VONAGE HOLDINGS CORP (Form: 10-Q, Received: 05/07/2010 06:05:29)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission File Number 001-32887

VONAGE HOLDINGS CORP.

(Exact name of registrant as specified in its charter)


Delaware		11-3547680
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

23 Main Street, Holmdel, NJ		07733
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (732) 528-2600

(Former name, former address and former fiscal year, if changed since last report): Not Applicable

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

*	The registrant has not yet been phased into the interactive data requirements

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at April 30, 2010
Common Stock, par value $0.001		210,881,209 shares

VONAGE HOLDINGS CORP.

INDEX


		Page
*Part I. Financial Information*

Item 1.	Financial Statements

	A) Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009	3
	B) Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009	4
	C) Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009	5
	D) Unaudited Consolidated Statement of Stockholders’ Deficit for the Three Months Ended March 31, 2010	6
	E) Notes to Unaudited Consolidated Financial Statements for the Three Months Ended March 31, 2010	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	32

*Part II. Other Information*

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	33

Item 4.	Submission of Matters to a Vote of Security Holders

Item 5.	Other Information	33

Item 6.	Exhibits	34

	Signature	35

Financial Information Presentation

For the financial information discussed in this Quarterly Report on Form 10-Q, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted.

Part I – Financial Information

Item 1.

Financial Statements

VONAGE HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)


	March 31, 2010			December 31, 2009
	(unaudited)
Assets
Assets
Current assets:
Cash and cash equivalents	$	52,055		$	32,213
Accounts receivable, net of allowance of $772 and $1,432, respectively		15,376			15,053
Inventory, net of allowance of $398 and $432, respectively		12,498			7,771
Deferred customer acquisition costs, current		13,407			15,997
Prepaid expenses and other current assets		26,591			40,425

Total current assets		119,927			111,459

Property and equipment, net		84,979			90,548
Software, net		31,630			35,540
Deferred customer acquisition costs, non-current		2,959			7,075
Debt related costs, net		6,627			7,412
Restricted cash		70,773			43,700
Intangible assets, net		5,045			5,331
Other assets		12,327			12,319

Total assets	$	334,267		$	313,384

Liabilities and Stockholders’ Deficit
Liabilities
Current liabilities:
Accounts payable	$	16,053		$	11,512
Accrued expenses		78,410			69,171
Deferred revenue, current portion		51,602			55,929
Current maturities of capital lease obligations		1,567			1,500
Current portion of long-term debt		1,303			1,303

Total current liabilities		148,935			139,415

Notes payable, net of discount		202,624			200,468
Embedded conversion option within convertible notes, at fair value		10,860			25,050
Deferred revenue, net of current portion		4,008			8,629
Capital lease obligations, net of current maturities		19,029			19,448
Other liabilities, net of current portion in accrued expenses		10,630			12,283

Total liabilities		396,086			405,293

Commitments and Contingencies
Stockholders’ Deficit
Common stock, par value $0.001 per share; 596,950 shares authorized at March 31, 2010 and December 31, 2009; 212,459 and 201,628 shares issued at March 31, 2010 and December 31, 2009, respectively; 210,707 and 199,898 shares outstanding at March 31, 2010 and December 31, 2009, respectively		212			202
Additional paid-in capital		1,024,347			1,008,547
Accumulated deficit		(1,074,268	)		(1,088,236	)
Treasury stock, at cost, 1,752 shares at March 31, 2010 and 1,730 shares at December 31, 2009		(12,906	)		(12,878	)
Accumulated other comprehensive income		796			456

Total stockholders’ deficit		(61,819	)		(91,909	)

Total liabilities and stockholders’ deficit	$	334,267		$	313,384

The accompanying notes are an integral part of the consolidated financial statements.

VONAGE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended March 31,
	2010			2009
Operating Revenues:
Telephony services	$	224,527		$	215,643
Customer equipment and shipping		3,424			8,362

		227,951			224,005

Operating Expenses:
Direct cost of telephony services (excluding depreciation and amortization of $4,902 and $4,757, respectively)		62,495			51,751
Direct cost of goods sold		16,647			20,512
Selling, general and administrative		60,787			68,051
Marketing		49,240			65,695
Depreciation and amortization		13,768			12,896

		202,937			218,905


Income from operations		25,014			5,100


Other Income (Expense):
Interest income		53			110
Interest expense		(13,211	)		(13,542	)
Change in fair value of embedded conversion option and stock warrant		835			12,970
Gain on extinguishment of notes		1,038			—
Other, net		103			801

		(11,182	)		339


Income before income tax benefit (expense)		13,832			5,439

Income tax benefit (expense)		136			(168	)


Net income	$	13,968		$	5,271


Net income (loss) per common share:
Basic	$	0.07		$	0.03

Diluted	$	0.06		$	(0.03	)


Weighted-average common shares outstanding:
Basic		201,324			156,718

Diluted		221,947			218,787

The accompanying notes are an integral part of the consolidated financial statements.

VONAGE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended
	Mar 31, 2010			Mar 31, 2009
Cash flows from operating activities:
Net income	$	13,968		$	5,271
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization and impairment charges		13,482			12,249
Amortization of intangibles		286			647
Change in fair value of embedded conversion option and stock warrant		(835	)		(12,970	)
Gain on extinguishment of notes		(1,038	)		—
Amortization of discount on notes		1,370			1,347
Accrued interest paid in-kind		3,920			4,645
Allowance for doubtful accounts		(623	)		96
Allowance for obsolete inventory		667			540
Amortization of debt related costs		403			734
Share-based expense		1,018			2,608
Changes in operating assets and liabilities:
Accounts receivable		305			(3,781	)
Inventory		(5,389	)		(764	)
Prepaid expenses and other current assets		13,803			(4,107	)
Deferred customer acquisition costs		6,702			6,144
Other assets		(8	)		563
Accounts payable		4,558			(2,318	)
Accrued expenses		9,245			3,478
Deferred revenue		(8,972	)		(6,387	)
Other liabilities		(1,614	)		(1,432	)

Net cash provided by operating activities		51,248			6,563

Cash flows from investing activities:
Capital expenditures		(1,959	)		(2,519	)
Acquisition and development of software assets		(2,041	)		(3,995	)
Increase in restricted cash		(27,098	)		(437	)

Net cash used in investing activities		(31,098	)		(6,951	)

Cash flows from financing activities:
Principal payments on capital lease obligations		(352	)		(292	)
Principal payments on notes		(326	)		(326	)
Debt related costs		—			(251	)
Proceeds from exercise of stock options		30			—

Net cash used in financing activities		(648	)		(869	)

Effect of exchange rate changes on cash		340			(148	)

Net change in cash and cash equivalents		19,842			(1,405	)
Cash and cash equivalents, beginning of period		32,213			46,134

Cash and cash equivalents, end of period	$	52,055		$	44,729


Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest	$	7,375		$	6,878

Income taxes	$	33		$	307

Non-cash financing transactions during the periods for:
Third lien convertible notes, net of discount and debt related costs	$	2,406		$	—

Embedded derivative liability within third lien convertible notes	$	13,394		$	—

The accompanying notes are an integral part of the consolidated financial statements.

VONAGE HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(In thousands)

(Unaudited)


	Common Stock		Additional Paid-in Capital		Accumulated Deficit			Treasury Comprehensive Stock			Accumulated Other Income		Total
Balance at December 31, 2009	$	202	$	1,008,547	$	(1,088,236	)	$	(12,878	)	$	456	$	(91,909	)
Stock option exercises				30										30
Share-based expense				1,018										1,018
Share-based award activity									(28	)				(28	)
Convertible notes conversion		10		14,752										14,762
Comprehensive income:
Foreign currency translation adjustment												340		340
Net income						13,968								13,968

Total comprehensive income		—		—		13,968			—			340		14,308

Balance at March 31, 2010	$	212	$	1,024,347	$	(1,074,268	)	$	(12,906	)	$	796	$	(61,819	)

The accompanying notes are an integral part of the consolidated financial statements.

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 1. Basis of Presentation and Significant Accounting Policies

Nature of Operations

Vonage Holdings Corp. (“Vonage”, “Company”, “we”, “our”, “us”) is incorporated as a Delaware corporation. We are a leading provider of high quality voice and messaging services over broadband networks. While customers in the United States represented 94% of our subscriber lines at March 31, 2010, we continue to serve customers internationally with services in Canada and the United Kingdom.

Unaudited Interim Financial Information

The accompanying unaudited interim consolidated financial statements and information have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position, results of operations, cash flows and statement of stockholders’ deficit for the periods presented. The results for the three month period ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year.

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2010.

Significant Accounting Policies

Basis of Consolidation

The consolidated financial statements include the accounts of Vonage and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.

