Forward-Looking Information

In addition to historical information, the foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. These forward-looking statements involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed below,the risk factors discussed in Part II, Item 1A - "Risk Factors" of this Quarterly Report on Form 10-Q and in Part I, Item 1A - "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 (together, the "Risk Factors"), and the factors discussed in the section in this Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures About Market Risk". Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the Risk Factors and the risk factors set forth in other documents we file from time to time with the SEC.

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

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

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

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

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

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

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

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

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

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

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

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

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

and

o Recruit and retain key personnel.

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

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

We deliver many of our services through our global telephony/Internet Protocol ("IP") network, which spans 3,500 cities in 46 countries across six continents. We have created this network, and continuously seek to expand it, through negotiating with U.S. and foreign telecommunications and co-location providers for telephone numbers (also referred to as Direct Inward Dial numbers or "DIDs"), Internet bandwidth and co-location space for our equipment. We maintain and seek to grow an inventory of telephone numbers to be assigned to new customers. Most of these numbers are "local" (as opposed to toll-free), which enables us to provide our paying subscribers telephone numbers with a geographic identity. In addition to growing our business internally, we have used small acquisitions to grow our customer base, enhance our technology and acquire skilled personnel.

Our core services include fax, voicemail, email and call handling, as well as bundled suites of certain of these services. These are business services that make our customers more efficient, more mobile, more cost-effective and more secure than traditional alternatives. We generate substantially all of our revenue from subscribers that pay activation, subscription and usage fees. Activation and subscription fees are referred to as "fixed" revenues, while usage fees are referred to as "variable" revenues. We also generate revenues from patent licensing and sales, advertising and revenue share from our customers' use of premium rate telephone numbers. Of the 11.3 million telephone numbers deployed as of September 30, 2009, approximately 1.3 million were serving paying subscribers, with the balance deployed to free subscribers, including those with premium rate telephone numbers. We operate in one reportable segment: value-added messaging and communications services, which provides for the delivery of fax, voice and email messages and communications via the telephone and/or Internet networks.

We hold multiple United States patents and international counterparts to those patents consisting of thousands of claims covering a range of inventions that incorporate fundamental messaging and communications technologies. Over the past five years we have engaged in a program of enforcing our patents against third parties using this technology without our permission. We have also sold non-core patent assets for profit. Three of our core patents have been reaffirmed through reexamination proceedings with the United States Patent and Trademark Office:
(i) U.S. Patent No. 6,350,066 covers retrieval of fax or voice messages directed to an intended recipient via an Internet browser; (ii) U.S. Patent No. 6,208,638 covers transmission of fax or voice messages to an intended recipient via electronic mail as an attachment and (iii) U.S. Patent No. 6,597,688 covers transmission of a message received via the Internet to an intended recipient via facsimile protocol. We currently have several cases involving these and other patents against several companies in the United States District Court for the Central District of California. As a result of these core patents successfully existing reexamination proceedings, the stay that had been in place in these pending cases was lifted during the second quarter of 2009. These cases are now proceeding forward and are in the discovery stage. For more information on this and other litigation involving j2 Global please see Part II, Item 1. Legal Proceedings.

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

For the past three years, 90% or more of our total revenues have been produced by our DID-based services. DID-based revenues have increased to $229.0 million from $167.9 million for the three-year period ended December 31, 2008. The primary reason for this increase was a 67% increase in the number of paid DIDs over this period. We expect that DID-based revenues will continue to be a dominant driver of total revenues.

                                     September 30,        September 30,
                                         2009                 2008
Free service telephone numbers                 9,976              10,357
Paying telephone numbers                       1,274               1,199
Total active telephone numbers                11,250              11,556

                                     Three Months Ended September 30,            Nine Months Ended September 30,
                                           2009                 2008                2009                   2008
Subscriber revenues:
Fixed                              $          49,781     $        47,481     $        148,306       $        138,333
Variable                                      11,264              12,985               33,428                 38,885
Total subscriber revenues          $          61,045     $        60,466     $        181,734       $        177,218

Percentage of total subscriber
revenues:
Fixed                                           81.5 %              78.5 %               81.6 %                 78.1 %
Variable                                        18.5 %              21.5 %               18.4 %                 21.9 %

Revenues:
DID-based                          $          58,969     $        58,440     $        175,322       $        171,292
Non-DID-based                                  2,832               3,112                9,334                  9,585
Total revenues                     $          61,801     $        61,552     $        184,656       $        180,877

Average monthly revenue per
paying
telephone number(1)                $           15.03     $         15.87     $          15.10       $          16.14

(1) See calculation of average monthly revenue per paying telephone number at the end of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Critical Accounting Policies and Estimates

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements. Actual results could differ significantly from those estimates under different assumptions and conditions. Our critical accounting policies are described in our 2008 Annual Report on Form 10-K filed with the SEC on February 25, 2009 as amended on March 5, 2009. During the nine months ended September 30, 2009, there were no significant changes in our critical accounting policies and estimates.

