Initiation of Coverage

______________________________________________________________________________

January 15, 2008 8x8, Inc.

___________________________________________
Nasdaq: EGHT
Event: Initiating Coverage with a “Buy”
Rating: Buy
Rating and $3.00 Price Target
Sector: Comm. Service Provider
____________________________________
Michael Coady, CFA Price Target: $3.00
310-966-1443
mcoady@brileyco.com Price: $0.99
___________________________________________ Float: 50.07
_________ Shares Out: 61.93
Investment Rationale
While EGHT is largely viewed as a standalone, residential VoIP Market Cap: $61.3
service provider, approximately half of its revenues are derived 52 Wk High: $1.84
from its Packet8 Virtual Office, a hosted iPBX offering for the
52 Wk Low: $0.84
small/medium business (SMB) market. Focusing on this market
has driven substantial gross margin improvement and enabled Average Volume: 333,000
the company to generate positive cash flows for the past two
Enterprise Value: $48.3
quarters, which we believe is sustainable. As Virtual Office
increases as a percentage of revenues, we anticipate accelerating Dividend: Nil
top-line growth and improving profits and cash flows. Despite *In millions except per-share data and volume.
what are improving fundamentals, as Virtual Office increases as EPS exclude FAS 123R and benefit/loss from
a percentage of total revenues, EGHT shares trade at just 0.8x non-cash warrant pricing.
EV/Sales (TTM) compared with its peer group average of 3.2x. Estimates Revs EPS
We suggest EGHT trades at a low valuation because it is
thought of as a residential VoIP services provider—and a Jun. Q1’08(A) $14.7 $(0.00)
comparable company to Vonage—and because of weak Q2 Sep. Q2’08(A) 14.8 (0.05)
results.
Dec. Q3’08(E) 15.7 (0.01)
After posting solid Q1 results including GAAP EPS of $0.01, Mar. Q4’08(E) 16.0 0.00
20% Y-o-Y revenue growth and significant Y-o-Y and FY’08(E) $61.2 $(0.05)
sequential gross margin expansion, Q2 results suffered from a
one-time event. EGHT picked up 25k residential subscribers
from the second-largest alternative VoIP services provider Jun. Q1’09(E) $16.7 $0.01
(SunRocket), which abruptly went out of business. The Sep. Q2’09(E) 17.4 0.01
subscriber pick-up resulted in an immediate cash influx (from
pre-paid subscribers) and we estimate added to revenues in Q3 Dec. Q3’09(E) 18.1 0.02
(December); however, cash and non-cash expenses were Mar. Q4’09(E) 18.9 0.03
incurred in Q2 with little corresponding revenues. The result FY’09(E) $71.1 $0.07

Analyst Certification & Additional Disclosures are Included in Appendix A

Any recommendation contained in this report may not be suitable for all investors. Moreover, although the information contained
herein has been obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. B. Riley & Co.,
LLC may make markets and effect transactions, including transactions contrary to any recommendations herein, or have positions in
the securities mentioned herein (or options with respect thereto) and may also have performed investment banking services for the
issuers of such securities. In addition, employees of B. Riley & Co., LLC may have positions and effect transactions in the securities
or options of the issuers mentioned herein and may serve as directors of such issuers. Contact B. Riley & Co. for additional
information on the securities mentioned herein. Copyright 2008. All right reserved by B. Riley & Co., LLC. Member FINRA &
SIPC.
11100 Santa Monica Blvd. Suite 800, Los Angeles, CA, 90025 Phone: 310-966-1444 Fax: 310-966-1448
was a sequential contraction in the gross margin of more than 10 percentage points, an increase in operating
expenses and a greater loss for the quarter.

The shares declined 14% following the release of Q2 results and are now off more than 30% since then.
We believe that its Q2 results created the impression that EGHT would seek to continue to pick up
residential subscribers and that doing so would lead to deteriorating financial results. While we expect
EGHT to occasionally take on additional residential subs from failing competitors, we expect any negative
impact to be negligible (with the exception of Vonage, no alternative VoIP service providers have near the
subscribers that SunRocket had). Furthermore, we anticipate that improving results will show that EGHT
remains committed to driving profitable growth by focusing its sales and marketing and R&D resources on
Virtual Office. As Virtual Office increases as a percentage of revenues, we expect EGHT to enjoy an
expanding multiple similar to other companies that service the SMB space with VoIP solutions. Our $3.00
price target is based on an EV/Sales multiple of 2.5x based on our CY ’08 estimates. This multiple is
consistent with the average of its peers (see table on page 9). In the near-term, we anticipate that a
substantial sequential improvement in Q3 results will be a catalyst for the stock. We are initiating coverage
of EGHT with a “Buy” rating.