On an ongoing basis, we evaluate our estimates, including the following:

•

those related to the average period of service to a customer (the “customer life”) used to amortize deferred revenue and deferred customer acquisition costs associated with customer activation;

•

the useful lives of property and equipment, software costs and intangible assets;

•

assumptions used for the purpose of determining share-based compensation and the fair value of our stock warrant using the Black-Scholes option pricing model (“Model”), and various other assumptions that we believed to be reasonable. The key inputs for this Model are our stock price at valuation date, exercise price, the dividend yield, risk-free interest rate, life in years and historical volatility of our common stock; and

•

assumptions used to determine the fair value of the embedded derivative within our convertible notes using the Monte Carlo simulation model. The key inputs are maturity date, risk-free interest rate, our stock price at valuation date and historical volatility of our common stock.

We base our estimates on historical experience, available market information, appropriate valuation methodologies, and on various other assumptions that we believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Prepaid Expenses and Other Current Assets


	March 31, 2010		December 31, 2009
Nontrade receivables	$	7,257	$	7,117
Software and hardware maintenance and support		7,063		6,958
Telecommunications		5,785		8,845
Services		2,246		2,887
Marketing		2,098		894
Insurance		697		1,885
Inventory		—		9,457
Other prepaids		1,445		2,382

	$	26,591	$	40,425

Restricted Cash and Letters of Credit

Our credit card processors have established reserves to cover any exposure that they may have as we collect revenue in advance of providing services to our customers, which is a customary practice for companies that bill their customers in advance of providing services. As such, we provided our credit card processors with cash reserves of $22,774 and $22,423 as of March 31, 2010 and December 31, 2009, respectively, and a cash collateralized letter of credit for $10,500 as of March 31, 2010 and December 31, 2009, respectively. We also had a cash collateralized letter of credit for $7,350 as of March 31, 2010 and December 31, 2009, respectively, related to lease deposits for our offices. The total amount of collateralized letters of credit was $18,000 at March 31, 2010 and December 31, 2009, respectively. Pursuant to the terms of credit facilities (see Note 3. Long-Term Debt) commencing October 1, 2009, all specified unrestricted cash above $30,000, subject to certain adjustments, has been swept into a concentration account (the “Concentration Account”), and until the balance in the Concentration Account is at least equal to $30,000, we may not access or make any withdrawals from the Concentration Account. As of March 31, 2010, we have funded $41,285 into the Concentration Account, of this amount, $30,000 is reflected as restricted cash and $11,285 is reflected as cash, as with limited exceptions, we will have the right to withdraw funds from the Concentration Account in excess of $30,000. We funded an additional $7,625 through April 30, 2010. In the aggregate, cash reserves and collateralized letters of credit of $70,773 and $43,700 were recorded as long-term restricted cash at March 31, 2010 and December 31, 2009, respectively.

Software Costs

We capitalize certain costs, such as purchased software and internally developed software that we use for customer acquisition and customer care automation tools, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40, “Internal-Use Software”. Computer software is stated at cost less accumulated amortization and the estimated useful life is two to three years. Total computer software was $74,297 and $72,359 at March 31, 2010 and December 31, 2009, respectively, substantially all of which were external costs. Accumulated amortization was $42,668 and $36,819 at March 31, 2010 and December 31, 2009, respectively. Amortization expense was $5,951, including $102 impairment, and $4,743, including $677 impairment, for the three months ended March 31, 2010 and 2009, respectively.

Debt Related Costs

Costs incurred in raising debt are deferred and amortized as interest expense using the effective interest method over the life of the debt. In connection with our financing transaction in November 2008, we recorded debt related costs of $12,271, which are being amortized over the life of the debt which is five years and seven years. Amortization expense related to these costs is included in interest expense in the consolidated statements of operations and was $403 and $734 for the three months ended March 31, 2010 and 2009, respectively. Accumulated amortization of debt related costs was $5,644 and $4,859 at March 31, 2010 and December 31, 2009, respectively, including a $382 and $1,673 write off of debt related costs associated with the conversion of convertible notes for the three months ended March 31, 2010 and the year ended December 31, 2009, respectively.

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Accrued Expenses


	March 31 2010		December 31, 2009
Taxes and fees	$	20,510	$	14,415
Marketing		16,568		9,331
Compensation and related taxes and temporary labor		10,351		16,747
Telecommunications		9,801		9,873
Litigation		8,870		6,689
Accrued interest		3,182		3,304
Customer credits		2,748		3,384
Professional fees		2,733		2,209
Credit card fees		226		124
Inventory		49		95
Other accruals		3,372		3,000

	$	78,410	$	69,171

Derivative Instruments

We do not hold or issue derivative instruments for trading purposes; however, certain features within our 20% senior secured third lien notes due 2015 (“Convertible Notes”) and a common stock warrant to purchase 514 shares of common stock at an exercise price of $0.58 require us to account for such features as derivative instruments. In accordance with new guidance codified in FASB ASC 815, “Derivatives and Hedging” (“FASB ASC 815”) which we adopted on January 1, 2009, we recognize these embedded derivatives as liabilities in our consolidated balance sheet at fair value each period and recognize any change in the fair value in our statement of operations in the period of change. We estimate the fair value of these embedded derivatives using available market information and appropriate valuation methodologies.

Fair Value of Financial Instruments

Effective January 1, 2008, we adopted FASB ASC 820-10-25, “Fair Value Measurements and Disclosures .” This standard establishes a framework for measuring fair value and expands disclosure about fair value measurements. We did not elect fair value accounting for any assets and liabilities allowed by FASB ASC 825, “Financial Instruments” .

FASB ASC 820-10 defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FASB ASC 820-10 describes the following three levels of inputs that may be used:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data. Our common stock warrant with a value of $515 as of March 31, 2010 is included as a Level 2 liability.

Level 3: Unobservable inputs when there is little or no market data available, thereby requiring an entity to develop its own assumptions. The fair value hierarchy gives the lowest priority to Level 3 inputs. The embedded derivative within our Convertible Notes with a value of $10,860 as of March 31, 2010 is included as a Level 3 liability.

The following tables set forth the inputs as of March 31, 2010 and December 31, 2009 and a summary of changes in the fair value of our Level 3 liabilities for the three months ended March 31, 2010 and the year ended December 31, 2009:


	March 31, 2010			December 31, 2009
Maturity date		October 31, 2015			October 31, 2015
Risk- free interest rate		2.82	%		2.95	%
Price of common stock	$	1.35		$	1.40
Volatility		106.6	%		109.3	%

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)


Liabilities:	Three Months Ended March 31, 2010			For the Year Ended December 31, 2009
Beginning balance	$	25,050		$	32,720
Increase (decrease) in value for notes converted		(220	)		34,682
Fair value adjustment for notes converted		(13,394	)		(57,050	)
Total unrealized (gain) loss in earnings		(576	)		14,698

Ending balance	$	10,860		$	25,050

Fair Value of Other Financial Instruments

The carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of their short maturities. The carrying amounts of our capital leases approximate fair value of these obligations based upon management’s best estimates of interest rates that would be available for similar debt obligations at March 31, 2010 and December 31, 2009.

Each reporting period we evaluate market conditions, including available interest rates, credit spread relative to our credit rating and liquidity in estimating the fair value of our debt. After considering such market conditions, we estimate that if we were to issue debt with terms similar to our senior secured first lien credit facility (the “First Lien Senior Facility”), our senior secured second lien credit facility (the “Second Lien Senior Facility”) and Convertible Notes at March 31, 2010, each debt instrument would bear an interest rate significantly below the stated coupon rates (See Note 3 Long-Term Debt). Given the reductions in the market rate of interest, we estimate the fair value of our debt at March 31, 2010, using a present value model, was approximately $145,000 for the First Lien Senior Facility ($109,407 carrying amount); approximately $138,000 for the Second Lien Senior Facility ($91,308 carrying amount) and approximately $4,700 for the Convertible Notes ($3,211 carrying amount) exclusive of the conversion feature which, as noted above, is already recorded at fair value.

Earnings per Share

Net income (loss) per share has been computed according to FASB ASC 260, “ Earnings per Share” , which requires a dual presentation of basic and diluted earnings per share (“EPS”). Basic EPS represents net income (loss) divided by the weighted average number of common shares outstanding during a reported period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, including warrants, stock options and restricted stock units under our 2001 Stock Incentive Plan and 2006 Incentive Plan, and the Convertible Notes, were exercised or converted into common stock. The dilutive effect of outstanding warrants, stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. In applying the treasury stock method for stock-based compensation arrangements, the assumed proceeds are computed as the sum of the amount the employee must pay upon exercise and the amounts of average unrecognized compensation cost attributed to future services. The dilutive effect of the Convertible Notes is reflected in diluted earnings per share using the if-converted method.

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

The following table sets forth the computation for basic and diluted net income per share for the three months ended March 31, 2010.


