ITEM 1. Business

Disclosure Regarding Forward-looking Information

This report contains forward-looking statements that involve risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions, and the assumptions underlying or relating to any of these statements. These statements may be identified by the use of words such as "expect", "anticipate", "estimate", "believe", "intend" and "plan". Our actual results may differ materially from those discussed in these statements. Factors that could contribute to such differences include those discussed in "Risk Factors" and elsewhere in this report.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance of achievements. Neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We assume no duty to update any of the forward-looking statement after the date of this report or to conform these statements to actual results.

Reverse Stock Split

On February 8, 2001 we carried out a 1 for 4 reverse stock split. Except as noted, all share and per data are presented on a post split basis.

Company Overview

We provide a variety of business critical communications and messaging services via our global communications/telephony/messaging network. Through three distinct sales channels - Web, Corporate, and Licensed Services - we deploy more than 4.3 million active phone numbers. Our global network is capable of providing billing, customer support, transport, value added applications and a local presence in 4 continents, 157 cities, and 14 countries. The value added applications we currently offer include Internet protocol (IP) faxing, voicemail, email by phone, conference calling, and unified communications.

The parameters we utilize to evaluate our sales channels include number of customers, number of active phone numbers deployed, and revenues. As of December 31, 2000 we had 4.3 million phone numbers deployed in our Web channel and approximately 7,000 phone numbers deployed in our Corporate channel. We launched our Licensed Services channel in the second half of 2000 by entering into two agreements. This channel generated its first revenues in the first quarter of 2001.

On November 29, 2000, we acquired eFax.com, an IP based faxing company, and immediately began integrating eFax and j2. The integration of all personnel and all sales and marketing programs have been completed. The integration of our network is underway and will be completed this year.

Industry Background

Our business operates in the faxing, conference calling, and unified communications and messaging markets, each of which is summarized below:

Faxing continues to be a popular method to conduct business in the United States and throughout the world evidenced by the estimated 100 million fax machines in use.

In 1999, a leading industry consultant estimated that the worldwide transmission costs of faxing were $80 billion. The total number of pages faxed in the US alone is projected to be 192 billion for 2001.

Conference calling is a stable market estimated to be in excess of $1 billion annually.

The unified communications and messaging market remains in its early stages of adoption. Different industry experts size the market from $100 to $300 million for 1999, the latest year data was available. TIA, a leading messaging and communications industry consulting firm, estimates that the unified messaging service market will double in size in 2001 and will exceed $2 billion by 2004.

Need for Cost-Effective Solutions

Businesses and individuals are increasingly making use of third parties to manage their communication and messaging needs. Their goal is to reduce or eliminate the cost of purchasing and maintaining hardware for voice and fax and the associated dedicated phone lines. In addition, businesses find that it is difficult to incorporate state-of-the-art technology in their existing infrastructure and employ the necessary expertise to maintain and upgrade a sophisticated messaging system. In addition, the end user is looking for enhanced efficiency which makes sending and receiving messages less time consuming and provides greater flexibility to access messages.

Our Solution

We provide an IP based, fully integrated outsourced solution designed to replace or augment individual and corporate faxing, messaging and communications systems. We utilize our network to tailor our solutions to each of our different groups of users. For example, in the Web channel, we provide all the information our customers need on our websites. The user is offered two primary services:
faxing under the eFax brand and unified communications and messaging under the j2 brand. In the Corporate channel, certain information is provided on the website, but additional information is obtained via direct contact. These users are offered faxing, broadcast faxing and conference calling along with corporate administrative tools. The Licensed

Services channel does not utilize the website for customer contact but instead relies on indepth direct contact to integrate the capabilities of our network into the proper service of our licensed services customer.

Sales and Marketing

In late 2000, we organized our sales and marketing function around our three revenue channels: Web; Corporate; and Licensed Services.

Web channel

The Web channel utilizes one-to-one marketing over the web to drive free and paying customers to our websites. Once a customer has signed up for the service, we utilize a proprietary statistical approach to lifecycle management, designed to increase the revenue derived from each subscriber. After an introductory period, free subscribers are encouraged to upgrade to a paying service. In addition, free subscribers receive advertising and promotional offers for which j2 is compensated. Free subscribers are consistently monitored to ensure they are receiving benefits from having access to our services and that we are realizing an adequate return on providing those services. Users are encouraged to utilize our additional services and to acquire additional phone numbers. New customers are acquired either for free based on word of mouth and joint marketing arrangements or under cost of acquisition arrangements. As of March 15, 2001, this channel had more than 4.3 million active phone numbers deployed.

Corporate channel

The Corporate channel was formed in late 2000 to focus and consolidate all of our ongoing corporate sales initiatives and includes a telemarketing sales group and a direct sales force. The group focuses on selling our services to small and large businesses. This is done principally through telephone calls and individual meetings. The primary reason a client uses the j2 service is substantially reduced costs for faxing and enhanced efficiency and security. The direct sales force utilizes a proprietary template that analyzes a company's existing cost of faxing compared to the j2 alternative. The savings are often in the range of 50% to 75%. As of March 15, 2001, we had more than 750 corporate clients deploying more than 10,000 phone numbers.