Revenues

Subscriber Revenues. Subscriber revenues consist of both a fixed monthly or annual recurring subscription component and a variable component which is driven by the actual usage of our service offerings. Over the past three calendar years the fixed portion of our subscriber revenues has contributed an increasing percentage to our total subscriber revenues. Subscriber revenues were $61.0 million and $60.5 million for the three months ended September 30, 2009 and 2008, respectively. Subscriber revenues were $181.7 million and $177.2 million for the nine months ended September 30, 2009 and 2008, respectively. This increase in subscriber revenues was due to an increase in our paying subscriber base. The increase in our base of paying subscribers primarily resulted from new subscribers coming directly to our Websites, free-to-paid subscriber upgrades, small to mid-sized corporate and enterprise sales, direct large enterprise and government sales, direct marketing costs for acquisition of paying subscribers and international sales and business acquisitions, in each case net of cancellations. The increased revenue as a result of our subscriber base is offset by new subscribers selecting lower priced products and a decrease in usage revenues.

Other Revenues. Other revenues were $0.8 million and $1.1 million for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, other revenues were $2.9 million and $3.7 million, respectively. Other revenues consist primarily of patent sales and licensing revenues and advertising revenues generated by delivering email messages to our free customers on behalf of advertisers. The decrease in other revenues resulted primarily from a reduction in patent licensing revenues resulting from our recent acquisitions of patent licensees and a reduction in advertising revenues due to the general economic environment partially offset by other revenues from the sale of non-core intellectual property during the period.

Cost of Revenues

Cost of revenues is primarily comprised of costs associated with data and voice transmission, telephone numbers, sales and other non-income based taxes, network operations, customer service, on-line processing fees and equipment depreciation. Cost of revenues was $11.3 million, or 18% of total revenues, and $11.7 million, or 19% of total revenues, for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, cost of revenues was $34.2 million, or 19% of total revenues, and $35.0 million, or 19% of total revenues, respectively. The decrease in cost of revenues was primarily due to increased efficiency of network operations and customer service.

Operating Expenses

Sales and Marketing. Our sales and marketing costs consist primarily of Internet-based advertising, sales and marketing personnel costs and other business development-related expenses. Our Internet-based advertising relationships consist primarily of fixed cost and performance-based (cost-per-impression, cost-per-click and cost-per-acquisition) advertising relationships with an array of online service providers. We have a disciplined return-on-investment approach to our Internet-based advertising and marketing spend, which causes sales and marketing costs as a percentage of total revenues to vary from period to period based upon available opportunities. Sales and marketing expenses were $9.3 million, or 15% of total revenues, and $10.8 million, or 18% of total revenues, for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, sales and marketing expenses were $27.4 million, or 15% of total revenues, and $31.6 million, or 18% of total revenues, respectively. The decrease in sales and marketing expenses for the three and nine months ended September 30, 2009 was primarily due to more efficient and cost effective marketing opportunities both in the United States and around the world.

Research, Development and Engineering. Our research, development and engineering costs consist primarily of personnel-related expenses. Research, development and engineering costs were $2.9 million, or 5% of total revenues, and $3.0 million, or 5% of total revenues, for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, research, development and engineering costs were $8.7 million, or 5% of total revenues, and $9.2 million, or 5% of total revenues, respectively. The decrease in research, development and engineering costs for the three and nine months ended September 30, 2009 compared to the same period in the prior year was primarily due to increased efficiency and synergies from the integration of acquisitions.

General and Administrative. Our general and administrative costs consist primarily of personnel-related expenses, depreciation and amortization, share-based compensation expense, bad debt expense and insurance costs. General and administrative costs were $11.7 million, or 19% of total revenues, and $10.9 million, or 18% of total revenues, for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, general and administrative costs were $33.6 million, or 18% of total revenues, and $33.4 million, or 18% of total revenues, respectively. The increase in expense for the three months ended was primarily due increased amortization resulting from acquisitions and compensation costs offset by decreased professional fee expense. The increase in the nine months ended was primarily due to increased amortization resulting from acquisitions and compensation costs offset by decreased bad debt and professional fee expenses.

Share-Based Compensation

The following table represents share-based compensation expense included in cost
of revenues and operating expenses in the accompanying condensed consolidated
statements of operations for the three and nine months ended September 30, 2009
and 2008 (in thousands):

                                            Three Months Ended September 30,               Nine Months Ended September 30,
                                              2009                     2008                 2009                     2008
Cost of revenues                        $            323         $            259     $            935         $            646
Operating expenses:
Sales and marketing                                  477                      289                1,338                      955
Research, development and engineering                217                      215                  634                      620
General and administrative                         1,877                    1,228                5,188                    3,771
                                        $          2,894         $          1,991     $          8,095         $          5,992

Non-Operating Income and Expenses

Interest and Other Income, net. Our interest and other income, net is generated primarily from interest earned on cash, cash equivalents and short-term and long-term investments and gain or losses on foreign exchange. Interest and other income, net, was zero and $1.7 million for the three months ended September 30, 2009 and 2008, respectively, and $0.5 million and $3.5 million for the nine months ended September 30, 2009 and 2008, respectively. The decrease in interest and other income, net, was primarily due to losses on foreign currency exchange and a one-time adjustment of certain tax accruals in connection with stock options.