Investment Highlights

• EGHT has developed an attractive recurring revenue model, providing hosted iPBX services to
the SMB market: Introduced in 2004, Packet8 Virtual Office provides feature-rich PBX service at
an affordable flat monthly fee, and has experienced steady subscriber growth. The financial
metrics of Virtual Office (ARPU, gross margin, contribution margin, churn) are far superior to
Packet8 residential service. Virtual Office now accounts for just under 50% of revenues. With
residential attrition and continued growth in Virtual Office, we expect accelerating overall growth
and expanding margins in FY ’09 and beyond.
• EGHT was pro forma breakeven and cash flow positive in Q1 ‘08: Thanks to Virtual Office
sales, which increased 23% sequentially and accounted for 44% of revenues, the Q1 gross margin
improved nearly 10 percentage points from Q4, to 63.6%, and the pro forma operating loss was
cut to $0.4MM from $5.3MM and $2.2MM in the year-ago and previous quarters, respectively.
The company reported GAAP EPS of $0.01, thanks to a modest gain from warrant pricing.
• EGHT’s valuation is depressed following weak Q2 results that were impacted by a one-time
event—picking up 25k subscribers from SunRocket—that should be a long-term positive for the
company: EGHT was named the preferred company to provide VoIP services to subscribers of
SunRocket, which shut its doors overnight. Picking up 25k subscribers required shipping $750k
worth of hardware at no charge and incurring $1.5MM in shipping, customer service, e911
provisioning and other charges that hurt the gross margin and substantially increased the loss in
the quarter. Many SunRocket subscribers accepted a one-month-free offer, which exacerbated the
impact on EGHT’s results. Importantly, the equipment shipped was sitting in inventory and need
not be fully replenished, and roughly half of the subscribers opted to pay up front for the annual
plan, resulting in an influx of cash. With the recognition of revenues from these customers and
absence of one-time charges, we expect meaningful improvement in Q3 results that will
demonstrate that EGHT remains on a profitable growth path.
• Leverage in the model should result in expanding profitability and cash flows: Packet8 Virtual
Office generates contribution margin of nearly 60%. As Virtual Office increases as a percentage
of total revenues, we expect the company will achieve double-digit operating margins likely as
soon as FY ’10, with continued improvements in profitability and cash flows as the business
scales.
• Strong patent portfolio: We believe the valuations of VoIP services providers as a group have
been penalized based on fears of patent lawsuits by the major telcos. Vonage has settled patent
lawsuits with Verizon, Sprint-Nextel, AT&T and Nortel. Owing to its history as a technology
company and chip developer, EGHT has 70 issued U.S. IP- , VoIP- and video-related patents.

2
 While EGHT could pursue monetization of its patents from licensing or royalties, we believe their
real worth is in deterring others from filing suit against the company.

Company Background
The company was incorporated in California in 1987 under the name Integrated
Information Technology, Inc., and changed its name to 8x8, Inc. prior to its IPO in 1997.
The company originally developed and marketed video compression semiconductors and
EGHT can attribute associated software to OEMs of corporate videoconferencing systems. EGHT also
its strong patent leveraged its expertise in semiconductor design and software to develop
portfolio to its videoconferencing systems for the consumer market. In the late 1990s, EGHT shifted its
history as a emphasis from video to voice-over-IP, as it appeared this would be the larger market.
technology The company marketed VoIP chipsets to such telephone OEMs as Cisco, and in 1999, it
company and a acquired France-based Odisei in order to further its VoIP offerings. In 2000, 8x8, still
semiconductor, thought of as a video company, changed its name to Netergy Networks (and changed its
software and ticker to NTRG). NTRG created Centile, a wholly-owned subsidiary that utilized
equipment technology from Odisei to market software to carriers (CLECs) that would enable them
developer. to offer hosted IP PBX solutions to enterprises. In 2001, in the midst of the telecom
meltdown, it became apparent that the company would need to again shift its focus if it
were to survive. The company changed its name back to 8x8 (and ticker back to EGHT)
and moved away from an OEM focus to one targeting end users. EGHT developed a
service offering in an effort to create a market for its equipment. This strategy quickly
changed to one of subsidizing equipment in order to sell a service, and in November 2002
EGHT launched Packet8 Broadband Telephone Service. The company completed its
metamorphosis away from selling to OEMs and service providers in March 2004 when it
launched Packet8 Virtual Office, which utilizes the same technology that its Centile
subsidiary had marketed to service providers. EGHT can attribute its strong patent
portfolio to its history as a technology company and a semiconductor, software and
equipment developer.

Industry Background and Outlook

Voice-over Internet Protocol (VoIP) generally refers to the transmission of voice over the
Internet. The traditional telephone network (PSTN, public switched telephone network)
utilizes a circuit-switched architecture; voice and data is transmitted in a continuous
stream over dedicated circuits between endpoints. In an IP environment (packet-
switched), voice is digitized and broken into packets that are sent to a desired endpoint
using multiple shared network paths. The packets are re-assembled prior to reaching the
endpoint. Voice was first transmitted over the early Internet more than 30 years ago;
however, the technology is only now becoming mainstream. Enterprises began adopting
Market research VoIP technologies in the 1990s—and that adoption is accelerating today—and the
firm IDC predicts residential market took off with the introduction of Vonage’s (NYSE: VG; NR) service in
that residential U.S. 2002. VoIP service providers include cable MSOs (Comcast has the most VoIP
VoIP subscribers subscribers with nearly 4MM), incumbent telephone companies and alternative providers,
will total 44MM in such as EGHT and VG. While such VoIP quality issues as echo and latency remain, a
2010, up from majority of VoIP subscribers report satisfaction with the service.
10MM in 2006.
VoIP is seen as the future of telecommunications. Market research firm IDC predicts that
residential U.S. VoIP subscribers will total 44MM in 2010, up from 10MM in 2006.
Subscriber growth is being driven by demand for a lower-cost alternative to traditional
phone service. VoIP also enables enhanced features, such as the ability to choose from
available phone numbers, voicemail alerts provided by email and on-line account
management. Cable MSOs are expected to capture the lion’s share of VoIP subscribers
to the detriment of traditional telephone companies. Although service offerings from
alternative providers are typically less expensive, the triple-play (phone, TV and high-
speed Internet) offered by MSOs and telcos appeals to subscribers. The outlook for pure-

3
 play residential VoIP service providers has been called into question, as many have
exited the market (such as the aforementioned SunRocket) and Vonage, the largest and
most well-known alternative VoIP provider, has dealt with highly publicized patent
lawsuits with Verizon, Sprint-Nextel, AT&T and Nortel. The triple-play also provides
cable MSOs and traditional telcos with a competitive advantage.