Licensed Services

Licensed Services allows third parties to access the j2 network and its related applications. The first client in this channel is Intuit. The eFax inbound and outbound faxing capabilities are offered to the QuickBooks 2001 users through both software and over the web. The next customer to deploy the j2 faxing service will be Xdrive. We are currently developing a technical solution that will allow third parties to more rapidly integrate our network capabilities for sale to their customer bases.

Global Network and Operations

We have 61 points of presence (POPS) worldwide and a central data center in Los Angeles. We connect our POPS to our central data center via either a Virtual Private Network (VPN) or frame relay. Our network includes a billing system through which we are able to bill one time, recurring, and per minute/page usage.

Through our network, we offer our services locally in over 140 area codes in the United States and abroad, including in 22 of the 25 most populous major metropolitan areas in the United States and such international business centers as London, Paris, Milan, Frankfurt, Zurich, Sydney and Tokyo. We obtain

phone numbers from various local carriers throughout the United States and internationally with whom we have relationships. As of March 15, 2001, our active and inventoried phone numbers acquired from local carriers are sufficient to satisfy our expected demand for the foreseeable future. Our ability to continue to acquire additional quantities of phone numbers in the future will depend on our relationships with our local carriers and our ability to pay market prices for such phone numbers.

Our telecommunications transport, circuit based, as well as packet based, are purchased from multiple phone companies around the world. Our multiple value added applications included on our network are primarily developed by us although some are licensed from third parties.

Customer Support Services

Our customer service department provides various levels of support. The department handles all account issues for our subscribers, ranging from initial sales and sign-up to technical support and account administration. To provide this "one-stop shop," we have installed a technology infrastructure for our customer service representatives to leverage available data from our main enterprise database and our customer database. These databases give our customer service representatives the ability to track purchase history, payment history, caller history, contact history, and report, analyze and solve technical issues in an efficient and organized manner. We maintain a list of frequently asked questions for use by customer service representatives in responding to common queries and issues. This list of questions is updated to keep our customer service representatives abreast of new issues.

Further, we offer Internet-based online self-help. This allows customers to resolve simple issues on their own. We have found that most customer questions come from new users, and with an online self-help guide we believe we are able to address the majority of new users' questions efficiently.

Competition

Competition is becoming increasingly intense for each of the marketplaces we operate in. We face competition for our services from, among others, voice- mail providers, fax providers, paging companies, Internet service providers, e- mail providers and telephone companies.

Competitive pressures may impair our ability to achieve profitability. The increased competition may also make it more difficult for us to successfully enter into strategic relationships with major companies, particularly if our goal is to have an exclusive relationship with a particular company.

We compete against other companies that provide one or more of the services that we do. In addition, these competitors may add services to their offerings to provide messaging and communication services comparable to ours. Future competition could come from a variety of companies both in the Internet industry and the telecommunications industry. These industries include major companies that have much greater resources than we do, have been in operation for many years and have large subscriber bases. These companies may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily and devote greater resources to the marketing and sale of their products and services than we can. There can be no assurance that additional competitors will not enter markets that we plan to serve or that we will be able to compete effectively.

Patents and Proprietary Rights

We rely on a combination of patent, trademark, trade secret and copyright law and contractual agreements to protect our proprietary technology and intellectual property rights.

We have developed or acquired substantially all of our software. We have entered into agreements with our software programmers that provide for our ownership of all software and intellectual property.

We have licensed from third parties some components of our end-user software for unlimited use for one-time, up-front payments pursuant to written license agreements. Some of our license agreements provide for a modest additional payment in the event of a subsequent major upgrade.

We have two U.S. patents and multiple pending U.S. patent applications covering components of our technology. Unless and until patents are issued on the applications pending, no patent rights on those applications can be enforced. We have obtained U.S. copyright registrations for certain proprietary software.

We own a registration in the United States for the service mark eFax(R) and have applications pending for the service mark j2(R) and the j2 logo. We also have a European Community application for registration for eFax, j2 and the j2 logo. We also own registrations and applications for registrations in the United States and internationally for various other service marks and slogans that we use.

We hold numerous Internet domain names, including "j2.com" and "efax.com". Under current domain name registration practices, no one else can obtain an identical domain name, but can obtain a similar name, or the identical name with a different suffix, such as ".net" or ".org" or with a country designation. The relationship between regulations governing domain names and the laws protecting trademarks and similar proprietary rights is evolving. Domain names are regulated by Internet regulatory bodies, while trademarks are enforceable under local national law. In addition, the regulation of domain names in the United States and in foreign countries is subject to change. There are plans to establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names in all of the countries in which we conduct business, and we could be unable to prevent third-parties from acquiring domain names that infringe or otherwise decrease the value of our domain names or trademarks.

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.

On October 28, 1999, AudioFAX IP LLC filed a lawsuit against us in the United States District Court for the Northern District of Georgia asserting the ownership of certain United States and Canadian patents and claiming that we are infringing these patents as a result of our sale of enhanced facsimile services. The suit requests unspecified damages, treble damages due to willful infringement, and preliminary and permanent injunctive relief. We have reviewed the AudioFAX patents with our business and technical personnel and outside patent counsel and have concluded that we do not infringe these patents. As a result, we are confident of our position in this matter and are defending the suit vigorously.

