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 the "Risk Factors" section of 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.

Company Overview

j2 Global Communications, Inc. ("j2 Global", "Our" or "We") provides outsourced value-added messaging and communications services to individuals and businesses throughout the world. We offer faxing and voicemail solutions, Web initiated conference calling, document management solutions and unified messaging services. We market our services principally under the brand names "eFax" and "jConnect".

We deliver our services through our global telephony/IP network, which spans more than 600 cities in 18 countries across 5 continents (including four capital cities in Latin America where we are in the process of launching service).

We generate a substantial portion of our revenue from subscribers that pay through subscription and usage fees. We also generate revenue from advertising to non-paid subscribers. Our advertising supported subscribers also serve as a significant source of new paid subscribers.

Our sales organization is organized into three distinct channels: Web, Corporate and Licensed Services. The Web channel, which today represents the majority of our revenue, markets eFax and jConnect branded services primarily to individuals and small businesses through a combination of Internet-based advertising and third-party sales relationships. The Corporate channel, which we introduced in 2000 and expect to represent an increasing percentage of our revenue, markets our services to midsize and large businesses, as well as government agencies, through a growing in-house sales force. Our Licensed Services channel seeks to integrate our services and network capabilities into third party product offerings and to license our intellectual property.

We hold patents covering important aspects of our core inbound messaging services. Through our Licensed Services channel we have initiated a patent licensing program in an effort to generate additional revenue and make our technology available for use by others in the industry. During 2002 we began taking our document handling software solutions to the market under a variety of brand names, including "Messenger Plus" and "Papermaster".

For the year ended December 31, 2001, our Web, Corporate and Licensed Services channel revenues represented 75%, 19% and 6% of our revenue, respectively. For fiscal years 2000 and 1999, substantially all of our revenue was generated from our Web channel. In the future, we expect the Corporate channel to represent a growing proportion of our revenues.

As of March 1, 2002, our Web and Corporate channels had more than 4 million and 22,000 telephone numbers deployed, respectively.

We operate in the fax, voicemail, conference calling, document management and unified messaging industries.

Our 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 fax and voice 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. End users are looking for ways to make sending and receiving messages less time consuming and more flexible.

We currently offer a fully integrated solution designed to replace or augment individual and corporate messaging and communications services. We tailor and brand our solutions to each of our different groups of users for more cost effective fax, voicemail, conference calling, document management and unified messaging functionality. Our paid services allow a subscriber to select a phone number from more than 600 cities around the world and toll-free numbers are available as well.

We offer the following suite of products and services:

Faxing

Our faxing service provides a user both the ability to receive faxes as an easy to open e-mail attachment in their existing e-mail box and to send faxes directly from a PC or e-mail account, or from our Web sites.

Voicemail

Our voicemail service provides a user both the ability to receive voicemails as an easy to open e-mail attachment in their existing e-mail box and to send voicemails directly from an e-mail account or from our Web sites.

Conference calling

Our conference calling service, which is currently a bundled offering, enables the initiation and management of conference calls via the Web.

Document Management

Our document management solutions offerings include (1) a service that allows registered users to email Web pages, screenshots and other documents as easy-to-open email attachments, (2) an application for the PC designed to automate the process of organizing, archiving and retrieving digital versions of files and (3) a full featured Internet gateway, designed to deliver documents and data as faxes and alphanumeric pages from email, the Web and directly from Windows(TM) applications.

Unified Messaging

Our unified messaging service allows a subscriber to utilize their e-mail box as a single repository to bundle our fax, voicemail and conference calling features.

We consistently evaluate our branding and product features and offerings in order to make them as attractive as possible to our current and prospective customers. For example, in the future we may offer a stand-alone conference calling product or enhanced voicemail, or may more closely integrate our document delivery and document management products.

Sales and Marketing

We market our products and services through three distinct sales channels:
Web, Corporate and Licensed Services.