Other-than-temporary impairment losses. An other-than-temporary impairment occurred in connection with our securities for the nine month period ended September 30, 2009. As a result, we recorded an impairment of $9.2 million within the condensed consolidated statement of operations.

Income Taxes

Our effective tax rate is based on pre-tax income, statutory tax rates, tax regulations (including those related to transfer pricing) and different tax rates in the various jurisdictions in which we operate. The tax bases of our assets and liabilities reflect our best estimate of the tax benefits and costs we expect to realize. When necessary, we establish valuation allowances to reduce our deferred tax assets to an amount that will more likely than not be realized. Income tax expense amounted to approximately $7.4 million and $8.1 million for the three months ended September 30, 2009 and 2008, respectively. Income tax expense for the nine months ended September 30, 2009 and 2008 was $22.9 million and $23.0 million, respectively. Our effective tax rate was approximately 27.6% compared to 30.0% and 31.8% compared to 30.5% for the three and nine months ended September 30, 2009 and 2008, respectively. The decrease in expense for the three and nine months ended is primarily due to a change in the state apportionment factor during the third quarter and an increase in foreign income as a percentage of total income offset by the impairment of debt and preferred securities in the amount of $9.2 million which is not deductible for income tax purposes for the year.

Liquidity and Capital Resources

Cash and Cash Equivalents and Investments

At September 30, 2009, we had cash and investments of $222.5 million compared to cash and investments of $161.9 million at December 31, 2008. The increase in cash and investments resulted primarily from cash provided by operations offset by cash used in connection with business acquisitions. At September 30, 2009, cash and investments consisted of cash and cash equivalents of $188.4 million, short-term investments of $31.2 million and long-term investments of $3.0 million. Our investments are comprised primarily of readily marketable corporate debt securities, auction rate debt and preferred securities and certificates of deposits. For financial statement presentation, we classify our investments primarily as held-to-maturity and, thus, they are reported as short and long-term based upon their maturity dates. Short-term investments mature within one year of the date of the financial statements and long-term investments mature one year or more from the date of the financial statements. We retain a substantial portion of our cash in foreign jurisdictions for future reinvestment. If we were to repatriate funds held overseas, we would incur U.S. income tax on the repatriated amount at an approximate blended federal and state rate of 40%.

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

Cash Flows

Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents and short-term investments. Net cash provided by operating activities was $78.0 million and $66.9 million for the nine months ended September 30, 2009 and 2008, respectively. Our operating cash flows resulted primarily from cash received from our subscribers. Our cash and cash equivalents and short-term investments were $219.5 million at September 30, 2009.

Net cash (used in) provided by investing activities was approximately ($46.6) million and $27.1 million for the nine months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009, net cash used in investing activities was primarily attributable to the purchase of certificates of deposit and business acquisitions. For the nine months ended September 30, 2008, net cash used in investing activities was primarily attributable to the sales of available-for-sale investments and net redemptions and sales of held-to-maturity investments.

Net cash provided by (used in) financing activities was approximately $5.4 million and ($106.2) million for the nine months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009, net cash provided by financing activities was primarily attributable to the excess tax benefits from share-based compensation and the exercise of stock options. For the nine months ended September 30, 2008, net cash used in financing activities was primarily attributable to the repurchase of our common stock, partially offset by the exercise of stock options.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of
September 30, 2009:

                                              Payments Due in
                                              (in thousands)
Contractual
Obligations      2009         2010         2011         2012         2013        Thereafter       Total

Operating
leases         $    450     $    432     $    226     $    214     $    187     $        690     $  2,199
Telecom
services and
co-location
facilities        1,907        6,909        1,026            -            -                -        9,842

               $  2,357     $  7,341     $  1,252     $    214     $    187     $        690     $ 12,041

Calculation of Average Monthly Revenue per Paying Telephone Number:


                                                              Three Months Ended September 30,              Nine Months Ended September 30,
                                                               2009                      2008                 2009                   2008
                                                               (In thousands except average monthly revenue per paying telephone number)

DID-based revenues                                       $          58,969         $         58,440     $        175,322       $        171,292
Less other revenues                                                  1,515                    2,223                4,759                  6,932
Total paying telephone number revenues                   $          57,454         $         56,217     $        170,563       $        164,360

Average paying telephone number monthly
  revenue (total divided by number of months)            $          19,151         $         18,739     $         18,951       $         18,262

Number of paying telephone numbers
Beginning of period                                                  1,274                    1,163                1,236                  1,064
End of period                                                        1,274                    1,199                1,274                  1,199

Average of period                                                    1,274                    1,181                1,255                  1,131

Average monthly revenue per paying telephone number(1)   $           15.03         $          15.87     $          15.10       $          16.14
. . .