Government Regulation

There is currently only a small body of laws and regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted at the international, federal, state and local levels with respect to the Internet, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security and the convergence of traditional telecommunications services with Internet communications. Moreover, a number of laws and regulations have been proposed and are currently being considered by federal, state and foreign legislatures with respect to these issues. The nature of any new laws and regulations and the manner in which existing and new laws and regulations may be interpreted and enforced cannot be fully determined. For example, recent laws affecting the internet include:

. The Digital Millennium Copyright Act, which provides stronger copyright protection for software, music and other works on the Internet. Under this law, Internet service providers and web site operators must register with the U.S. Copyright Office to avoid liability for infringement by their subscribers and must satisfy the conditions for safe harbor protection contained therein for ISPs.

. The Child Online Protection Act ("COPA"), prohibits persons from making communications available to minors that contained material that was harmful to minors. On June 22, 2000, the Third Circuit Court of Appeals affirmed a preliminary injunction of this statute, concluding that it violated First Amendment protections in the U.S. Constitution. Appeal of this decision is presently pending before the United States Supreme Court.

. The Children's Online Privacy Protection Act ("COPPA"), which requires certain websites and online services to implement specific procedures and generally to obtain parental consent before collecting, using, or disclosing personal information from children under 13 years of age.

. Child Online Protection Act, which makes illegal the communication of material that is harmful to minors on the Internet for commercial purposes in such a manner as to be available to minors. This law also contains a section that requires web sites to obtain parental consent before collecting information from children 12 and younger.

. Child Protection and Sexual Predator Punishment Act, which imposes stronger criminal penalties for using the Internet to solicit minors for sexual purposes and criminalizes sending obscene material to persons under the age of 16.

. The Internet Tax Freedom Act, which provides a three-year moratorium on taxes deemed discriminatory in order to give state and federal lawmakers time to develop a more comprehensive approach to Internet taxation. The current federal moratorium is scheduled to expire on October 21, 2001.

. The EU Data Privacy Directive, which requires EU member states to enact legislation creating strong protections governing the use of personal data about individuals. One specific provision the Directive prohibits the transfer of personal data from an EU country to a non-EU country that lacks "adequate" data protection laws. Because the EU has determined that the United States lacks adequate data protection laws, persons failing to follow certain alternative procedures risk the interruption of data flows between EU countries and the US.

. Various State and proposed federal anti-spam laws, which restrict the ability of parties to send unsolicited, commercial e-mail.

In addition, there is substantial uncertainty as to the applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy. The vast majority of these laws were adopted prior to the advent of the Internet and, as a result, did not contemplate the unique issues of the Internet. Future developments in the law might decrease the growth of the Internet, impose taxes or other costly technical requirements, create uncertainty in the market or in some other manner have an adverse effect on the Internet. These developments could, in turn, have a material adverse effect on our business, prospects, financial condition and results of operations.

We provide our services through data transmissions over public telephone lines and other facilities provided by telecommunications companies. These transmissions are subject to regulation by the Federal Communications Commission, state public utility commissions and foreign governmental authorities. However, as an Internet messaging services provider, we are not subject to direct regulation by the FCC or any other governmental agency, other than regulations applicable to businesses generally. Nevertheless, as Internet services and telecommunications services converge or the services we offer expand, there may be increased regulation of our business including regulation by agencies having jurisdiction over telecommunications services. Additionally, existing telecommunications regulations affect our business through regulation of the prices we pay for transmission services, and through regulation of competition in the telecommunications industry, and through the management of the nation's telephone numbering system. Continued regulation arising from telephone number administration may make it more difficult for us to obtain necessary numbering resources in a timely fashion.

The FCC has ruled that calls to Internet service providers are jurisdictionally interstate and that Internet service providers should not pay access charges applicable to telecommunications carriers. Several telecommunications carriers are advocating that the FCC regulate the Internet in the same manner as other telecommunications services by imposing access fees on Internet service providers. The FCC is examining inter-carrier compensation for calls to Internet service providers, which could affect Internet service providers' 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.

The United Kingdom and the European Union have adopted legislation which has a direct impact on business conducted over the Internet and on the use of the Internet. For example, the United Kingdom Defamation Act of 1996 protects an Internet service provider, under certain circumstances, from liability for defamatory materials stored on its servers. However, we note that in a 1999 case a London court found that an Internet Service Provider was liable for defamatory statements made by one of its subscribers. The European Directive on the Protection of Consumers is expected to have a direct effect on the use of the Internet for commercial transactions and will create an additional layer of consumer protection legislation with respect to electronic commerce. In addition, numerous other regulatory schemes are being contemplated by governmental authorities in both the United Kingdom and the European Union. As in the United States, there is uncertainty as to the enactment and impact of foreign regulatory and legal developments. For instance, in France, a court recently found that Yahoo! violated French law by failing to prohibit the sale of Nazi paraphernalia to French citizens through its .com

website. These developments may have a material and adverse impact on our business, prospects, financial condition and results of operations.

Seasonality and Backlog

Our business is not seasonal to any significant extent. Due to sales occurring primarily by credit card, we experience no material backlog.

Research and Development

The market for our services is characterized by rapid change and technological advances requiring ongoing expenditures for research and development and the timely introduction of new services and enhancements of existing services. Our future success will depend, in part, upon 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 are devoting significant resources to the development of enhancements to our existing services and the migration of existing services to new software platforms. There can be no assurance that we will successfully complete the development of new services or the migration of services to new platforms or that current or future services will satisfy the needs of the market for unified messaging and communications systems. Further, there can be no assurance that products or technologies developed by others will not adversely affect our competitive position or render our services or technologies noncompetitive or obsolete.