Web channel

The Web channel uses Internet-based advertising and third party sales relationships to drive customers to our Web sites www.j2.com and www.efax.com. New paid customers are acquired based on word-of-mouth, upselling advertiser supported subscribers to paid services and under cost-of-acquisition arrangements. Advertiser supported subscribers, who receive a service with limited functionality, are acquired based on word-of-mouth and under cost-of-acquisition arrangements.

We generate activation, recurring monthly and usage fees from our paid subscribers, and advertising revenue from our advertising supported subscribers. Our advertising supported subscribers also serve as a significant source of new paid subscribers. Once a customer has signed up for an advertising supported service, we use a lifecycle management process to encourage them to upgrade to a paid service.

Corporate channel

Our Corporate sales channel, which we formed in late 2000, sells our services to midsize and large businesses and to government agencies. We recently expanded our Corporate channel sales force and expect this channel over time to represent a growing percentage of our revenue. The Corporate channel consists of a direct sales force whose members are assigned to particular geographic territories, as well as a telemarketing sales group that fields telephone inquiries for corporate services.

j2 Global's corporate services can reduce costs for faxing and enhance efficiency and security. Our sales force uses a proprietary template to analyze a prospective customer's existing cost of faxing compared to the j2 Global alternative. As of March 1, 2002, we had more than 800 corporate clients using more than 22,000 telephone numbers.

Licensed Services channel

Our Licensed Services channel seeks to integrate our services and network capabilities into third party product offerings and to license our intellectual property. Service and network integration transactions can take long periods of time to complete, and we cannot predict when they will occur. In February 2002 we initiated a patent licensing program through this sales channel in an effort to generate additional revenue and to offer others in our industry the benefits of our intellectual property.

Global Network and Operations

We have 68 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 is designed to deliver value-added user applications, customer support, billing and a local presence in over 600 cities in 18 countries on 5 continents. Our network covers all major metropolitan areas in the United States, including New York, Los Angeles and Chicago, and such international business centers as London, Paris, Milan, Frankfurt, Zurich, Sydney and Tokyo. We are currently in the process of expanding our network to four capital cities in Latin America.

We obtain telephone numbers from various local carriers throughout the United States and internationally. As of March 2002, our active and inventoried telephone numbers 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, our ability to pay market prices for such phone numbers and the regulatory environment.

Customer Support Services

Our customer service department provides support to our customers through a combination of online self-help, email messages and telephone calls. Our Internet-based online self-help allows customers to resolve simple issues on their own through knowledge-based tools, eliminating the need to speak to our customer service representatives. We provide email support 7 days per week, 24 hours per day, and telephone support 15 hours per day on weekdays. Dedicated telephone support is provided for Corporate customers.

Competition

Competition in the outsourced value-added messaging and communication space is intense. We face competition from, among others, voice-mail providers, fax providers, paging companies, Internet service providers, e-mail providers and telephone companies.

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 in the messaging and communications space. Included in this space are 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 five U.S. patents and multiple pending U.S. and foreign patent applications covering components of our technology. Patents are sought 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 applications pending, no patent rights on those applications can be enforced. Our trade secrets are protected through formal procedures that include employee agreements and confidentiality agreements with other entities. We have obtained U.S. copyright registrations for certain proprietary software.

We own and use a number of trademarks in connection with our products and services, including eFax, jConnect, j2 and the j2 logo, Hotsend, Papermaster, Protofax, Email-By-Phone, Documagix, JFAX and the JFAX logo, among others. Many of these trademarks are registered in the United States and other countries, and numerous trademark applications are pending in the United States and other countries, including applications for the mark j2 and the j2 logo.

We hold numerous Internet domain names, including "efax.com", "j2.com" and "j2global.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", ".org", or ".biz" 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 non-governmental Internet regulatory bodies, while trademarks are enforceable under localized national law. However, the regulation of domain names in the United States and in foreign countries is subject to change. There are plans to continue to establish additional top-level domains, appoint additional domain name registrars and/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.