	Three Months Ended March 31, 2010			Three Months Ended March 31, 2009
Numerator
Numerator for basic earnings per share-net income	$	13,968		$	5,271
Add: interest savings on assumed conversion of Convertible Notes		394			1,242
Less: gain on extinguisment of debt		(1,038	)		—
Less: change in fair value of embedded conversion option and stock warrant		(835	)		(12,970	)

Numerator for diluted earnings per share	$	12,489		$	(6,457	)

Denominator
Basic weighted average common shares outstanding		201,324			156,718
Dilutive effect of stock options and restricted stock units		2,000			—
Dilutive effect of stock warrant		315			—
Dilutive effect of Convertible Notes		18,308			62,069

Diluted weighted average common shares outstanding		221,947			218,787

Basic net income per share
Basic net income per share	$	0.07		$	0.03

Diluted net income per share
Diluted net income per share	$	0.06		$	(0.03	)

For the quarters ended March 31, 2010 and 2009, the following were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects:


	Three Months Ended March 31,
	2010	2009
Common stock warrant	—	514
Convertible Notes	—	—
Restricted stock units	1,178	2,870
Employee stock options	26,867	24,902

	28,045	28,286

Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”) “Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force (“EITF”)”. This ASU provides amendments to the criteria in FASB ASC 605-25 for separating consideration in multiple-deliverable arrangements. ASU 2009-13 changes existing rules regarding recognition of revenue in multiple deliverable arrangements and expands ongoing disclosures about the significant judgments used in applying its guidance. It will be effective for revenue arrangements entered into or materially modified in the fiscal year beginning on or after June 15, 2010. Early adoption is permitted on a prospective or retrospective basis. We are currently evaluating the impact of ASU 2009-13 on our financial statements.

Note 2. Commitments and Contingencies

Litigation

Consumer Class Action Litigations. We have been named in several purported class actions venued in California, New Jersey, and Washington alleging a wide variety of deficiencies with respect to our business practices, marketing disclosures, email marketing and quality issues for both phone and fax service.

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

For example, there are various class actions, on behalf of both nationwide and state classes, pending in New Jersey, Washington and California generally alleging that we delayed and/or refused to allow consumers to cancel their Vonage service; failed to disclose procedural impediments to cancellation; failed to adequately disclose that their 30-day money back guarantee does not give consumers 30 days to try out our services; suppressed and concealed the true nature of our services and disseminated false advertising about the quality, nature and terms of our services; imposed an unlawful early termination fee; and invoked unconscionable provisions of our Terms of Service to the detriment of customers. On May 11, 2007, plaintiffs in one action petitioned the Judicial Panel on Multidistrict Litigation (the “Panel”), seeking transfer and consolidation of the pending actions to a single court for coordinated pretrial proceedings. In an Order dated August 15, 2007, the Panel transferred the pending actions to the United States Court for the District of New Jersey, captioned In re Vonage Marketing and Sales Practices Litigation, MDL No. 1862, Master Docket No. 07-CV-3906 (USDC, D.N.J.). On October 1, 2007, counsel for one group of plaintiffs moved before the Court for Consolidation and Appointment of Co-Lead Counsel of the actions, and requested time to file an Amended Consolidated Complaint. On November 6, 2008, the Court entered an Order Granting Consolidation and Appointment of Co-Lead Counsel, and ordered that a consolidated Complaint be filed within 45 days, which Complaint was filed on December 19, 2008. On February 6, 2009, we filed a Motion to Compel Arbitration. On September 1, 2009, the Court denied without prejudice the Motion to Compel Arbitration. On December 2, 2009, we filed a Renewed Motion to Compel Arbitration. Briefing on the motion was completed in February 2010. The parties have engaged in limited discovery.

Mohammad Sarabi v Vonage. On January 15, 2010, plaintiff Mohammad Sarabi filed a putative class action in the Superior Court of California (Orange County), alleging that the Company binds telephonic subscribers to two year contracts without telling them, and then charges an undisclosed early termination fee if cancellation occurs before the two years expire. The named plaintiff alleged that this conduct (1) violates the California Unfair Competition Law, (2) violates the California Consumer Legal Remedies Act and (3) has unjustly enriched Vonage. On March 8, 2010, the parties entered into a confidential settlement agreement, and on March 15, 2010, the complaint was dismissed with prejudice.

IPO Underwriter Indemnification. On December 4, 2009, we received final Court approval for the settlement of litigation arising from our initial public offering (“IPO”), which included a release and dismissal of all stockholder claims against Vonage and its individual directors and officers who were named as defendants. The firms who served as underwriters to the IPO, pursuant to an indemnification agreement entered into between us and those firms prior to the IPO have demanded that Vonage reimburse them for the costs and fees incurred by them in defense of the IPO litigation. In addition, three of the firms have demanded that Vonage reimburse them for the costs and fees incurred by them in response to various regulatory inquiries by the Financial Industry Regulatory Authority (formerly the NASD) and the New York Stock Exchange, among other things. Vonage has declined to reimburse these three firms any fees or expenses. The settlement of the IPO litigation did not resolve the IPO underwriters’ claims for indemnification against the Company.

IP Matters

Alcatel-Lucent. On November 4, 2008, Vonage received a letter from Alcatel-Lucent initiating an opportunity for Vonage to obtain a non-exclusive patent license to certain of its patents that may be relevant to Vonage’s business. Vonage is currently analyzing the applicability of such patents to its business, as well as additional patents subsequently identified by Alcatel-Lucent. If Vonage determines that these patents are applicable to its business and valid, it may incur expense in licensing them. If Vonage determines that these patents are not applicable to its business or invalid, it may incur expense and damages if there is litigation.

Centre One. On December 5, 2008, Centre One filed a lawsuit against Vonage and its subsidiary Vonage America Inc. in the United States District Court for the Eastern District of Texas alleging that some of Vonage’s products and services are covered by a patent held by Centre One (United States Patent No. 7,068,668) entitled “Method and Apparatus for Interfacing a Public Switched Telephone Network and an Internet Protocol Network for Multi-Media Communication”. The suit also named Verizon Communications Inc. and deltathree Inc. as defendants. We filed our Answer to the Complaint on February 23, 2009, along with a motion to transfer this matter to the United States District Court for the District of New Jersey. On April 2, 2009, we filed a motion to sever the case against us from the case against the other defendants. During oral argument on the motions on June 22, 2009, the Court orally denied the motions to transfer and to sever. On June 22, 2009, the United States Patent and Trademark Office (“PTO”) granted Verizon’s April 30, 2009 request for inter parte s reexamination of the claims of Centre One’s patent and issued an office action rejecting on multiple grounds as not patentable certain claims of Centre One’s patent. On July 9, 2009, Vonage and Verizon moved to stay the litigation pending the resolution of the inter parte s reexamination, which motion was denied on February 24, 2010. On August 13, 2009, Vonage filed an Amended Answer to First Amended Complaint and Counterclaims in which Vonage added an affirmative defense and counterclaim for a declaration of unenforceability due to inequitable conduct. On September 18, 2009, Centre One filed a Motion for Leave to Supplement its P.R. 3-1 Infringement

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Contentions in which it seeks to withdraw its allegations of infringement of certain patent claims based on amendments made during the pending reexamination proceedings, and add allegations of infringement of other patent claims. On October 2, 2009, Vonage filed a request for inter partes reexamination of the claims of Centre One’s patent. The PTO granted Vonage’s request for reexamination on December 16, 2009. On January 13, 2010, Verizon filed a Motion to Transfer Venue to the United States District Court for the District of New Jersey. On February 9, 2010, all parties filed a Joint Motion for Extension of Time to make Joint Claim Construction Submissions. On February 16, 2010 the Court entered an Order granting an extension of time for filing joint claim constructions, with submissions due on February 19, 2010. On February 16, 2010, plaintiff’s counsel filed an Emergency Motion to Withdraw, citing an ethical conflict, asking for a stay of all deadlines and discovery until new counsel can enter an appearance on behalf of Centre One. On February 19, 2010, the Court granted the Motion to Withdraw and stayed all deadlines in the case for 60 days to allow Centre One to retain and educate new counsel. On April 22, 2010, the Court stayed all deadlines in the case for an additional 60 days and indicated it would dismiss the case for failure to prosecute if counsel does not appear for Centre One within 60 days.

From time to time, in addition to those identified above, Vonage is subject to legal proceedings, claims, investigations and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with generally accepted accounting principles, Vonage makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. For the quarter ended March 31, 2010, we recorded an additional reserve of $2,000 to cover the potential exposure relating to litigation, which has been recorded as selling, general and administrative expense in the consolidated statement of operations. Litigation is inherently unpredictable. We believe that we have valid defenses with respect to the legal matters pending against Vonage and are vigorously defending these matters. Given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome in the above noted matters, it is possible that the resolution of one or more of these matters could have a material adverse effect on our consolidated financial position, cash flows or results of operations.

Regulation

Telephony services are subject to a broad spectrum of state and federal regulations. Because of the uncertainty over whether VoIP should be treated as a telecommunications or information service, we have been involved in a substantial amount of state and federal regulatory activity. Implementation and interpretation of the existing laws and regulations is ongoing and is subject to litigation by various federal and state agencies and courts. Due to the uncertainty over the regulatory classification of VoIP service, there can be no assurance that we will not be subject to new regulations or existing regulations under new interpretations, and that such change would not introduce material additional costs to our business.