Our research and development expenditures were $2,762,000, $1,829,000, and $1,226,000 for the fiscal years ended December 31, 2000, 1999, and 1998, respectively.

Employees

As of March 15, 2000, we employed or contracted a total of 130 employees, including 4 consultants on a full or part-time basis. We have 106 full-time and 24 hourly workers. 32 of our employees are technical staff, reflecting our emphasis on technology.

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. We have never experienced a work stoppage. We believe our relationship with our employees is good.

RISK FACTORS

The following discussion should be read in conjunction with the audited consolidated financial statements contained herein. In addition to the factors set forth below, there may be other factors, or factors which arise in the future which may affect our future performance and the market prices for our securities.

Our business is subject to numerous risks

You should consider our prospects in light of the risks, expenses and difficulties we may encounter, including those frequently encountered by companies competing in rapidly evolving markets. Among the other risks set forth in this section, these risks include our ability to:

Integrate the network and database of eFax.com;

Retain a significant portion of the efax.com paid customer base in light of our recent price increase to that base

Upgrade our systems and infrastructure to handle any increases in messaging traffic;

Reduce service interruptions; and maintain network security

Maintain and expand our web channel base and retain key corporate clients;

Successfully market our corporate activities;

Derive revenues from our Licensed Services channel

Successfully protect our intellectual property and avoid infringing on proprietary rights of others

Obtain telephone numbers and comply with a changing regulatory environment on a cost effective basis

Compete in a highly competitive market;

Create and maintain strategic relationships;

Introduce new services;

Recruit and retain key personnel.

If we are unable to execute our plans and grow our business, either as a result of the risks identified in this section or for any other reason, this failure would have a material adverse effect on our business, prospects, financial condition and results of operations.

We expect our losses to continue, which may adversely impact our business and our stockholders

We have incurred substantial operating losses, net losses and cash flows used in operating activities on both an annual and quarterly basis. For the year ended December 31, 2000, we had an operating loss of $24.6 million, a net loss of $22.2 million and net cash used in operating activities of $11.9 million. Although we expect to achieve monthly positive operating cash flow in the second quarter of 2001, we will continue to incur net accounting losses for the foreseeable future due to the amortization of acquisition related goodwill and other intangibles and cannot assure you that we will ever achieve profitability.

We may need and be unable to obtain additional funding on satisfactory terms, which could dilute our stockholders or impose burdensome financial restrictions on our business

If our capital requirements or revenue vary materially from our current plans or if unforeseen circumstances occur, we may require additional financing. This may not be available on a timely basis, in sufficient amounts or on terms acceptable to us. Recently, a number of Internet companies have had difficulty obtaining financing. Any new financing may also dilute existing stockholders. Any debt financing or other financing of securities senior to common stock will likely include financial and other covenants that will restrict our flexibility. At a minimum, we expect these covenants to include restrictions on our ability to pay dividends on our common stock. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition and results of operation.

Further acquisitions could result in dilution, operating difficulties and other harmful consequences

We may acquire or invest in additional businesses, products, services and technologies that complement or augment our service offerings and customer base. Since January 2000, we have completed the acquisition of two companies (SureTalk.com, Inc. and eFax.com) and certain assets of another company (TimeShift, Inc.). We will need to identify suitable acquisition candidates, integrate disparate technologies and corporate cultures and manage a geographically dispersed company. We cannot assure you that we will be able to do this successfully. Acquisitions could divert attention from other business concerns and could expose us to unforeseen liabilities. In addition, we may lose key employees while integrating any new companies. We may pay for some acquisitions by issuing additional common stock, which would dilute current stockholders. We may also use cash to make acquisitions. It may be necessary for us to raise additional funds through public or private financings. We cannot assure you that we will be able to raise additional funds at any particular point in the future or on favorable terms. In addition, we will be required to amortize significant amounts of goodwill and other intangible assets in connection with past and future acquisitions, which will materially increase operating expenses.

We will face technical, operational, strategic and financial challenges that may prevent us from successfully integrating eFax.com.

Acquisitions involve risks related to the integration and management of acquired technology, operations and personnel. The integration of eFax.com into our business has been and will be a complex, time consuming and expensive process and may disrupt our business if not completed in a timely and efficient manner. We must operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices. We may encounter substantial difficulties, costs and delays involved in integrating the operations eFax.com.

We have already incurred direct transaction costs of over $1 million associated with the merger, which has been included as a part of the total purchase cost for accounting purposes excluding expenses related to transitioning the eFax.com operating system to the operating system of the combined company. We believe that we may incur additional charges to operations, which we cannot currently estimate, in fiscal 2001, to reflect costs associated with integrating the two companies. We may incur additional material charges in subsequent quarters to reflect additional costs associated with the merger.

Our operating results will suffer as a result of the impact of amortization of goodwill and other intangibles relating to our combinations with eFax.com and SureTalk.