AMI-Partners projects the North American SMB hosted VoIP market will grow to
$1.57 billion in 2010 from an estimated $416MM in 2007, or at a three-year CAGR
AMI-Partners
of 55%. Thanks to technological advances and greater broadband penetration, hosted IP
projects the North
PBX (private branch exchange) solutions are gaining traction, particularly with SMBs.
American SMB Unlike premised-based PBXs and key-telephone systems that cost tens of thousands of
hosted VoIP market dollars, hosted solutions require limited or no up-front capital costs. Rather, SMBs pay a
will grow to $1.57 monthly fee on a per-seat or per-service basis, and the equipment and management of the
billion in 2010 from service is hosted and performed by the service provider. Paying little or nothing up front
an estimated and having low, fixed monthly communication expenses are especially attractive features
$416MM in 2007, or to very small businesses with limited capital. Despite the low cost, hosted solutions
a three-year CAGR typically provide a rich set of features that improve productivity and help small
of 55%. businesses appear larger and more professional. Hosted solutions may also be the best
option for firms with remote workers and without IT resources.

AMI-Partners projects strong growth in the North American SMB hosted VoIP market,
driven by a forecasted increase in seats from less than 400k in 2005 to about 3MM in
2010; however, penetration is expected to be less than 10% of the SMB market. In other
words, we believe there is substantial further growth potential and room for multiple
players.

Growth Strategy – Virtual Office

Packet8 Virtual Office was introduced in March, 2004, and toward the end of FY ’06,
EGHT began to shift the focus of its sales, marketing and R&D efforts toward growing
its Virtual Office subscriber base and expanding its functionality. The reasons for
emphasizing Virtual Office are many. Relative to Packet8 Residential, Virtual Office
has:

• Higher ARPU (average revenue per user)

• Better gross margins
• Higher contribution margin
• Lower churn
• Faster payback

Virtual Office, which EGHT’s success in growing the service is evidenced by Virtual Office’s ranking by AMI-
now accounts for Partners as the most popular SMB hosted VoIP service. According to AMI’s April 2007
nearly half of report, Virtual Office’s 6,000 customers (businesses, not seats) were more than those of
revenues, has competitive offerings from XO Communications, Cbeyond and Covad. Covad and XO
higher margins, had 71k and 66k seats, respectively, compared with Packet8’s 48k according to AMI.
However, we suggest continued growth in the number of Virtual Office customers has
lower churn and
narrowed the gap versus the April report; EGHT reported more than 10,000 U.S.-based
faster payback than
SMB customers as of December 31, 2007 (EGHT does not break out seats per customer;
traditional Packet8 but the average customer has five seats and utilizes more than seven services).
Residential
services. In an effort to drive subscriber growth, EGHT has improved the functionality of Virtual
Office, added direct sales personnel and is expanding distribution channels. In late 2006,
the company introduced a high-performance fax-over-IP service and launched Packet8
Softalk Office, a PC-based softphone for use with Virtual Office. Intended for
telecommuters and road warriors, Softalk Office gives subscribers access to a full-
featured Virtual Office extension on a laptop (or PC) without the need for a Virtual

4
 Office telephone. The softphone also enables videoconferencing between as many as six
participants. In mid-2007, EGHT added Outlook integration, overhead paging, toll-free
fax numbers and the Packet8 Complete Contact Center. The call center solution was
developed in partnership with Contactual, Inc., a global leader in on-demand contact
center technology solutions. Without the need to buy expensive specialized equipment,
Recently launched
the solution offers such features as skill-based routing, multimedia management
MobileTalk enables
(telephony, email, chat), real-time monitoring and reporting, voice recording and logging,
subscribers to place IVR (interactive voice response) support and CRM (customer relationship management)
international mobile integration. In November 2007, EGHT launched Packet8 MobileTalk International
calls at EGHT’s low Calling Service, which lets subscribers make international calls using their mobile phones
international rates at EGHT’s low international rates of as little as $0.02-$0.05 per minute. The
by seamlessly downloadable software enables most Windows-, Palm- or Symbian-based mobile phones
connecting cellular to seamlessly connect international calls from the mobile phone to the Packet8 digital
calls to the Packet8 VoIP network. This service is available to non-Packet8 subscribers (Virtual Office or
digital VoIP Residential), but we believe it will appeal to business users.
network.
Sales and Distribution
Approximately 70% of the company’s sales are direct, which entails receiving inbound
calls and placing outbound calls to follow up on lead. Inbound calls are generated from
such sources as banner advertising on certain websites, print ads in select magazines,
direct mailings and the company’s presence in retailers such as Office Depot and
CompUSA. Last year at approximately this time, the company more than doubled its
sales force to 20 and has steadily increased the number to the current 35. In 2005, EGHT
entered into a co-marketing relationship with Pitney Bowes, the world’s leading provider
of integrated mail and document management systems and services. The Pitney Bowes-
Packet8 marketing program is a small business outreach campaign consisting of Packet8
service discounts, website promotions and advertising, direct mail and email offers,
Currently, 70% of payment stuffers and packaging inserts. Pitney Bowes receives a flat monthly fee and
the company’s sales has been a successful lead generator.
are direct;
expanding The company’s retail presence is limited, as customer acquisition costs are typically
distribution higher. EGHT has been in CompUSA (which is experiencing substantial difficulties and
channels is part of store closures) since early 2006 and in late 2006, the company struck a relationship with
EGHT’s growth Office Depot. Sales made directly at Office Depot are considered retail and account for
strategy roughly 5%-10% of revenues depending on the time of year—the retailer is more
aggressive during the summer and fall promoting back-to-school items. EGHT is also
pursuing a channel/reseller approach with marketers such as Hello Direct and, more
recently, SYNNEX Corp., a leading business process services company that will offer
Virtual Office as part of its Technology-as-a-Service (TaaS) offering.