We have developed substantially all of our software internally, and 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 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.

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.

Government Regulation

There is currently only a small body of laws and regulations directly applicable to 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, local 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 ("ISP(s)") 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"), which prohibits persons from making harmful communications available 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 Web sites 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 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 Nondiscrimination Act, which provides a 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 November 1, 2003.

. 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 of 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 ("FCC"), 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. The FCC has recently initiated several proceedings to examine the regulatory framework for the delivery of broadband services. While it is impossible to predict the outcome, the FCC's inquiry 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 transmission and switching services, while continued regulation of competition in the telecommunications industry may have an indirect affect on our services.

Continued regulation arising from telephone number administration may also make it more difficult for us to obtain necessary numbering resources in a timely fashion. For instance, the FCC has recently decided to allow states to petition for authority to adopt specialized area codes, including area codes that would only contain unified messaging service providers. We intend to seek reconsideration from the FCC of this decision, and the outcome of this proceeding could affect our ability to offer services in competition with incumbents.

The FCC has also ruled that calls to ISPs are jurisdictionally interstate and that ISPs 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 ISPs. The FCC is 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.

The European Union has 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 ISP, 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 ISP 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 Web site. However, a U.S. Federal District Court subsequently held that French law does not trump free expression rights. These developments may have a material and adverse impact on our business, prospects, financial condition and results of operations.

Seasonality and Backlog

Our Web channel business is not seasonal to any significant extent, except as is generally the case for most businesses during extended holiday periods. Although we have limited operating history, we have experienced and expect to continue to experience some seasonality with respect to our Corporate channel.

We experience no material backlog.

Research and Development

The market for our services is 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, 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 to introduce new services. There can be no assurance that we will successfully complete the development of new services or features or that current or future services will satisfy the needs of the market for outsourced messaging, communications and document management solutions. 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 $2,535,000, $2,762,000 and $1,829,000 for the fiscal years ended December 31, 2001, 2000 and 1999, respectively.

Employees

As of March 1, 2002, we employed or contracted a total of 134 employees, including 6 consultants on a full or part-time basis. We have 90 full-time salaried personnel and 38 full-time hourly workers. 45 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.

Reverse Stock Split

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

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:

. Maintain, expand and market and our Web and Corporate channel customer bases;

. Successfully maintain our advertising and outbound usage revenues;

. Obtain large quantities of non-paying customers on a cost effective basis, and effectively derive revenues from those users through advertising to them and selling them paid services;

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

. On a cost effective basis, retain our current base of telephone numbers and obtain additional telephone numbers in such quantities and geographic areas as are necessary to satisfy the demand for our services;

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

. Maintain acceptable levels of service quality and availability;

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

. Maintain the security of customer information and transmissions through our network;

. Introduce new services and achieve acceptable levels of return on investment for those new services; and

. 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 could have a material adverse effect on our business, prospects, financial condition and results of operations.

Customers may be unwilling to pay our prices, either because they find satisfactory free services or because they believe other paid services provide a better value.

The prices for our paid services are in some cases higher than those charged by our competitors. We may need to reduce prices for our paid services. We cannot predict whether we will be able to sustain adequate pricing levels as competitors introduce competing services, including free services. Our failure to sustain desired pricing levels would have a material adverse effect on our business, prospects, financial condition and results of operations.

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

Our sales, marketing and other costs to acquire new customers have historically been 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 at attractive costs. We

continue to invest significant resources in our systems and network infrastructure and customer support capabilities to provide satisfactory levels of service quality and customer service. We cannot be certain that these expenditures will be sufficient to maintain customer retention. We believe that competition from companies providing similar services has caused, and may continue to cause, some of our customers to switch to 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 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 in the converging Internet and telecommunications industries 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, email providers and telephone companies.