We have accounted for the acquisitions of eFax.com and SureTalk using the purchase method of accounting. Under purchase accounting, we have recorded the market value of our common stock issued in connection with these acquisitions, the fair value of the options and warrants to purchase eFax.com common stock, which became options and warrants to purchase our common stock, and the amount of direct transaction costs as the cost of acquiring the businesses. We have allocated those costs to the individual assets acquired and liabilities assumed, including various identifiable intangible assets such as acquired technology and trade names. Acquisition related goodwill and other intangibles will generally be amortized over a three to seven year period. The amount of purchase cost allocated to goodwill and other intangibles, net of accumulated amortization was $21.1 million at December 31, 2000. If total goodwill and other intangible assets were amortized in equal quarterly amounts over a three to seven year period following completion of these acquisitions, the accounting charge attributable to these items would be approximately $1.7 million per quarter and $6.8 million for fiscal 2001. As a result, purchase accounting treatment for these acquisitions will increase our net loss in the foreseeable future, which could have a material and adverse effect on the market value of our common stock.

We have experienced rapid growth that has placed a strain on resources and our failure to manage growth could cause our business to suffer

We have expanded our operations rapidly and intend to continue this expansion. This expansion has placed, and is expected to continue to place, a significant strain on managerial, operational and financial resources. To manage any further growth, we will need to improve or replace our existing operational, customer service and financial systems, procedures and controls. Any failure to properly manage these systems and procedural transitions could impair our ability to attract and service customers, and could cause us to incur higher operating costs and delays in the execution of our business plan. In addition, our management may not be able to successfully identify, manage and exploit existing and potential market opportunities. If we cannot manage growth effectively, our business and operating results could suffer.

We may not be able to respond to technological changes of the messaging and communications industry

The messaging and communications industry are subject to technological change, changes in user and customer requirements and preferences, and the emergence of new industry standards and practices that could render our existing services, proprietary technology and systems obsolete. We must continually improve the performance, features and reliability of our services, particularly in response to competitive offerings. Our success depends, in part, on our ability to enhance our existing messaging and communications services and to develop new services, functionality and technology that address the increasingly sophisticated and varied needs of prospective subscribers. If we do not properly identify the feature preferences of prospective subscribers, or if we fail to deliver features that meet the standards of these subscribers, our ability to market our service successfully and to increase revenues could be impaired. The development of proprietary technology and necessary service enhancements entail significant technical and business risks and require substantial expenditures and lead-time. We may not be able to keep pace with the latest technological developments. We may also be unable to use new technologies effectively or adapt services to customer requirements or emerging industry standards.

If we do not successfully address service design risks, our reputation could be damaged and our business and operating results could suffer

We must accurately forecast the features and functionality required by target subscribers. In addition, we must design and implement service enhancements that meet customer requirements in a

timely and efficient manner. We may not successfully determine customer requirements and may be unable to satisfy subscriber demands. Furthermore, we may not be able to design and implement a service incorporating desired features in a timely and efficient manner. In addition, if customers and end-users do not favorably receive any new service we launch, our reputation could be damaged. If we fail to accurately determine customer feature requirements or service enhancements or to market services containing such features or enhancements in a timely and efficient manner, our business and operating results could suffer materially.

Our failure to achieve or sustain market acceptance at desired pricing levels could impair our ability to achieve profitability or positive cash flow

The widespread availability of free services, including our own, may result in consumers being unwilling to pay for messaging services. Even if customers are willing to pay for these services to avoid the advertising associated with free services, or to obtain the benefits of unified messaging in our complete form, we expect prices in our industry will continue to fall. Therefore we may need to reduce prices for our existing and future services. We cannot predict whether our pricing schedule will prove to be viable, whether demand for our services will materialize at the prices we expect to charge or whether we will be able to sustain adequate future pricing levels as competitors introduce competing services, including free services.

Customers may be unwilling to pay our prices, either because they find free services to be satisfactory, or because they find other paid services to offer better value for the cost involved. The prices for our services are in some cases higher than those charged by our competitors. Our failure to achieve or sustain desired pricing levels would have a material adverse effect on our business, prospects, financial condition and results of operations.

We generate revenues from our free service customers by selling them additional services for which charges are usage-based. We also encourage free service customers to convert to paid subscriptions. We have a limited track record from which to predict levels of revenue to be achieved from customers who are attracted by our free services. The availability of free services may cause some of our paying customers to switch to our free services and discontinue their payments to us. We introduced our free services principally as a promotional tool, and partially in response to the introductions by competing companies. There can be no assurance that the recent introduction of these competing services will not have a material adverse effect on our business, prospects, financial condition and results of operations.

If we fail to expand and upgrade our network infrastructure, our business may be harmed

We must continue to expand and adapt our network infrastructure, both domestically and internationally, as the number of customers and the volume of messages they wish to transmit increases. The expansion and adaptation of our network infrastructure will require substantial financial, operational and management resources. There can be no assurance that we will be able to expand or adapt our network infrastructure to meet any additional demand on a timely basis, at a commercially reasonable cost or at all. In addition, future growth in our subscriber base for both free and paid services, together with growth in the subscriber bases of other companies which have recently introduced free facsimile-to-e-mail services and other Internet-dependent services, will increase the demand for available network infrastructure and Internet data transmission capacity. This could lead to insufficient capacity and an inability on our part to accommodate our future growth. Insufficient network capacity could lead to a reduction in the reliability of our services. Since customers will not tolerate a service hampered by slow delivery times or unreliable service levels, insufficient network capacity could have a material adverse effect on our business, prospects, financial condition and results of operations.

