market. The voice product is very complex. Less is more. Simplifying the product. Getting customers to buy on-line. As you know we are an on-line company and we are working hard to simplify so people can get comfortable sign on-line, call and buy it and I'm very pleased with the success.

With that said, I will now pass the conversation to Scott for our guidance.

Scott Turicchi

Thank you, Hemi. If you go to Slide 15 as you know, as a company we give guidance on an annual basis which on Slide 16 we are affirming today we wanted to draw and remind you of certain factors that are always the case in Q4 and certain factors that may be new to this Q4. Obviously what has gone on, the economy in the last several months, and specifically in the last several weeks, we believe will continue in Q4 and result in negative GDP growth. We believe they'll continue to be weakness in the economy in Europe. The results of these two is a malaise in the productivity and the activity of businesses post-Thanksgiving.

Usually, we always have a decline in business days from Q3 to Q4 sequential. The calendar this year is a bit more unfavorable than in most years, resulting in a loss of five business days from Q3 to Q4. As I just mentioned, because of the economy we believe there'll be an additional lost business day of productivity as people take additional vacation, longer lunches, show up later to work, or not show up at all. To remind you, each business day has about $200,000 of variable revenue, so we're anticipating in Q4 relative to Q3 of reduction of approximately $1.2 million in our variable revenue due primarily to the calendar in business days and secondarily to the poor economy and I would also add that to the extent the dollar continues to remain strong against the euro and the pound, that will add a little bit of pressure for international operations.

Our view is to continue to work on the margin structure, as Hemi has just outlined. There are still additional opportunities in both the cost of goods sold and certain other of our operating expenses to continue to maintain or improve margin structure and cash flows, complete the M&A deal that Hemi has already mentioned, as well to pursue more deals that are in the pipeline.

I'll just give a quick commentary on the 2009 process. We are in the midst of our budgeting. It's relatively early stage. I think it's safe to assume that we will not have a – or we will have a consistent with what is going on in the marketplace view of the economy for '09. we are working through some of the items that Hemi just talked about such as brand strategy for voice and how that, as well as some of the M&A that's in work now will work through to '09 numbers, and we'll be prepared to give the '09 guidance in conjunction with the Q4 conference call, which should be sometime in mid-February.

And that is the end of our prepared remarks. Slide 17 and following are the metrics, the reconciliation of free-cash-flow, and as Kathy mentioned on Slide 20, the usage chart, which showed relative consistency over the first three quarters of this year, both in terms of the usage of the credit-sensitive customer and the non-credit sensitive customers.

At this time we will turn the conversation back to the operator, who will instruct you how to queue for questions.

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