Expanding distribution channels is part of management’s growth strategy. The company

would like to replicate the success it has had at Office Depot with such big-box retailers
as Staples and OfficeMax. EGHT intends to establish new relationships with distributors,
value added resellers and system integrators, other service providers, equipment
manufacturers and retailers. We believe the company will be more successful in
attracting partners as it becomes a greater force in the SMB communications space.

Although Virtual Office is the focus, EGHT has opportunistically picked up residential
subscribers and we believe it will continue to do so. In addition to increased revenues,
more residential subscribers add scale and enable the negotiation of lower wholesale
prices from carriers such as Level 3, Global Crossing and Qwest that own the
infrastructure. In July, EGHT announced that Packet8 had been selected as the preferred
replacement VoIP service by SunRocket, which had more than 200k VoIP subscribers.
SunRocket abruptly shut off its service after running out of funds. During Q2
(September), approximately 25k ex-SunRocket subs signed up for Packet8 Residential,

5
 increasing EGHT’s residential subscriber base by more than 25%. As discussed below
(Recent Results and Our Model section), taking on the subscribers had a one-time
negative impact on Q2 ’08 results. However, we expect increased revenues in Q3 to
show the merit of the decision. In September, EGHT announced that it had signed an
agreement with a service provider that was soon exiting the market. The service was
Packet8 residential NetZero Voice, provided by NetZero, a subsidiary of United Online (UNTD; Buy). We
is $24.99 a month anticipate the addition of slightly over 1k subscribers from NetZero Voice, which should
for unlimited calling have a nominal impact to results in Q3.
in the U.S. and
Canada with a Packet8 Services
$29.99 activation Residential – All that is required for Packet8 Residential phone service is a high-speed
fee. internet connection (DSL, cable or fiber) and a service plan. EGHT provides free of
charge one of three Uniden Packet8 service-ready phones (corded/cordeless) with built-in
adapter; or subscribers can opt for a separate adapter and keep their existing standard
telephone. Substantially all of the underlying technologies of the Packet8 service were
developed internally. The most popular plan is Freedom Unlimited, which, for $24.99 a
month, allows Packet8 subscribers to make unlimited calls to any telephone number in
the U.S. and Canada and to any other Packet8 subscriber anywhere in the world.
International calls to non-Packet8 numbers are charged at low per-minute rates. Other
plans include Freedom Unlimited Global ($29.99/month), Freedom Annual ($199/year),
Freedom Choice 500 (which offers unlimited inbound and 500 outbound minutes for
$14.99/month) and Freedom Fax (300 minutes for $9.99/month). The company charges a
$29.99 activation fee with each plan. Videoconferencing is included in each plan with
the purchase of a Packet8 videophone; the Tango ($99 after a $100 mail-in rebate) has a
built-in adapter and is all that is required for voice and video calls. All Packet8 accounts
come with voice mail, caller ID, call waiting, call waiting caller ID, call forwarding, hold,
line-alternate, 3-way conferencing, and web- and phone-based access to account controls,
directory assistance and real-time online billing. We estimate that there are
approximately 120k Packet8 Residential subscribers.
Virtual Office
provides a host of Virtual Office – Unlike residential, Virtual Office equipment is not subsidized.
PBX features Subscribers must purchase the Packet8 telephone and adapter for $99. The basic Virtual
including direct Office service plan is $49.99/month (plus a $39 activation fee per extension) for
inward dial (DID) unlimited calling in the U.S. and Canada and to other Packet8 subscribers worldwide.
phone numbers Virtual Office provides a host of PBX features including direct inward dial (DID) phone
with any desired numbers with any desired area code for each extension, conference bridge, music-on-
area code for each hold, call park/pick-up, business-class voicemail including voicemail to email alerts,
extension, extension-to-extension dialing anywhere in the world, and one-touch controls for
conference bridge, regularly used features such as three-way calling, forwarding, do not disturb, voicemail,
distinctive ringing and others. Allowing each extension to choose any area code can be
music-on-hold, call
useful for one-man shops or disparate organizations. The feature can be used to create
park/pick-up,
the impression that a one-person-shop is a larger, geographically dispersed organization;
business-class or that people around the country or world are located in one location. Also, a business
voicemail including can place ads in different spots around a state, for example, using local area codes to
voicemail to email make the business appear local in each advertisement. For monthly fees ranging from
alerts, extension- $9.99 to $89.99, other plans and value-added features are available, such as virtual
to-extension dialing attendant, metered extensions (limited number of outbound minutes), global extensions
anywhere in the and unlimited fax. The average business customer has five extensions, subscribes to
world. slightly over seven services, and generates approximately $700 in revenue per quarter.
Virtual Office customers generate gross margins of 81% and contribution margins of
59% (after customer service and billing), or approximately $420 per quarter. With a
customer acquisition cost of approximately $1,031, the payback on a Virtual Office
customer occurs during the third quarter, and the average life of a customer is 10
quarters. For every $1,000 invested, Packet8Virtual Office service will generate $7,140
in revenue and $4,200 in contribution margin. EGHT does not break out Virtual Office

6
 churn separately; however, monthly churn for all services was 3.9% in Q2 ’08, and we
estimate Virtual Office churn is roughly 3% per month. One of the greatest sources of
churn is small offices going out of business.