Our business could suffer if we cannot obtain telephone numbers

Our future success will depend upon our ability to procure large quantities of telephone numbers in the United States and foreign countries. Our ability to procure telephone numbers depends on applicable regulations, the practices of telecommunications carriers that provide telephone numbers and the level of demand for new telephone numbers. Failure to obtain these numbers in a timely and cost-effective manner may prevent us from entering some foreign markets or hamper our growth in domestic markets, and may have a material adverse effect on our business, prospects, financial condition and results of operations.

Our ability to procure large quantities of phone numbers will be particularly limited in area codes of large metropolitan areas, and we may at some point be unable to provide our customers with phone numbers in the most desirable area codes (e.g., 212 in Manhattan and 171 in London) in such areas, having to rely instead on new area codes created for these areas. We do not allow customers of our free services to choose the area code for the phone number we provide, and to some extent this makes our free services less attractive, particularly in comparison to our subscription services, or subscription services provided by others where the customer may select an area code.

In addition, future growth in our subscriber base for both free and paid services, together with growth in the subscriber bases of providers of free fax to e-mail services, will increase the demand for large quantities of telephone numbers, which could lead to insufficient capacity and an inability on our part to acquire the necessary phone numbers to accommodate our future growth.

Any failure of the Internet as a message transmission medium could harm our business

Our future success will depend upon our ability to route our customers' traffic through the Internet and through other data transmission media. For our services, other data transmission media include fiber optic or copper lines owned and operated by third parties, with portions of the capacity on these media being dedicated for our use. Our success is largely dependent upon the viability of the Internet as a medium for the transmission of documents. We also depend on the continued operation of a user's e-mail system. To date, we have transmitted a limited amount of customer traffic. There can be no assurance that these will prove to be viable communications media, that document transmission will be reliable or that capacity constraints which inhibit efficient document transmission will not develop.

We access the Internet and other data transmission media through dedicated or shared connections to third party service providers. In many cases, we pay fixed monthly fees for Internet and other access, regardless of our usage or the volume of our customers' traffic. There can be no assurance that the current pricing structure for access to and use of these media will not change unfavorably and, if the pricing structure changes unfavorably, our business, prospects, financial condition and results of operations could be materially and adversely affected.

The market may not switch to our services due to concerns about the reliability of Internet communications, which may significantly impair our business and prevent the execution of our business plan

Our ability to route existing customers' traffic through the Internet and to sell our services to new customers may be inhibited by, among other factors, the reluctance of some customers to switch from traditional fax delivery to delivery over the Internet, and by widespread concerns over the adequacy of security in the exchange of information over the Internet. Additionally, there may be delays in any

transmission over the Internet, which may result in our service being regarded as less timely than a traditional fax delivery. If our existing and potential customers do not accept delivery through the Internet as a means of sending and receiving documents via fax, our business, prospects, financial condition and results of operations would be materially and adversely affected.

In addition, we face similar risks regarding the market acceptance of the delivery of customers' voice-mail messages and "real time" voice communications over the Internet. As a result, our business, prospects, financial condition and results of operations may be materially and adversely affected.

Our business may be constrained because it supports a limited number of operating system platforms

Only those users whose computers are run by Windows 3.1, Windows 95, Windows 98, Windows 2000, Windows NT, Macintosh and UNIX operating systems can utilize our services. Since there are other operating system platforms, we cannot provide our services to all potential customers for our services. To the extent other operating systems proliferate in the future, our ability to attract new customers and keep existing customers could be significantly impaired.

The markets in which we operate are highly competitive, and we may be unable to compete successfully against new entrants and established industry competitors with significantly greater financial resources

Competition is becoming increasingly intense for each of the industries we operate in. We face competition for our services from, among others, voice-mail providers, fax providers, paging companies, Internet service providers, e-mail providers and telephone companies.

Competitive pressures may impair our ability to achieve profitability. The increased competition may also make it more difficult for us to successfully enter into strategic relationships with major companies, particularly if our goal is to have an exclusive relationship with a particular company.

We compete against other companies that provide one or more of the services that we do. In addition, these competitors may add services to their offerings to provide messaging and communication services comparable to ours. Future competition could come from a variety of companies both in the Internet industry and the telecommunications industry. These industries include major companies that have much greater resources than we do, have been in operation for many years and have large subscriber bases. These companies may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily and devote greater resources to the marketing and sale of their products and services than we can. There can be no assurance that additional competitors will not enter markets that we plan to serve or that we will be able to compete effectively.

We may have difficulty in retaining our customers, which may prevent our long- term success

Our sales, marketing, and other costs to acquire new subscriptions are substantial relative to the monthly fees derived from subscriptions. Accordingly, we believe that our long-term success depends largely on our ability to retain our existing customers while continuing to attract new ones. We continue to invest significant resources in our network infrastructure and customer and technical support capabilities to provide high levels of customer service. We cannot be certain that these investments will maintain or improve customer retention. We believe that intense competition from our competitors, has

caused, and may continue to cause, some of our customers to switch to our competitors' services. In addition, some new customers do not become consistent users of our services and, therefore, may be more likely to discontinue their subscription. These factors adversely affect our customer retention rates. Any decline in customer retention rates could have a material adverse effect on our business, prospects, financial condition and results of operations.

The messaging and communications industry is undergoing rapid technological changes and new technologies may be superior to the technologies we use

The messaging and communications industry is subject to rapid and significant technological change. We cannot predict the effect of technological changes on our business. Additionally, widely accepted standards have not yet developed for the technologies we use.