Federal – CALEA

On August 5, 2005, the Federal Communications Commission (the “FCC”) released an Order extending the obligations of Communications Assistance for Law Enforcement Act (“CALEA”) to interconnected VoIP providers. Under CALEA, telecommunications carriers must assist law enforcement in executing electronic surveillance, which include the capability of providing call content and call-identifying information to a local enforcement agency, or LEA, pursuant to a court order or other lawful authorization.

The FCC required all interconnected VoIP providers to become fully CALEA compliant by May 14, 2007. To date, we have taken significant steps towards CALEA compliance, which include testing a CALEA solution with the FBI and delivering lawful CALEA requests. We have also implemented alternative solutions that allow CALEA access to call content and call-identifying information. The FCC and law enforcement officials have been advised as to our CALEA progress and our efforts at implementing alternative solutions. We could be subject to an enforcement action by the FCC if our CALEA solution is deemed not fully operational.

Federal – Local Number Portability

On May 13, 2009, the FCC adopted an order that reduced to one business day the amount of time that a telecommunications provider such as Vonage has to port a telephone number to another provider. The North American Numbering Council proposed processes to implement the one-day requirement on November 2, 2009. Large telecommunication providers (greater than 2% of the nation’s subscriber lines) have nine months to implement the process before the one-day requirement becomes effective on August 2, 2010.

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Smaller telecommunication providers, like Vonage, have fifteen months to implement the process before the one-day requirement becomes effective on February 2, 2011. If Vonage, or third parties it relies upon for porting, have difficulty complying with the new one-day porting requirement after the effective date, it could be subject to FCC enforcement action.

State Telecommunications Regulation

In general, the focus of interconnected VoIP telecommunications regulation is at the federal level. On November 12, 2004, the FCC issued a declaratory ruling providing that our service is subject to federal regulation and preempted the Minnesota Public Utilities Commission from imposing certain of its regulations on us. The FCC’s decision was based on its conclusion that our service is interstate in nature and cannot be separated into interstate and intrastate components. On March 21, 2007, the United States Court of Appeals for the 8th Circuit affirmed the FCC’s declaratory ruling preempting state regulation of Vonage’s service. The 8th Circuit found that it is impossible for Vonage to separate its interstate traffic from its intrastate traffic because of the nomadic nature of the service. As a result, the 8th Circuit held that it was reasonable for the FCC to preempt state regulation of Vonage’s service. The 8th Circuit was clear, however, that the preemptive effect of the FCC’s declaratory ruling may be reexamined if technological advances allow for the separation of interstate and intrastate components of the nomadic VoIP service. Therefore, the preemption of state authority over Vonage’s service under this ruling generally hinges on the inability to separate the interstate and intrastate components of the service.

While this ruling does not exempt us from all state oversight of our service, it effectively prevents state telecommunications regulators from imposing certain burdensome and inconsistent market entry requirements and certain other state utility rules and regulations on our service. State regulators continue to probe the limits of federal preemption in their attempts to apply state telecommunications regulation to interconnected VoIP service. Lawsuits by the Nebraska Public Service Commission and New Mexico Public Regulatory Commission that were resolved in 2009 are examples of state public utility commission attempts to extend traditional state telecommunications regulation to our service. In these cases, the state public utility commissions sought to apply state universal service funding requirements to Vonage. The Kansas Corporation Commission also has taken the position that it has jurisdiction to seek state universal service funding from nomadic VoIP providers. Similarly, the Public Utility Commission of Ohio has adopted rules that would apply state fees for Telephone Relay Service to nomadic VoIP service.

On July 16, 2009, the Nebraska Public Service Commission and the Kansas Corporation Commission filed a petition with the FCC seeking a declaratory ruling or, alternatively, adoption of a rule declaring that state authorities may apply universal service funding requirements to nomadic VoIP providers. A declaratory ruling could have the effect of overruling a May 1, 2009 decision by the United States Court of Appeals for the 8th Circuit in favor of Vonage. That decision enjoined the Nebraska Public Service Commission from asserting state jurisdiction over Vonage and forcing Vonage to contribute to the Nebraska Universal Service Fund and found the Nebraska Public Service Commission’s assertion of state jurisdiction over Vonage is unlawful as preempted by the FCC. A declaratory ruling could also include a finding that the FCC’s 2004 declaratory ruling did not preempt states from assessing services provided by nomadic VoIP providers, such as Vonage, to support state universal service funding. The alternative action requested by the Nebraska Public Service Commission and Kansas Corporation Commission, adoption of a rule, could result in a finding that it is in the public interest to allow states to assess services provided by nomadic VoIP providers, such as Vonage, for state universal service funding on a going forward basis. In addition to this effort, we expect that state public utility commissions and state legislators will continue their attempts to apply state telecommunications regulations to nomadic VoIP service.

State and Municipal Taxes

For a period of time, we did not collect or remit state or municipal taxes (such as sales, excise, utility, use and ad valorem taxes), fees or surcharges (“Taxes”) on the charges to our customers for our services, except that we historically complied with the New Jersey sales tax. We have received inquiries or demands from a number of state and municipal taxing and 911 agencies seeking payment of Taxes that are applied to or collected from customers of providers of traditional public switched telephone network services. Although we have consistently maintained that these Taxes do not apply to our service for a variety of reasons depending on the statute or rule that establishes such obligations, a number of states have changed their statutes as part of the streamlined sales tax initiatives to include VoIP and we are now collecting and remitting sales taxes in those states. In addition, many states address how VoIP providers should contribute to support public safety agencies, and in those states we began to remit fees to the appropriate state agencies. We could also be contacted by state or municipal taxing and 911 agencies regarding Taxes that do explicitly apply to VoIP and these agencies could seek retroactive payment of Taxes. As such, we have a reserve of $4,336 as of March 31, 2010 as our best estimate of the potential tax exposure for any retroactive assessment. We believe the maximum estimated exposure for retroactive assessments is $16,632 as of March 31, 2010.

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Purchase Obligations

We have engaged a vendor to provide IP bandwidth. We have committed to pay this vendor approximately $612 in 2010, $744 in 2011 and $180 in 2012. We have also engaged a vendor to provide telecommunication services. We have committed to pay this vendor $6,000 through 2012; however, we may terminate the contract sooner subject to a minimum payment of $1,000.

Note 3. Long-Term Debt


	March 31, 2010		December 31, 2009
16% First Lien Senior Facility - due 2013, net of discount	$	108,105	$	107,246
20% Second Lien Senior Facility - due 2015, net of discount		91,308		86,614
20% Third Lien Convertible Notes - due 2015, net of discount		3,211		6,608

	$	202,624	$	200,468

On October 19, 2008, we entered into definitive agreements (collectively, the “Credit Documentation”) for a financing consisting of (i) a $130,300 senior secured first lien credit facility (the “First Lien Senior Facility”), (ii) a $72,000 senior secured second lien credit facility (the “Second Lien Senior Facility”) and (iii) the sale of $18,000 of our 20% senior secured third lien notes due 2015 (the “Convertible Notes” and, together with the First Lien Senior Facility and the Second Lien Senior Facility, the “Financing”). The funding for this transaction was completed on November 3, 2008.

The co-borrowers under the Financing are Vonage Holdings Corp. and Vonage America Inc., its wholly owned subsidiary. Obligations under the Financing are guaranteed, fully and unconditionally, by our other U.S. subsidiaries (together with the borrowers, the “Credit Parties”), and may in the future be guaranteed by Vonage Limited, a United Kingdom subsidiary of Vonage Holdings Corp. The lenders under the First Lien Senior Facility and the Second Lien Senior Facility and the purchasers of the Convertible Notes were Silver Point Finance, LLC (“Silver Point”), certain of its affiliates, other third parties and affiliates of the Company.

For the First Lien Senior Facility, an aggregate value of $105,322, or a discount of $24,978, was recorded. This discount is currently amortized to interest expense over the life of the loan using the effective interest method. The accumulated amortization was $6,546 and $5,362 at March 31, 2010 and December 31, 2009, respectively. The amortization for the three months ended March 31, 2010 and 2009 was $1,184 and $1,119, respectively.

For the Second Lien Senior Facility, an aggregate value of $67,273, or a discount of $4,727, was recorded. This discount is currently amortized to interest expense over the life of the loan using the effective interest method. The accumulated amortization was $931 and $766 at March 31, 2010 and December 31, 2009, respectively. The amortization for the three months ended March 31, 2010 and 2009 was $165 and $157, respectively.

For the Convertible Notes, an aggregate value of $55,884, or a premium of $37,884, was recorded. Given the magnitude of the premium, this amount was recorded as additional-paid-in capital as prescribed in FASB ASC 470-20-25 “ Debt with Conversions and Other Options-Recognition” .

The following descriptions summarize certain material terms of the Financing as provided in the Credit Documentation.