Competition and Competitive Advantages

In the residential space, EGHT competes with incumbent telephone companies, cable
companies and alternative voice and video communications providers. The ability to
provide a triple-play is a strong competitive advantage for telcos and cable companies.
Alternative providers have used low prices and heavy marketing to attract subscribers,
and have suffered losses for doing so. Vonage, the largest and most well known
alternative service provider has attracted more than 2.5MM subscribers but has suffered
EGHT is the second- substantial losses in the process. SunRocket and NetZero Voice are just two of literally
largest standalone hundreds of VoIP service providers that have exited the market, indicating just how
VoIP services challenging a space it is. From an investment standpoint, herein lies EGHT’s
provider to the differentiator: focus on the business market. However, although EGHT spends little or
residential market, nothing on marketing its residential service, the company benefits from these subscribers
and has numerous as noted above—increased revenue and greater leverage with its wholesale carriers. The
competitive departure of many low-cost providers could reduce residential churn.
advantages in the
SMB space, such as Some of the same players compete in the hosted VoIP, iPBX space, including traditional
plug ‘n’ play telcos and cable MSOs. However, this is typically not a focus area, particularly not
functionality from SMBs. Equipment vendors, too, such as Avaya, Cisco, Mitel (which recently acquired
any high-speed Inter-Tel) and Nortel offer hosted solutions as part of managed services offerings; but
Internet they generally are more interested in on-premise solutions and often do not serve the very
connection. small office. The most direct competitors to EGHT, in terms of service offerings, are
communication service providers, such as Cbeyond, M5, Aptela, Speakeasy, and Covad;
although Covad is exiting the VoIP business. A key competitive advantage is that it is
not an ISP and its service is available wherever there is a broadband connection.
Subscribers are not limited to a particular region in which an ISP provides service. This
feature makes the Virtual Office solution highly scalable and ideal for remote offices.
EGHT’s patents are a competitive advantage. At some point, we expect EGHT could
attempt to monetize them via licensing arrangements or seeking one-time payments from
infringers. More importantly, however, we believe its patents are a deterrent to others
suing the company, as the plaintiff would likely face a countersuit from a company with a
strong patent portfolio.

Recent Results and Our Model

In Q2 ’08, EGHT reported a GAAP per-share loss of $0.04, compared with EPS of $0.01
in the previous quarter and a loss of $0.04 in Q2 ’07. On a pro forma basis, excluding
EGHT’s Q2 results FAS 123R and a non-cash gain related to accounting for warrants, the loss was $0.05,
versus breakeven in Q1 and a loss of $0.04 in the year-ago quarter. (The non-cash
suffered from
warrant gain relates to EGHT’s classification of warrants granted in previous financings
several one-time
as liabilities, which means changes in the warrants’ fair value, based on changes in the
factors related to share price, are reported in the P&L.) As noted on page one of this report, the 25k
SunRocket that did SunRocket subscribers had a negative one-time impact on EGHT’s results, lowering the
not recur in Q3. gross margin and boosting opex. In total, the subscriber pick-up accounted for $2.2MM
of EGHT’s $2.8MM pro forma loss, or $0.04 out of the $0.05 loss. The expenses are
broken out below.

Revenues in Q2 were $14.8MM, up 12% Y-o-Y and flat sequentially. Excluding a one-
time benefit to Q1 revenues (from a court settlement related to the Universal Service
Fund), revenues increased 4% sequentially. Total service revenues grew 18% Y-o-Y, to
$13.3MM, while equipment revenues declined 22%, to $1.5MM. Equipment revenues
include activation fees, videophones and Virtual Office equipment. Equipment is not a

7
 revenue or margin driver, but rather a necessary component of providing a service.
Service revenues are therefore the more important metric.

Virtual Office revenues more than doubled Y-o-Y, to $6.9MM (47% of revenues),
offsetting a 20% decline in residential/video and other revenues, to $7.8MM. (In Q2 ’07
Virtual Office the company recognized $0.5MM in wholesale revenue under an agreement with
revenues more than BellSouth that was discontinued. Excluding this, residential/video revenue declined
doubled in Q2 15%.) Excluding the aforementioned USF benefit, Virtual Office revenues increased
versus the year-ago 12% sequentially on a 1,000-customer increase, to just over 9,000. Residential/video
period, and revenues were $7.8MM, flat versus the previous quarter excluding the USF benefit.
accounted for 47%
of total revenues. The consolidated gross margin was 52.1%, up 30 basis points Y-o-Y but down from
63.6% in Q1. The contraction broke a six-quarter string of sequential gross margin
expansion and resulted from shipping equipment to the SunRocket subscribers. EGHT
incurred $1.2MM in one-time COGS ($750k in hardware; $50k for number-porting and
e911 provisioning; and $350k in freight and packaging), that lowered the equipment
gross margin to -77%. Excluding these costs, the equipment gross margin was -4%, flat
with the previous quarter. Services gross margin was 66.7%, up from 55.6% in Q2 ’07
but down sequentially from 68.5% (excluding a 150 basis-point benefit from the 100%-
margin USF payment). The sequential decline related to providing services to the
SunRocket subscribers with little corresponding revenues. Excluding one-time COGS
related to SunRocket, the blended gross margin was 59.9%.

Excluding FAS 123R expense of $430k, opex totaled $10.7MM, versus $9.3MM and
$9.8MM in the year-ago and previous quarters, respectively. SG&A included expenses
totaling $1MM for sales and customer service call centers to handles the high call volume
from SunRocket customers, as well as expenses for credit card processing and bounties
paid to the SunRocket liquidator. Excluding the one-time costs associated with the
SunRocket subscribers (which generated little revenue in the quarter), the pro forma
operating loss was $0.8MM, up from $0.4MM in Q1 and well below the $2.5MM in the
year-ago quarter.