We expect that new services and technologies will emerge in the market in which we compete. These new services and technologies may be superior to the services and technologies that we use or these new services may render our services and technologies obsolete. In addition, these services and technologies may not be compatible or operate in a manner sufficient for us to execute our business plan, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

A system failure or breach of network security could delay or interrupt service to our customers

Our operations are dependent on our ability to protect our network from interruption by damage from fire, earthquake, power loss, telecommunications failure, unauthorized entry, computer viruses or other events beyond our control. There can be no assurance that our existing and planned precautions of backup systems, regular data backups and other procedures will be adequate to prevent significant damage, system failure or data loss.

Despite the implementation of security measures, our infrastructure may also be vulnerable to computer viruses, hackers or similar disruptive problems caused by our customers or other Internet users. Persistent problems continue to affect public and private data networks, including computer break-ins and the misappropriation of confidential information. Computer break-ins and other disruptions may jeopardize the security of information stored in and transmitted through the computer systems of the individuals and businesses utilizing our services, which may result in significant liability to us and also may deter current and potential customers from using our services. Any damage, failure or security breach that causes interruptions or data loss in our operations or in the computer systems of our customers could have a material adverse effect on our business, prospects, financial condition and results of operations.

Our software may have defects and we may encounter development delays

Software-based services and equipment, such as our services, may contain undetected errors or failures when introduced or when new versions are released. There can be no assurance that, despite testing by us and by current and potential customers, errors will not be found in our software after commercial release, or that we will not experience development delays, resulting in delays in market acceptance, any of which could have a material adverse effect on our business, prospects, financial condition and results of operations.

We depend on third parties to market our services, and the failure by these third parties to market our services may hinder our marketing efforts

Currently, we primarily rely on third parties as part of our Licensed Services channel. The inability of these parties to successfully integrate and market our products may have an adverse effect on our operating results.

Our success depends on our retention of our executive officers and our ability to hire and retain additional key personnel

Our success depends on the skills, experience and performance of senior management and other key personnel, many of whom have worked together for only a short period of time. The loss of the services of one or more of our executive officers or other key employees could have a material adverse effect on our business, prospects, financial condition and results of operations. Our future success also depends on our continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for these personnel is intense, and there can be no assurance that we can retain our key employees or that we can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future.

The price of our common stock may decline due to shares eligible for future sale

As of March 15, 2001, we had approximately 11.5 million shares of common stock outstanding (including the shares issued in connection with the recently completed eFax.com merger). Most of these shares are available for sale, subject to compliance with Rule 144 in certain cases. Sales of a substantial number of shares of common stock in the public market could cause the market price of we common stock to decline.

Anti-takeover provisions could negatively impact our stockholders

Provisions of Delaware law and of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us. For example, we are subject to Section 203 of the Delaware General Corporation Law, which would make it more difficult for another party to acquire us without the approval of our board of directors. Additionally, our certificate of incorporation authorizes our board of directors to issue preferred stock without requiring any stockholder approval, and preferred stock could be issued as a defensive measure in response to a takeover proposal. These provisions could make it more difficult for a third party to acquire us even if an acquisition might be in the best interest of our stockholders.

Our stock price may be volatile or may decline

Our stock price and trading volumes have been volatile and our stock price has generally declined since our initial public offering on July 23, 1999. We expect that this volatility will continue in the future due to factors such as:

. Assessments of our progress in adding paid subscriptions or free customers, and comparisons of our results in these areas versus our competitors;

. Variations between our actual results and investor expectations;

. New service or technology announcements by us or others, and regulatory or competitive developments affecting our markets;

. Investor perceptions of us and comparable public companies;

. Conditions and trends in the communications, messaging and Internet related industries;

. Announcements of technological innovations and acquisitions;

. Introduction of new services by us or our competitors;

. Developments with respect to intellectual property rights;

. Conditions and trends in the Internet and other technology industries; and

. General market conditions.

In addition, the stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stocks of technology companies, particularly communications companies. These broad market fluctuations have resulted in a material decline in the market price of our common stock. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation is often expensive and diverts management's attention and resources, which could have a material adverse effect on our business and operating results.

We may have liability for Internet content and we may not have adequate liability insurance

As a provider of messaging and communications services, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials transmitted via our services. We do not and cannot screen all of the content generated by our users, and we could be exposed to liability with respect to this content. Furthermore, some foreign governments, such as Germany, have enforced laws and regulations related to content distributed over the Internet that are more strict than those currently in place in the United States. Although we carry general liability and umbrella liability insurance, our insurance may not cover claims of these types or may not be adequate to indemnify us for all liability that may be imposed. There is a risk that a single claim or multiple claims, if successfully asserted against we, could exceed the total of our coverage limits. There is also a risk that a single claim or multiple claims asserted against us may not qualify for coverage under our insurance policies as a result of coverage exclusions that are contained within these policies. Should either of these risks occur, capital contributed by our stockholders may need to be used to settle claims. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could have a material adverse effect on our reputation and business and operating results, or could result in the imposition of criminal penalties.