First Lien Senior Facility

The loans under the First Lien Senior Facility will mature in October 2013. Principal amounts under the First Lien Senior Facility are repayable in quarterly installments of $326 for each quarter ending December 31, 2008 through September 30, 2011 and $3,258 for each quarter ending December 31, 2011 through September 30, 2013, with the balance due in October 2013. Amounts under the First Lien Senior Facility, at our option, bear interest at:

•

the greater of 4.00% and LIBOR plus, in either case, 12.00%, payable on the last day of each relevant interest period or, if the interest period is longer than three months, each day that is three months after the first day of the interest period and the last day of such interest period, or

•

the greater of 6.75% and the higher of (i) the rate quoted in The Wall Street Journal, Money Rates Section as the Prime Rate as in effect from time to time and (ii) the federal funds effective rate from time to time plus 0.50% plus, in either case, 11.00%, payable on the last day of each month in arrears.

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Certain events trigger prepayment obligations under the First Lien Senior Facility. Beginning as of the end of the quarter ended March 31, 2010, because it was the first quarter during which we had more than $75,000 of specified unrestricted cash in any quarter, we are obligated to offer to prepay without premium certain amounts each quarter. Accordingly, as required under the Credit Documentation, on April 22, 2010, we offered to prepay loans under the First Lien Senior Facility in an aggregate amount equal to 50% of Consolidated Excess Cash Flow (as defined in the Credit Documentation). Consolidated Excess Cash Flow for the three months ended March 31, 2010 was $48,064. While certain holders of loans under the First Lien Senior Facility waived their right to receive the prepayment as permitted under the Credit Documentation, the $24,032 offered was paid on April 27, 2010 to holders that did not waive the prepayment. Of this amount $23,187, was applied to the outstanding principal balance and $845 was applied to accrued but unpaid interest. A loss on extinguishment, representing unamortized debt discount and debt related costs, of approximately $4,000 will be recorded in the three-month period ending June 30, 2010 as a result of the prepayment. We expect Consolidated Excess Cash Flow will be generated from operations during the three-month period ending June 30, 2010, and that we will make a similar prepayment offer. To the extent we obtain proceeds from asset sales, insurance/condemnation recoveries or extraordinary receipts, certain prepayments may be required that will be subject to a premium of 8% in year 1, 7% in year 2, 6% in year 3, 5% in year 4 and 3% in the first 9 months of year 5 and no premium thereafter. In addition, any voluntary prepayments or any mandatory prepayments that may be required from proceeds of debt and equity issuances will be subject to a make-whole during the first three years, and thereafter a premium of 5% in year 4 and 3% in the first 9 months of year 5, with the First Lien Senior Facility callable at par thereafter.

Second Lien Senior Facility

The loans under the Second Lien Senior Facility will mature in October 2015. Principal amounts under the Second Lien Senior Facility will be repayable in quarterly installments of $1,800 commencing the later of: (i) the last day of the fiscal quarter after payment-in-full of amounts under the First Lien Senior Facility and (ii) December 31, 2012, with the balance due in October 2015. Amounts under the Second Lien Senior Facility bear interest at 20% payable quarterly in arrears and payable in-kind, or PIK, beginning December 31, 2008 until the third anniversary of the effective date and thereafter 20% payable quarterly in arrears in cash. If the First Lien Senior Facility has not been refinanced in full by the third anniversary of the effective date, then until such refinancing has occurred 70% of the interest due will be payable in cash with the balance payable in PIK. The amount paid in PIK as of March 31, 2010 and December 31, 2009 was $23,104 and $18,576, respectively. After payment-in-full of amounts under the First Lien Senior Facility or in the event mandatory payments are waived by lenders under the First Lien Senior Facility, the Second Lien Senior Facility will be subject to prepayment obligations and premiums consistent with those for the First Lien Senior Facility. Voluntary prepayments for the Second Lien Senior Facility may be made at any time subject to a make-whole.

Third Lien Convertible Notes

Subject to conversion, repayment or repurchase of the Convertible Notes, the Convertible Notes mature in October 2015. Subject to customary anti-dilution adjustments (including triggers upon the issuance of common stock below the market price of the common stock or the conversion price of the Convertible Notes), the Convertible Notes are convertible into shares of our common stock at a rate equal to 3,448.2759 shares for each $1,000 principal amount of Convertible Notes, or approximately $0.29 per share. A permanent increase in the conversion rate, resulting in the issuance of additional shares, may occur if a fundamental change occurs. During the quarter ended March 31, 2010, we received additional Notices of Conversion from certain note holders indicating their desire to convert their Convertible Notes. In the aggregate in 2010 and 2009, $15,400 principal amount of Convertible Notes were converted into 53,103 shares of our common stock. As of March 31, 2010, there were $2,600 principal amount of Convertible Notes outstanding.

Amounts under the Convertible Notes bear interest at 20% that accrues and compounds quarterly until October 30, 2011 at which time such accrued interest may be paid in cash. Any accrued interest not paid in cash on such date will continue to bear interest at 20% that accrues and compounds quarterly and is payable in cash on the maturity date of the Convertible Notes. After October 30, 2011, principal on Convertible Notes will bear interest at 20% payable quarterly in arrears in cash. However, if the First Lien Senior Facility has not been refinanced in full by October 31, 2011, then until such refinancing occurs, the cash interest will be capped at 14% with the balance of 6% accruing and compounding interest quarterly at 20%, to be paid in cash on the maturity date of the Convertible Notes. The amount of accrued and compounding interest as of March 31, 2010 and December 31, 2009 was $859 and $1,478, respectively. In connection with note conversions during the quarter ended March 31, 2010, $958 was paid for accrued interest.

VONAGE HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Subject to specific limitations and the right of holders to convert prior to such time, we may cause the automatic conversion of the Convertible Notes into common stock on or after the third anniversary of the issue date. The amount of Convertible Notes that will be subject to our automatic conversion right will depend on our stock price: (i) if a 30-day volume-weighted average price of our common stock is greater than $3.00 per share, then not less than $12,000 principal amount of the Convertible Notes must remain outstanding after the conversion, (ii) if a 30-day volume-weighted average price of our common stock is greater than $4.50 per share, then not less than $6,000 principal amount of the Convertible Notes must remain outstanding after the conversion and (iii) if a 30-day volume-weighted average price of our common stock is greater than $6.00 per share, then we may cause the mandatory conversion of up to all of the then-outstanding Convertible Notes.

In accordance with FASB ASC 815, which was effective January 1, 2009, we determined that the Convertible Notes contain an embedded derivative that requires separate valuation from the Convertible Notes because an anti-dilution adjustment is triggered upon the issuance of common stock by us below the conversion price of the Convertible Notes. As explained below, we recognize this embedded derivative as a liability in our consolidated balance sheet at its fair value each period and recognize any change in the fair value in our statement of operations in the period of change. The fair value of the embedded derivative is determined using the Monte Carlo simulation model. The key inputs in the model are maturity date, risk-free interest rate, current share price and historical volatility of our common stock.

In accordance with FASB ASC 815, we determined the fair value of the conversion feature and recorded applicable amounts at issuance of the Convertible Notes, at December 31, 2008, at conversion of Convertible Notes during the quarter ended March 31, 2010 and at March 31, 2010:

Issuance . The fair value of the conversion feature at issuance was $39,990 which, upon the adoption of FASB ASC 815, was recorded as a liability with a corresponding reduction in additional-paid-in capital of $37,884, which was the premium originally recorded at issuance. The remaining $2,106 was recorded as a discount to be amortized to interest expense over the life of the loan using the effective interest method. Accumulated amortization of the discount was $1,858 and $1,541 as of March 31, 2010 and December 31, 2009, respectively, including a $297 and $1,271 write-off of discount on notes related to the conversion of Convertible Notes, for the three months ended March 31, 2010 and year ended December 31, 2009, respectively. Amortization for the three months ended March 31, 2010 and 2009 was $20 and $71, respectively.

December 31, 2008 . The fair value of the conversion feature at December 31, 2008 was $32,720. The $7,270 difference between the fair value of the conversion feature at December 31, 2008 and the issuance date, together with the $47 amortization of the discount for the period ended December 31, 2008, were recorded as an adjustment to the opening balance of retained earnings that was recognized as a cumulative effect of a change in accounting principle as of January 1, 2009 in accordance with FASB ASC 815.

Conversion of Convertible Notes in 2009. At the time of conversions of $12,305 principal amount of Convertible Notes, which were converted into 42,431 shares of our common stock, we determined that the aggregate fair value of the conversion feature of those Convertible Notes was $57,050, which was an increase of $34,682 in the fair value of the conversion feature from December 31, 2008. The changes in fair value were recorded as an expense within other income (expense) for the year ended December 31, 2009. The aggregate fair value of the common stock issued by us in the conversion was $62,370 at the time of conversion, which was recorded as common stock and additional paid-in capital. In addition, in connection with the extinguishment of the converted Convertible Notes, we recorded a gain on extinguishment of $4,041, which represented the difference in the carrying value of those Convertible Notes including the fair value of the conversion feature, which was reduced by the discount of $1,271 and debt related costs of $1,673 associated with those Convertible Notes, and the fair value of the common stock issued at the time of conversion.