For Q3, we estimate a GAAP and pro forma loss of $0.01. Based on the level of the
stock price, the company likely recorded a non-cash gain from warrant pricing that could
results in positive EP. We estimate revenues grew 18% Y-o-Y and 6% sequentially, to
$15.8MM. We anticipate that Virtual Office revenues grew 84% Y-o-Y and 14%
We project sequentially, to $7.9MM, based on the addition of nearly 1,000 business customers,
continued positive which we estimate totaled just over 10k (EGHT announced a couple weeks ago that it has
cash flows and crossed the 10k customers mark). Mitigating the increase in Virtual Office revenues, we
breakeven EPS in expect residential/video and other revenues were up about 7% sequentially thanks to the
the March quarter. SunRocket subscribers, but declined 14% Y-o-Y, to $7.8MM. We estimate the gross
margin recovered nicely from the previous quarter, expanding more than 10 percentage
points, to 63.2%, which implies nearly 10 percentage-point expansion from Q3 ’07. We
estimate opex declined by $0.3MM from Q2, to $10.4MM, compared with $9.5MM in
Q3 ’07.

For FY ’08, we estimate a GAAP and pro forma loss of $0.05 on a 15% increase in
revenues, to $61.2MM. We expect Virtual Office customers will total 11.1k, versus 7k at
March 31, 2007, and project Virtual Office revenues will grow 83%, to $29.7MM (half of
total revenues). We estimate residential/video and other revenues will drop 18%, to
$30.2MM. We estimate a blended gross margin of 61%, up from 49.2%, and estimate
that opex will increase less than $3MM, to $41.3MM, but decline as a percentage of
revenues by more than five percentage points, to 67.5%.

8
 We estimate FY ’09 GAAP and pro forma EPS of $0.05 and $0.07, respectively, on 16%
revenue growth, to $71.1MM. We project that an approximate 40% increase in the
number of business customers, to 15.6k, will drive 40% growth in Virtual Office
revenues, to $41.8MM. We estimate a 3% decline in residential/video revenues. We
estimate the gross margin will expand to 65.6% and opex will increase by less than
$2MM and decline to 60.7% of revenues. We feel that Virtual Office revenues could
grow faster, and residential revenues could decline faster, which would improve the
company’s gross and operating margins. Net, net, we see top- and bottom-line upside to
our FY ’09 projections.

Balance Sheet and Cash Flow

As of September 30, EGHT’s balance sheet listed cash and equivalents of $12.9MM
EGHT had cash of
(~$0.20 per share) and no debt. The company has increased its cash balance two quarters
$12.9MM as of in a row and we expect it to remain cash flow positive. Due to the company’s recurring
September 20, revenue model and because some customers pay for a year of service up front, EGHT’s
2007. We project accounts receivable balance and working capital requirements are nominal. Cap-ex was a
cash at the end of modest $1.4MM in FY ’07 and $0.3MM in 1H ’08. We believe some investors shy away
FY ’09 of $20.9MM. from EGHT for fear of a cash crunch and because the company has a history of private
placements. EGHT completed six PIPEs between 2003 and 2005, with its last in
December ’05. The company is committed, however, to not issuing additional shares,
and we believe there will be no need to do so. Five of the PIPEs had warrants attached.
The company’s fully diluted share count is 81MM, which includes roughly 10MM
employee stock options and 8MM warrants, with an average strike price of
approximately $2 for the options and $3.10 for the warrants. Regarding the warrants,
2.5MM expire in 2008, 3.7MM in 2009 and 1.8MM in 2010. Because the vast majority
of options and warrants are underwater, when EGHT reported profitability in the
previous quarter, the share count barely budged. The options and warrants would need to
be taken into consideration when valuing the company on a take-out basis; however, they
are not included in our EV calculation. We project cash flow of $1.1MM and $5.9MM in
FY ’08 and FY ’09, respectively.

Comparative Valuation Table

Price Market Net Revs EBITDA EPS Revs EBITDA EPS EV/Sales EV/Sales EV/EBITDA P/E
1/11/2008 Cap Cash EV TTM TTM TTM CY '08E CY '08E CY '08E TTM CY '08 CY '08 CY '08
CBEY $ 32.35 917 51 866 262 (8) $ 0.47 $ 363 $ 58 $ 0.65 3.3 2.4 15.0 50
CCOI $ 20.25 976 (106) 1,081 176 32 $ (0.71) $ 228 $ 75 $ (0.22) 6.1 4.7 14.4 N/A
PAET $ 8.39 863 (686) 1,549 904 149 $ (0.02) $ 1,405 $ 268 $ 0.34 1.7 1.1 5.8 25
SHOR $ 5.85 249 99 150 109 8 $ 0.18 $ 152 $ 22 $ 0.28 1.4 1.0 6.8 21
TWTC $ 18.91 2761 (1,073) 3,834 1,043 308 $ (0.41) $ 1,209.69 $ 418 $ 0.23 3.7 3.2 9.2 82
Average 3.2 2.5 10.2 44
EGHT $ 0.98 61 13 48 57.21 N/A $ (0.13) $ 68.26 $ 1.50 $ 0.04 0.8 0.7 31.8 25

Source: CapIQ; First Call; B. Riley & Co., LLC estimates

Valuation
While cash flow has only been positive for two quarters, given the increasing
contribution from the more profitable Virtual Office, we project expanding positive cash
flows and improving profitability. We expect that sustained profitability and a growing
cash balance will alleviate fears that EGHT will require additional capital, and will prove
that the company has developed a profitable, sustainable business model. Once EGHT is
no longer viewed as just a VoIP services provider to the residential market—which we
suggest will be an increasingly difficult market due to competition from cable MSOs and
telcos—we anticipate the market will accord the stock a multiple that reflects its
prospects for generation of cash and profits. Our $3 price target is based on a CY ‘08
EV/Sales multiple of 2.5x, which is consistent with the average of its peers. With 200%
appreciation potential implied by our price target, we initiate coverage of EGHT with a
“Buy” rating.