Inadequate intellectual property protections could prevent us from enforcing or defending our proprietary technology

Our success depends to a significant degree upon our proprietary technology. We rely on a combination of patents, trademark, trade secret and copyright law and contractual restrictions to protect our proprietary technology. However, these measures provide only limited protection, and we may not be able to detect unauthorized use or take appropriate steps to enforce our intellectual property rights,

particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. In addition, we may face challenges to the validity and enforceability of our proprietary rights and may not prevail in any litigation regarding those rights. Companies in the messaging industry have experienced substantial litigation regarding intellectual property. Any litigation to enforce our intellectual property rights would be expensive and time-consuming, would divert management resources and may not be adequate to protect our business.

We may be found to have infringed the intellectual property rights of others which could expose us to substantial damages or restrict our operations

We could be subject to claims that we have infringed the intellectual property rights of others. In addition, we may be required to indemnify our resellers and users for similar claims made against them. Any claims against us could require us to spend significant time and money in litigation, pay damages, develop new intellectual property or acquire licenses to intellectual property that is the subject of the infringement claims. These licenses, if required, may not be available at all or on acceptable terms. As a result, intellectual property claims against us could have a material adverse effect on our business, prospects, financial conditions and results of operations. For example, on October 28, 1999, AudioFAX IP LLC filed a lawsuit against us asserting infringement upon the ownership of certain United States and Canadian patents. See "Legal Proceedings".

Our services may become subject to burdensome telecommunications regulation which could increase our costs or restrict our service offerings

We provide our services through data transmissions over public telephone lines and other facilities provided by telecommunications companies. These transmissions are subject to regulation by the Federal Communications Commission, state public utility commissions and foreign governmental authorities. These regulations affect the prices we pay for transmission services, the competition we face from telecommunications services and other aspects of our market.

As a messaging and communications services provider, we are not subject to direct regulation by the FCC. However, as messaging and communications services converge and as the services we offer expand, there may be increased regulation of our business. Therefore, in the future, we may become subject to FCC or other regulatory agency regulation. Changes in the regulatory environment could decrease our revenues, increase our costs and restrict our service offerings.

If regulation of the Internet increases, our business may be adversely affected

There have been various regulations and court cases relating to the liability of Internet service providers and other online service providers for information carried on or through their services or equipment, including in the areas of copyright, indecency, obscenity, defamation and fraud. For example, federal and state statutes prohibit the online distribution of obscene materials. The law in this area is unsettled, and there may be new legislation and court decisions that expose companies such as us to liabilities or affect our services.

Additional laws and regulations may be adopted with respect to the Internet, covering issues such as support payments to fund Internet availability, content, user privacy, pricing, libel, obscene material, indecency, gambling, intellectual property protection and infringement and technology export and other controls. Other federal Internet-related legislation has been introduced which may limit commerce and discourse on the Internet.

Because our services relate principally to the Internet, but convert voice and fax transmissions into e-mails, we are necessarily exposed to legal or regulatory developments affecting either Internet services or telecommunications services. Regulatory developments could cause our business, prospects, financial condition and results of operations to be materially adversely affected.

We could be required to register as an investment company and become subject to substantial regulation that would interfere with our ability to conduct our business

As of December 31, 2000, we had significant cash and cash equivalents, short term investments and long term investments representing proceeds from our July 23, 1999 initial public offering. We invest such cash in short and long term instruments consistent with prudent cash management and not primarily for the purpose of achieving investment returns. Investment in securities primarily for the purpose of achieving investment returns could result in our being treated as an "investment company" under the Investment Company Act of 1940. In addition, the Investment Company Act requires the registration of companies that are primarily in the business of investing, reinvesting or trading securities or that fail to meet certain statistical tests regarding their composition of assets and sources of income even though they consider themselves not to be primarily engaged in investing, reinvesting or trading securities.

If we are required to register as an investment company pursuant to the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure, management, operations, transactions with affiliated persons and other matters. Application of the provisions of the Investment Company Act to us would materially and adversely affect our business, prospects, financial condition and results of operations.

Our management and board of directors own a significant percentage of our stock and will be able to exercise significant influence

Our executive officers and directors and principal stockholders together beneficially own over one third of our common stock, excluding shares subject to options and warrants that confer beneficial ownership of the underlying shares. Accordingly, these stockholders will continue to have significant influence over our affairs. This concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material and adverse effect on the market price of the common stock or prevent our stockholders from realizing a premium over the market prices for their shares of common stock.

This report, including the information incorporated by reference, contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business. These statements may be made directly in this report, or may be incorporated in this report by reference to other documents and may include statements regarding our projected performance. Statements in this report that are not historical facts are identified as "forward-looking statements" for the purpose of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act. You can find many of these statements by looking for words such as "believes," "expects," "anticipates," "estimates" or similar words or expressions. These forward-looking statements involve substantial risks and uncertainties. Some of the factors that may cause actual results to differ materially from those

contemplated by such forward-looking statements include, but are not limited to, the following possibilities:

. Combining the businesses of us and eFax.com may cost more than we expect;

. General economic conditions or conditions in securities markets may be less favorable than we currently anticipate;

. Expected cost savings from the merger may not be fully realized or realized within the expected time frame;

. Contingencies may arise of which we are not aware or of which we underestimated the significance;

. Our revenues after the merger may be lower than we expects;

. We may lose more business or customers after the merger than we expect; or

. Our operating costs may be higher than we expect.

Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this report or as of the date of any document incorporated by reference.

All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to such forward- looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.