Conversion of Convertible Notes in 2010. At the time of conversion of the $3,095 principal amount of Convertible Notes during the first quarter of 2010, which converted into 10,672 shares of our common stock, we determined that the aggregate fair value of the conversion feature of those Convertible Notes was $13,394, which was a decrease in value of $220 from the fair value of the conversion feature as of December 31, 2009. This change in fair value was recorded as income within other income (expense), net for the three-month ended March 31, 2010. The aggregate fair value of the common stock issued by us in the conversion was $14,762 at the time of conversion, which was recorded as common stock and additional paid-in capital. In addition, in connection with the extinguishment of the converted Convertible Notes, we recorded a gain on extinguishment of $1,038, which represented the difference in the carrying value of those Convertible Notes including the fair value of the conversion feature, which was reduced by the discount of $297 and debt related costs of $391 associated with those Convertible Notes, and the fair value of the common stock issued at the time of conversion.

March 31, 2010 . For the $2,600 principal amount of Convertible Notes that were not converted as of March 31, 2010, the fair value of the conversion feature of those Convertible Notes at March 31, 2010 was $10,860, which was a decrease in value of $576 from the fair value of the conversion feature as of December 31, 2009. This change in fair value was recorded as income within other income (expense), net for the three months ended March 31, 2010. Each reporting date we will update the fair value with any difference reflected within other income (expense), net in the consolidated statement of operations.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our audited financial statements included in our Annual Report on Form 10-K. This discussion contains forward-looking statements. These forward-looking statements are based on information available at the time the statements are made and/or management’s belief as of that time with respect to future events and involve risks and uncertainties that could cause actual results and outcomes to be materially different. Important factors that could cause such differences include but are not limited to: the competition we face; our ability to adapt to rapid changes in the market for voice and messaging services; our ability to control customer churn and attract new customers; worsening economic conditions; restrictions in our debt agreements that may limit our operating flexibility; our ability to generate excess cash flow; system disruptions or flaws in our technology; results of pending litigation and intellectual property and other litigation that may be brought against us; results of regulatory inquiries into our business practices; our dependence on third party facilities, equipment and services; our dependence upon key personnel; any failure to meet New York Stock Exchange listing requirements; our history of net operating losses; our ability to obtain additional financing if needed; differences between our service and traditional phone services, including our 911 service; our dependence on our customers’ existing broadband connections; uncertainties relating to regulation of VoIP services; and other factors that are set forth in the “Risk Factors” in our Annual Report on Form 10-K, in our Quarterly Reports on Form 10-Q and in our Current Reports on Form 8-K. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to the date this Form 10-Q is filed with the Securities and Exchange Commission.

Financial Information Presentation

For the financial information discussed in this Quarterly Report on Form 10-Q, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted.

Recent Developments

On February 25, 2010, we announced the appointment of Barry L. Rowan as Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer. Mr. Rowan brings twenty-five years of executive leadership experience in building technology and communications companies. Prior to joining Vonage Mr. Rowan spent three years with Nextel Partners, Inc., where he served most recently as Executive Vice President and Chief Financial Officer.

On March 15, 2010, we received notification from the New York Stock Exchange (the “NYSE”) that we were provided early approval for return to full compliance with NYSE listing standards for market capitalization. This approval came several months earlier than required and is a result of our sustained, positive financial performance consistent with the business plan presented to the NYSE in March of 2009. The NYSE requires average market capitalization of not less than $100,000 over a 30-day trading period.

From March 2, 2010 through March 24, 2010, we received Notices of Conversion from certain holders of our 20% senior secured third lien notes due 2015 (the “Convertible Notes”) indicating their desire to convert a portion of the Convertible Notes. The Convertible Notes were converted into shares of our common stock at a rate equal to 3,448.2759 shares for each $1,000 principal amount of Convertible Notes, or approximately $0.29 per share. During the quarter ended March 31, 2010, we received Notices of Conversion of $3,095 principal amount. In the aggregate, during 2009 and 2010, $15,400 principal amount of Convertible Notes were converted into 53,103 shares of our common stock.

On April 22, 2010, we offered to prepay loans under the senior secured first lien credit facility (the “First Lien Senior Facility”) in an aggregate amount equal to 50% of Consolidated Excess Cash Flow (as defined in the Credit Documentation). Consolidated Excess Cash Flow for the three months ended March 31, 2010 was $48,064. While certain holders of loans under the First Lien Senior Facility waived their right to receive the prepayment as permitted under the Credit Documentation, the $24,032 offered was paid on April 27, 2010 to holders that did not waive the prepayment. Of this amount $23,187 was applied to the outstanding principal balance and $845 was applied to accrued but unpaid interest. A loss on extinguishment, representing unamortized debt discount and debt related costs, of approximately $4,000 will be recorded in the three-month period ending June 30, 2010 as a result of this prepayment.

Overview

We are a leading provider of high quality voice and messaging services over broadband networks. Our technology serviced approximately 2.4 million subscriber lines as of March 31, 2010. While customers in the United States represented 94% of our subscriber lines at March 31, 2010, we also serve customers in Canada and in the United Kingdom.

Our residential and small and home office services are portable and we enable our customers to make and receive phone calls with a telephone almost anywhere a broadband Internet connection is available. We transmit these calls using Voice over Internet Protocol, or VoIP, technology, which converts voice signals into digital data packets for transmission over the Internet. At a cost effective rate, each of our calling plans provides a number of basic features typically offered by traditional telephone service providers, plus a wide range of enhanced features that we believe differentiate our service and offer an attractive value proposition to our customers. We also offer a number of premium services for additional fees.

We rely heavily on our network, which is a flexible, scalable Session Initiation Protocol (SIP) based VoIP network that rides on top of the Internet. This platform enables a user via a single “identity” to access and utilize services and features regardless of how they are connected to the Internet. As a result, with one identity, either a number or user name, customers have access to Vonage voice, messaging, features and personal profile information regardless of location, device or how they access the Internet, including over 3G, 4G, Cable or DSL broadband networks.

The Company’s main offering is Vonage World, a residential plan that includes unlimited calling to more than 60 countries, including India, Mexico and China for a flat monthly rate. In addition, we have two mobile offerings, Vonage Mobile and Vonage World Mobile, which use our mobile calling application for smart phones. The application can be downloaded for free and provides seamless, low-cost pay-per-use international calling while on Wi-Fi or cellular networks, depending on the device, for the Vonage Mobile plan or unlimited calling to more than 60 countries, including India, Mexico and China for a flat monthly rate for the Vonage World Mobile plan. Bundle discounts are provided for customers who subscribe to both our residential and mobile Vonage World plans.

Vonage has developed both a direct sales channel, as represented by web-sites and toll free numbers, and a retail distribution channel through regional and national retailers, including Wal-Mart. The direct and retail distribution channels are supported through integrated advertising campaigns across multiple media such as online, television, direct mail, alternative media, telemarketing, partner marketing and customer referral programs.

Our primary source of revenue is subscription fees that we charge customers for our service plans, primarily on a monthly basis. We also generate revenue from international calls customers make that are not included in their service plan and for additional features that customers add to their service plans.

Trends in Our Industry and Key Operating Data

A number of trends in our industry have a significant effect on our results of operations and are important to an understanding of our financial statements. Also, the table below includes key operating data that our management uses to measure the growth and operating performance of our business:


	Three Months Ended March 31,
	2010			2009
Gross subscriber line additions		154,718			226,610
Change in net subscriber lines		(25,779	)		(6,493	)
Subscriber lines (at period end)		2,409,117			2,583,861
Average monthly customer churn		2.6	%		3.1	%
Average monthly revenue per line	$	31.37		$	28.86
Average monthly telephony services revenue per line	$	30.90		$	27.78
Average monthly direct cost of telephony services per line	$	8.60		$	6.67
Marketing costs per gross subscriber line addition	$	318.26		$	289.90
Employees (excluding temporary help) (at period end)		1,207			1,413

Broadband adoption. The number of U.S. households with broadband Internet access has grown significantly. Further on March 16, 2010, the Federal Communications Commission released its National Broadband Plan, which seeks through supporting broadband deployment and programs to encourage broadband adoption for the approximately 100 million U.S. residents who do not have broadband at home. We expect the trend of greater broadband adoption to continue. We benefit from this trend because our service requires a broadband Internet connection and our potential addressable market increases as broadband adoption increases.

Competitive landscape . We face intense competition from traditional telephone companies, wireless companies, cable companies and alternative voice communication providers. Most traditional wire line and wireless telephone service providers and cable companies are substantially larger and better capitalized than we are and have the advantage of a large existing customer base. In addition, because of the other services our competitors provide, they often choose to offer VoIP services or other voice services as part of a bundle that includes other products, such as video, high speed Internet access and wireless telephone service, which we do not offer. Further, as wireless providers offer more minutes at lower prices, better coverage and companion landline alternative services, their services have become more attractive to households as a replacement for wire line service. We also compete against alternative voice communication providers, such as Skype, Google Voice, magicJack and independent VoIP service providers. Some of these service providers have chosen to sacrifice telephony revenue in order to gain market share and have offered their services at low prices or for free. As we continue the introduction of applications that integrate different forms of voice and messaging services over multiple devices, we are likely to face competition from emerging competitors focused on similar integration, as well as from established alternative voice communication providers. We also are subject to the risk of future disruptive technologies.