Competitive pressures may impair our ability to maintain 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 in the Internet, telecommunications and traditional faxing industries. 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.

Our business could suffer if we cannot obtain telephone numbers, or if we are prohibited from obtaining local 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 non-paid services to choose the area code for the phone number we provide, and to some extent this makes our non-paid services less attractive, particularly in comparison to our subscription services, or subscription services provided by others where the customer may select an area code.

The Federal Communications Commission ("FCC") recently adopted an order which could also impede our ability to obtain telephone numbers in existing area codes. The order permits states to apply to the FCC for

authority to implement specialized area codes which would segregate services such as the ones we provide, along with other services the FCC perceives as being geographically insensitive, into unique area codes. We have petitioned the FCC for reconsideration of this decision. The outcome of this petition may materially affect our operations if it restricts us from obtaining telephone numbers in area codes that are generally perceived as local by consumers.

In addition, future growth in our subscriber base, 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.

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.

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.

Our operating results may suffer as a result of purchase accounting treatment, the impact of the possible future impairment of goodwill relating to our combination with eFax.com and SureTalk.

Under U.S. generally accepted accounting principles, we have accounted for acquisitions of eFax.com and SureTalk.com using the purchase method of accounting. Under purchase accounting, we calculated the purchase price for these companies by recording the market value of our common stock issued in connection with these transactions, the fair value of the options and warrants which became options and warrants of the acquired company, and the amount of direct transaction costs of the transaction. We allocated the cost of each transaction to the individual assets acquired and liabilities assumed of such business.

Based on recent accounting pronouncements, beginning in the first quarter of 2002 and continuing on a periodic basis (generally at least once a year), we are required to determine if the goodwill on our books is impaired. The amount of purchase cost allocated to goodwill was $15.8 million at December 31, 2001. Should our future periodic evaluations of goodwill result in an impairment, we may experience a material loss in the related period of impairment which would increase our net loss and could have a material and adverse effect on the market value of our common stock.

Prior to these recent accounting pronouncements which are more fully described in footnote 2 paragraph (r) of Item 8 "Financial Statements and Supplementary Data" of this Report, we periodically evaluated whether changes had occurred that would have required revision of the remaining estimated useful life of the assigned goodwill or render the goodwill not recoverable. If such circumstances had arisen, we would use an estimate of the undiscounted value of expected future operating cash flows to determine whether the goodwill is recoverable. For the portion of goodwill deemed not recoverable, we would record a charge, in the period identified, between the difference of the carrying amount and the estimated undiscounted value of future operating cash flows.

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.

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.

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

We must continue to expand and adapt our network infrastructure as the number of customers and the volume of messages they transmit or receive increases. The expansion and adaptation of our systems and network infrastructure may 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.

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 system or 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.

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 NT, Windows 2000, 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.

Future 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 review goodwill and other intangible assets for impairment in connection with past and future acquisition which may materially increase operating expense if an impairment issue is identified.

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, cost structure 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 we find acceptable. 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.

We may not be able to respond to technological changes in the messaging, communications and document management industries

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.

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.

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.

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 1, 2002, we had approximately 10.8 million shares of common stock outstanding. 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 subscribers, 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.

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, 2001, we had cash and cash equivalents of $19.1 million, principally representing proceeds remaining 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 were 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.

Terrorist attacks have contributed to economic instability in the United States; continued terrorist attacks, war or other civil disturbances could lead to further economic instability and depress our stock price or adversely affect our business.

On September 11, 2001, the United States was the target of terrorist attacks of unprecedented scope. These attacks have caused instability in the global financial markets, and have contributed to volatility in the stock prices of United States publicly traded companies, such as j2 Global. These attacks have and may continue to lead to armed hostilities or may lead to further acts of terrorism and civil disturbances in the United States or elsewhere, which may further contribute to economic instability in the United States and could have a material adverse effect on our business, financial condition and operating results.