9
Company Description: 8x8, Inc., the second largest standalone VoIP service provider in the U.S., offers
internet-based telephony solutions (www.packet8.net) for individual residential and business users as well
as small- to medium-sized business organizations. In addition to regular Packet8 VoIP service plans priced
as low as $24.99 per month for unlimited anytime calling to the U.S., Canada and eight additional
countries, 8x8 offers the Packet8 Tango Video Terminal Adapter along with accompanying monthly service
plans also priced at $24.99 per month. Packet8 Virtual Office, 8x8's VoIP phone system for small- to
medium-sized businesses, is a hosted PBX solution comprised of powerful business class features.
Companies subscribing to Virtual Office pay just $49.99 per month per extension for enterprise class PBX
functionality along with unlimited local and long distance calling in the U.S. and Canada. The Packet8
Complete Contact Center(TM) is a hosted multimedia call center distribution and management platform
that works with any broadband Internet service and provides enterprise class contact center functionality
combined with Virtual Office hosted iPBX calling features and business calling plans.

10
8x8 (EGHT) Model ($ in thousands)
B. Riley & Co.
(310) 966-1444
FY '07A FY '08E FY '09E
FY '04(A) FY '05(A) FY '06(A) Q1-Jun Q2 - Sep Q3 - Dec Q4 - Mar FY '07A Q1-JunA Q2 - SepA Q3 - Dec Q4 - Mar FY '08(E) Q1-Jun Q2 - Sep Q3 - Dec Q4 - Mar FY '09(E)
Product revenues 2,679 2,389 5,779 2,394 1,916 1,800 1,974 8,084 1,331 1,496 1,380 1,440 5,647 1,460 1,440 1,470 1,500 5,870
Service revenues 6,629 9,086 26,113 9,877 11,240 11,515 12,414 45,046 13,411 13,272 14,290 14,599 55,572 15,257 15,948 16,650 17,392 65,246
Total revenues 9,308 11,475 31,892 12,271 13,156 13,315 14,388 53,130 14,742 14,768 15,670 16,039 61,219 16,717 17,388 18,120 18,892 71,116
Cost of product revenues 1,768 4,546 10,732 2,922 1,349 1,814 1,972 8,057 1,382 2,646 1,435 1,498 6,961 1,518 1,498 1,529 1,560 6,105
Cost of service revenues 2,594 5,195 12,367 4,720 4,994 4,539 4,673 18,926 3,986 4,423 4,338 4,160 16,907 4,412 4,525 4,640 4,764 18,341
Gross profit 4,946 1,734 8,793 4,629 6,813 6,962 7,743 26,147 9,374 7,699 9,897 10,382 37,352 10,786 11,365 11,951 12,568 46,670
R&D 2,747 3,109 5,916 1,185 1,156 998 1,001 4,340 1,016 942 1,035 1,040 4,033 1,035 1,035 1,035 1,035 4,140
SG&A 6,060 18,534 27,863 8,765 8,113 8,547 8,905 34,330 8,756 9,717 9,389 9,436 37,298 9,556 9,684 9,814 9,952 39,006
Other/FAS 123R 0 0 0 624 512 402 272 1,810 205 430 350 350 1,335 350 350 350 350 1,400
Operating income (3,861) (19,909) (24,986) (5,945) (2,968) (2,985) (2,435) (14,333) (603) (3,390) (877) (444) (5,314) (155) 296 752 1,231 2,124
Interest and other income 822 558 1,733 4,141 585 152 (475) 4,403 1,111 832 165 170 2,278 172 175 178 185 710
Gain/(loss) from warrant pricing 0 0 886 3,898 401 40 (603) 3,736 979 671 0 0 1,650 0 0 0 0 0
Pretax income (3,039) (19,351) (23,253) (1,804) (2,383) (2,833) (2,910) (9,930) 508 (2,558) (712) (274) (3,036) 17 471 930 1,416 2,834
Income tax provision 0 (203) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net income before extraordinary item (3,039) (19,148) (23,253) (1,804) (2,383) (2,833) (2,910) (9,930) 508 (2,558) (712) (274) (3,036) 17 471 930 1,416 2,834
Extraordinary item 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net income (loss) (3,039) (19,148) (23,253) (1,804) (2,383) (2,833) (2,910) (9,930) 508 (2,558) (712) (274) (3,036) 17 471 930 1,416 2,834
Net income (loss) pro forma (3,039) (19,148) (24,139) (5,078) (2,272) (2,471) (2,035) (11,856) (266) (2,799) (362) 76 (3,351) 367 821 1,280 1,766 4,234
EPS, GAAP (0.09) (0.43) (0.42) (0.03) (0.04) (0.05) (0.05) (0.16) 0.01 (0.04) (0.01) (0.00) (0.05) 0.00 0.01 0.01 0.02 0.05
EPS, pro forma (0.09) (0.43) (0.43) (0.08) (0.04) (0.04) (0.03) (0.19) (0.00) (0.05) (0.01) 0.00 (0.05) 0.01 0.01 0.02 0.03 0.07
Diluted shares 32,546 44,373 55,889 61,138 61,329 61,420 61,605 61,365 62,080 61,870 62,100 62,250 62,075 62,350 62,450 62,600 62,750 62,538