Gross subscriber line additions. Gross subscriber line additions for a particular period are calculated by taking the net subscriber line additions during that particular period and adding to that the number of subscriber lines that terminated during that period. This number does not include subscriber lines both added and terminated during the period, where termination occurred within the first 30 days after activation. The number does include, however, subscriber lines added during the period that are terminated within 30 days of activation but after the end of the period.

Net subscriber line additions. Net subscriber line additions for a particular period reflect the number of subscriber lines at the end of the period, less the number of subscriber lines at the beginning of the period.

Subscriber lines. Our subscriber lines include, as of a particular date, all subscriber lines from which a customer can make an outbound telephone call on that date. Our subscriber lines include fax lines and soft phones but do not include our virtual phone numbers or toll free numbers, which only allow inbound telephone calls to customers. We believe that the decrease in our subscriber lines was primarily due to increasing wireless substitution, other competition, particularly from cable companies, poor economic conditions, and reduced marketing spend. Subscriber lines decreased from 2,583,861 as of March 31, 2009 to 2,409,117 as of March 31, 2010.

Average monthly customer churn. Average monthly customer churn for a particular period is calculated by dividing the number of customers that terminated during that period by the simple average number of customers during the period, and dividing the result by the number of months in the period. The simple average number of customers during the period is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first 30 days after activation. Our average monthly customer churn was 2.6% and 3.1% for the three months ended March 31, 2010 and 2009, respectively. We believe the reduction in churn is due to initiatives to improve the customer’s experience including on-boarding and network quality, an improving economy and credit profile for new customer acquisitions, which has positively impacted non-pay churn, and the value proposition of the Vonage World offer. We monitor churn on a daily basis and use it as an indicator of the level of customer satisfaction. Other companies may calculate churn differently, and their churn data may not be directly comparable to ours. Customers who have been with us for a year or more tend to have a lower churn rate than customers who have not. Our churn will fluctuate over time due to economic conditions, competitive pressures including wireless substitution, market place perception of our services and our ability to provide high quality customer care and network quality and add future innovative products and services.

Average monthly revenue per line. Average monthly revenue per line for a particular period is calculated by dividing our total revenue for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. The simple average number of subscriber lines for the period is the number of subscriber lines on the first day of the period, plus the number of subscriber lines on the last day of the period, divided by two. Our average monthly revenue per line increased to $31.37 for the three months ended March 31, 2010 compared to $28.86 for the three months ended March 31, 2009. This increase was due primarily to pricing actions that we have taken in the past year. We do not expect average revenue per line to continue to increase in the second quarter due to greater second quarter impact of a pricing promotion that began in March 2010.

Average monthly telephony services revenue per line. Average monthly telephony services revenue per line for a particular period is calculated by dividing our total telephony services revenue for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. Our average monthly telephony services revenue per line increased to $30.90 for the three months ended March 31, 2010 from $27.78 for the three months ended March 31, 2009. This increase was due primarily to pricing actions that we have taken in the past year.

Average monthly direct cost of telephony services per line. Average monthly direct cost of telephony services per line for a particular period is calculated by dividing our direct cost of telephony services for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. We use the average monthly direct cost of telephony services per line to evaluate how effective we are at managing our costs of providing service. Our average monthly direct cost of telephony services per line was $8.60 for the three months ended March 31, 2010 compared to $6.67 for the three months ended March 31, 2009 due primarily to higher costs from higher international call volume associated with Vonage World, partially offset by more favorable rates negotiated with our service providers. Direct cost of telephony services is expected to continue to increase during the year as customer demand for Vonage World continues to grow.

Marketing cost per gross subscriber line addition. Marketing cost per gross subscriber line addition is calculated by dividing our marketing expense for a particular period by the number of gross subscriber line additions during the period. Marketing expense does not include the cost of certain customer acquisition activities, such as rebates and promotions, which are accounted for as an offset to revenues, or customer equipment subsidies, which are accounted for as direct cost of goods sold. As a result, it does not represent the full cost to us of obtaining a new customer. Marketing cost per gross subscriber line addition increased to $318.26 for the three months ended March 31, 2010 compared to $289.90 for the three months ended March 31, 2009 primarily due to increasing competition including wireless substitution and customer acquisition and targeting efforts not being as effective as planned.

Employees . Employees represent the number of personnel that are on our payroll and exclude temporary or outsourced labor.

Regulation. Our business has developed in an environment largely free from regulation. The United States and other countries, however, are examining how VoIP services should be regulated. Kansas and Nebraska’s request that the Federal Communications Commission (“FCC”) rule that states can impose state universal service on VoIP service, discussed in note 2 to our financial statements, is an example of regulators trying to determine how VoIP service fits into the telecommunications regulatory landscape. In addition to regulatory matters that directly address VoIP, a number of other regulatory initiatives could impact our business. One such regulatory initiative is net neutrality. In October 2009, the FCC proposed adopting net neutrality rules for broadband Internet service providers. If these rules are adopted, it would be more difficult for broadband Internet service providers to block or discriminate against Vonage service. The proposed rules also explicitly apply to wireless broadband Internet service, which could create greater opportunities for VoIP applications running on wireless broadband Internet service. The D.C. Circuit Court of Appeals in April 2010, however, ruled that the FCC had not provided an adequate justification to exercise regulatory authority over broadband Internet service to enforce its previous attempt at net neutrality regulation, the 2005 Internet Policy Statement, against a major broadband Internet service provider. This D.C. Circuit decision presents a potential obstacle for the FCC in its effort to adopt its proposed net neutrality rules. On May 6, 2010, FCC Chairman Genachowski announced that in response to the D.C. Circuit decision that the FCC would seek to establish its authority over broadband Internet service by reclassifying the transmission component as a telecommunications service. The FCC has extensive regulatory authority over telecommunications services. The FCC had classified all broadband Internet services as information services between 2002 and 2007. The FCC has relatively limited regulatory authority over information services. Reclassifying broadband Internet service as a telecommunications service would allow the FCC to adopt its proposed net neutrality rules for broadband Internet service. The FCC will shortly seek comment from interested parties on this proposal and other alternatives to ensure that the FCC has authority to protect consumers of broadband Internet service. See also the discussion under “Regulation” in note 2 to our financial statements included herein for a discussion of certain other regulatory issues that impact us.

Operating Revenues

Operating revenues consists of telephony services revenue and customer equipment and shipping revenue.

Telephony services revenue. Substantially all of our operating revenues are telephony services revenue. In the United States, we have four residential plans, “Vonage World”, “Residential Premium Unlimited”, “Vonage Pro” and “Basic 500,” two mobile plans, “Vonage World Mobile” and “Vonage Mobile Pay Per Use” and two small office and home office calling plans, “Small Business Premium Unlimited Minutes” and “Small Business Basic 1500 Minutes.” Each of our unlimited plans offers unlimited domestic calling as well as unlimited calling to Puerto Rico, Canada and selected European countries, subject to certain restrictions, and each of our basic plans offers a limited number of domestic calling minutes per month. We also offer international calling plans that are bundled with our Residential Premium Unlimited plan where a customer can make calls to a chosen international region. We offer similar plans in Canada and the United Kingdom. The “Vonage World” plan launched in August 2009 offers unlimited calling across the U.S. and Puerto Rico, unlimited international calling to over sixty countries including India, Mexico and Canada, subject to certain restrictions, and free voicemail to text messages with Vonage Visual Voicemail. Under our basic plans, we charge on a per minute basis when the number of domestic calling minutes included in the plan is exceeded for a particular month. International calls (except for calls to Puerto Rico, Canada and certain European countries under our unlimited plans and a variety of countries under international calling plans and Vonage World) are charged on a per minute basis. These per minute fees are not included in our monthly subscription fees. In October 2009, we launched Vonage Mobile, our first mobile calling application for smart phones. Vonage Mobile is a free downloadable application that provides seamless, low-cost pay-per-use international calling while on Wi-Fi or cellular networks, depending on the device. In December 2009, we began offering Vonage World Mobile using this mobile calling application. Bundle discounts are provided for customers who subscribe to both our residential and mobile Vonage World plans.

We derive most of our telephony services revenue from monthly subscription fees that we charge our customers under our service plans. We also offer residential fax service, virtual phone numbers, toll free numbers and other services, for each of which we charge an additional monthly fee. One business fax line is included with each of our two small office and home office plans, but we charge monthly fees for additional business fax lines. We automatically charge these fees to our customers’ credit cards, debit cards and electronic check payments, or ECP, monthly in advance. We also automatically charge the per minute fees not included in our monthly subscription fees to our customers’ credit cards, debit cards or ECP monthly in arrears unless they exceed a certain dollar threshold, in which case they are charged immediately.