Common Size
Product gross margin 34.0% -90.3% -85.7% -22.1% 29.6% -0.8% 0.1% 0.3% -3.8% -76.9% -4.0% -4.0% -23.3% -4.0% -4.0% -4.0% -4.0% -4.0%
Service gross margin 60.9% 42.8% 52.6% 52.2% 55.6% 60.6% 62.4% 58.0% 70.3% 66.7% 69.6% 71.5% 69.6% 71.1% 71.6% 72.1% 72.6% 71.9%
Gross margin 53.1% 15.1% 27.6% 37.7% 51.8% 52.3% 53.8% 49.2% 63.6% 52.1% 63.2% 64.7% 61.0% 64.5% 65.4% 66.0% 66.5% 65.6%
R&D expense 29.5% 27.1% 18.6% 9.7% 8.8% 7.5% 7.0% 8.2% 6.9% 6.4% 6.6% 6.5% 6.6% 6.2% 6.0% 5.7% 5.5% 5.8%
SG&A expense 65.1% 161.5% 87.4% 71.4% 61.7% 64.2% 61.9% 64.6% 59.4% 65.8% 59.9% 58.8% 60.9% 57.2% 55.7% 54.2% 52.7% 54.8%
Operating margin* -41.5% -173.5% -78.3% -43.4% -18.7% -19.4% -15.0% -23.6% -2.7% -20.0% -3.4% -0.6% -6.5% 1.2% 3.7% 6.1% 8.4% 5.0%

Year-Over-Year Growth Rates

Total revenue -15.4% 23.3% 177.9% 104.3% 86.3% 57.0% 39.1% 66.6% 20.1% 12.3% 17.7% 11.5% 15.2% 13.4% 17.7% 15.6% 17.8% 16.2%
Operating income* N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
EPS* N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
*Pro forma excludes FAS 123R and non-cash gain/(loss) from change in fair value of warrants

Selected Balance Sheet Data

Cash and investments 14,049 31,800 22,957 17,806 14,488 12,424 11,932 11,932 12,216 12,907 13,061 13,641 13,641 14,511 15,904 17,757 20,109 20,109
Cash per share 0.43 0.72 0.41 0.29 0.24 0.20 0.19 0.19 0.20 0.21 0.21 0.22 0.22 0.23 0.25 0.28 0.32 0.32
Accounts receivable 608 1,144 776 792 1,000 640 736 736 804 554 563 602 602 622 648 675 703 703
Accounts payable 854 4,496 4,907 4,933 5,627 4,610 4,919 4,919 5,208 4,338 4,414 4,534 4,534 4,651 4,809 4,971 5,145 5,145
Debt 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Stockholders' equity 12,786 29,744 12,970 11,793 10,100 10,441 5,377 5,377 6,094 4,991 4,779 5,005 5,005 5,522 6,492 7,923 9,839 9,839

Selected Financial Data

Price 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99 0.99
Market cap 32,221 43,929 60,493 60,527 60,716 60,806 60,989 60,989 61,459 61,251 61,479 61,628 61,628 61,727 61,826 61,974 62,123 62,123
Enterprise value 18,172 12,129 37,536 42,721 46,228 48,382 49,057 49,057 49,243 48,344 48,418 47,986 47,986 47,215 45,921 44,217 42,014 42,014
EV/Sales (TTM) 2.0 1.1 1.2 1.1 1.0 1.0 0.9 0.9 0.9 0.8 0.8 0.8 0.8 0.7 0.7 0.6 0.6 0.6
EV/EBITDA (TTM) NM NM NM NM NM NM NM NM NM NM NM NM NM NM 25.2 12.8 8.2 8.2
P/E (TTM) NM NM NM NM NM NM NM NM NM NM NM NM NM NM 68.7 24.3 14.6 14.6
_________________________________________________________________________________

APPENDIX A

Analyst Certification
I, Michael Coady, CFA, certify that this report reflects my personal beliefs about this company and that no
portion of my compensation was, is or will be directly or indirectly related to the specific recommendations or
views discussed in this report.

Disclosure Requirement
• B. Riley & Co., LLC makes a market in the securities of the company covered in this report.
• B. Riley & Co., LLC does and seeks to do business with companies covered in its research reports.
• A portion of this analyst’s compensation is based on the investment banking activities of B. Riley & Co.,
LLC.

Initiated on 1/15/08 with a “Buy” Rating and a Price Target of $3.00

Ratings Distribution as of Dec 31, 2007 % with Investment Banking Relationships*

Number of Such
Number of Companies for Each Percent of Total for
Rating Companies Percent of Total Rating Each Rating
Buy 52 67.5% Buy 0 0.0%
Neutral 24 31.2% Neutral 0 0.0%
Sell 1 1.3% Sell 0 0.0%
TOTAL 77 100.0% TOTAL 0 0.0%
_________________________________________________________________________________

APPENDIX A
Explanation of B. Riley & Co., LLC’s Rating System

• Buy: We generally expect “Buy” rated stocks to materially outperform both the S&P 500 and Russell
2000 as well as other stocks in their sector. Further, we believe that the potential reward relative to the
potential risk is particularly attractive.
• Neutral: We generally believe “Neutral” rated stocks will perform roughly in line with the S&P 500
and Russell 2000 over the intermediate and long term.
• Sell: We generally expect “Sell” rated stocks to materially underperform both the S&P 500 and Russell
2000 as well as other stocks in their sector. Further, we believe that the potential reward relative to the
potential risk is particularly unattractive.

Risks and Considerations

• The company is in a highly competitive business.

• The company's business is subject to pricing pressure.
• Certain of the company's competitors are much larger with greater financial resources.
• The company is at risk of patent lawsuits; although we believe its patent portfolio provides adequate
protection.
• EGHT has raised money via public offerings several times in the past and may need to do so again if it can
not sustain positive cash flow.
• See the company’s financial statements for a further discussion of risks and considerations.