By collecting monthly subscription fees in advance and certain other charges immediately after they are incurred, we are able to reduce the amount of accounts receivable that we have outstanding, thus allowing us to have lower working capital requirements. Collecting in this manner also helps us mitigate bad debt losses, which are recorded as a reduction to revenue. If a customer’s credit card, debit card or ECP is declined, we generally suspend international calling capabilities as well as the customer’s ability to incur domestic usage charges in excess of their plan minutes. Historically, in most cases, we are able to correct the problem with the customer within the current monthly billing cycle. If the customer’s credit card, debit card or ECP could not be successfully processed during three billing cycles (i.e. the current and two subsequent monthly billing cycles), we terminate the account.

We also generate revenue by charging a fee for activating service but from time to time we may forgo collecting this fee. For example, since May 2009 we have waived activation fees for almost all new customers. In these instances when no activation fee is being collected, no customer acquisition costs are deferred. Customer activation fees when collected, along with the related incremental direct customer acquisition amounts for customer equipment in the direct channel and for rebates and retailer commissions in the retail channel, up to but not exceeding the activation fee, are deferred and amortized over the estimated average customer relationship period (“customer life”). The amortization of deferred customer equipment is recorded to direct cost of goods sold. The amortization of deferred rebates is recorded as a reduction of telephony services revenues. The amortization of deferred retailer commissions is recorded as marketing expense. We estimate customer life by analyzing historical trends and applying those trends to future periods. This customer life is solely used to amortize deferred activation fees collected, which we have waived for almost all new customers since May 2009, including those signing up for our Vonage World plan, along with the related incremental customer acquisition costs. Customers signing up for our Vonage World plan currently churn at lower rates than other customers, and therefore appear to have a longer customer life. Because these customers have not paid an activation fee, this does not impact the customer life used in determining the amortization period. The customer life is 38 months for 2010 and was 44 months in 2009. The impact of the change to the customer life in 2010 is not material to the consolidated results of operations.

In the United States, we charge regulatory recovery fees on a monthly basis to defray the costs associated with regulatory consulting and compliance as well as related litigation, E-911 compliance and to cover taxes that we are charged by the suppliers of telecommunications services. In addition, we recognize revenue on a gross basis for contributions to the Federal Universal Service Fund, or USF, and related fees. All other taxes are recorded on a net basis.

In addition, we charge a disconnect fee for customers who terminate their service plan within the first twelve months of service. Disconnect fees are recorded as revenue and are recognized at the time the customer terminates service.

Telephony services revenue is offset by the cost of certain customer acquisition activities, such as rebates and promotions.

Customer equipment and shipping revenue. Customer equipment and shipping revenue consists of revenue from sales of customer equipment to our wholesalers or directly to customers and retailers. In addition, customer equipment and shipping revenue includes the fees when collected that we charge our customers for shipping any equipment to them. In addition, we charge an equipment recovery fee for customers who terminate their service plan within the first twelve months of service. Equipment recovery fees are recorded as revenue and are recognized at the time the customer terminates service.

Operating Expenses

Operating expenses consist of direct cost of telephony services, royalties, direct cost of goods sold, selling, general and administrative expense, marketing expense and depreciation and amortization.

Total direct cost of telephony services. Total direct cost of telephony services primarily consists of fees that we pay to third parties on an ongoing basis in order to provide our services. These fees include:

•

Access charges that we pay to other telephone companies to terminate domestic and international calls on the public switched telephone network. These costs represented approximately 47% and 46% of our direct cost of telephony services for the three months ended March 31, 2010 and 2009, respectively, with a portion of these payments ultimately being made to incumbent telephone companies. When a Vonage subscriber calls another Vonage subscriber, we do not pay an access charge.

•

The cost of leasing internet transit services from multiple internet service providers. This internet connectivity is used to carry VoIP session initiation signaling and packetized audio media between our subscribers and our regional data centers.

•

The cost of leasing from other telephone companies the telephone numbers that we provide to our customers. We lease these telephone numbers on a monthly basis.

•

The cost of co-locating our regional data connection point equipment in third-party facilities owned by other telephone companies, internet service providers or collocation facility providers.

•

The cost of providing local number portability, which allows customers to move their existing telephone numbers from another provider to our service. Only regulated telecommunications providers have access to the centralized number databases that facilitate this process. Because we are not a regulated telecommunications provider, we must pay other telecommunications providers to process our local number portability requests.

•

The cost of complying with the FCC regulations regarding VoIP emergency services, which require us to provide enhanced emergency dialing capabilities to transmit 911 calls for all of our customers.

•

Taxes that we pay on our purchase of telecommunications services from our suppliers or imposed by government agencies such as Federal USF and related fees.

•

Royalties for use of third-party intellectual property.

Direct cost of goods sold. Direct cost of goods sold primarily consists of costs that we incur when a customer first subscribes to our service. These costs include:

•

The cost of the equipment that we provide to customers who subscribe to our service through our direct sales channel in excess of activation fees when an activation fee is collected. The remaining cost of customer equipment is deferred up to the activation fee collected and amortized over the estimated average customer life.

•

The cost of the equipment that we sell directly to retailers.

•

The cost of shipping and handling for customer equipment, together with the installation manual, that we ship to customers.

•

The cost of certain products or services that we give customers as promotions.

Selling, general and administrative expense. Selling, general and administrative expense includes:

•

Compensation and benefit costs for all employees, which is the largest component of selling, general and administrative expense and includes customer care, research and development, network engineering and operations, sales and marketing, executive, legal, finance, human resources and business development personnel.

•

Share-based expense related to share-based awards to employees, directors and consultants.

•

Outsourced labor related to customer care and retail in-store support activities.

•

Transaction fees paid to credit card, debit card and ECP companies, which include a per transaction charge in addition to a percent of billings charge.

•

Rent and related expenses.

•

Professional fees for legal, accounting, tax, public relations, lobbying and development activities.

•

Litigation settlements.

Marketing expense. Marketing expense consists of:

•

Advertising costs, which comprise a majority of our marketing expense and include online, television, direct mail, alternative media, promotions, sponsorships and inbound and outbound telemarketing.

•

Creative and production costs.

•

The costs to serve and track our online advertising.

•

Certain amounts we pay to retailers for newspaper insert advertising, product placement and activation commissions.

•

The cost associated with our customer referral program.

Depreciation and amortization expenses. Depreciation and amortization expenses include:

•

Depreciation of our network equipment, furniture and fixtures, and employee computer equipment.

•

Amortization of leasehold improvements and purchased and developed software.

•

Amortization of intangible assets (patents and trademarks).

•

Loss on disposal or impairment of property and equipment.

Other Income (Expense)

Other Income (Expense) consists of:

•

Interest income on cash, cash equivalents and marketable securities.

•

Interest expense on notes payable, patent litigation judgments and settlements and capital leases.

•

Amortization of debt related costs.

•

Accretion of notes.

•

Debt conversion expense relating to the conversion of notes payable to equity.

•

Gain (loss) on extinguishment of notes.

•

Change in fair value of embedded conversion option and stock warrant.

Results of Operations

The following table sets forth, as a percentage of consolidated operating revenues, our consolidated statement of operations for the periods indicated:


	Three Months Ended March 31,
	2010		2009
Operating Revenues:
Telephony services	98	%	96	%
Customer equipment and shipping	2		4

	100		100

Operating Expenses:
Direct cost of telephony services (excluding depreciation and amortization)	27		23
Direct cost of goods sold	7		9
Selling, general and administrative	27		30
Marketing	22		29
Depreciation and amortization	6		6

	89		97


Income from operations	11		3


Other Income (Expense):
Interest income	—		—
Interest expense	(6	)	(6	)
Change in fair value of embedded conversion option and stock warrant	—		6
Gain on extinguishment of notes	—		—
Other, net	—		—

	(6	)	—
Loss before income tax benefit (expense)	5		3

Income tax benefit (expense)	—		—


Net income	5	%	3	%

Summary of Results for the Three months ended March 31, 2010 and March 31, 2009

Telephony Services Revenue and Direct Cost of Telephony Services

(in thousands, except percentages)


	Three Months Ended March 31,
	2010		2009		Dollar Change		Percent Change
Telephony services	$	224,527	$	215,643	$	8,884	4	%
Direct cost of telephony services (1)		62,495		51,751		10,744	21	%

(1)	Excludes depreciation and amortization of $4,902 and $4,757 respectively

Telephony services revenue. For the three months ended March 31, 2010, telephony services revenue increased by $8,884, or 4%, compared to the three months ended March 31, 2009. This was primarily driven by an increase in regulatory fees that we collected from subscribers of $11,829, which included $5,770 of USF and related fees, a decrease in credits we issued to subscribers of $3,211 and a decrease of $2,869 in bad debt expense. The changes in plan mix translated into an increase in monthly subscription fees of $1,058 offset by a decrease in activation fees of $1,593, which included $3,002 for the change in our customer life from 44 months to 38 months in the first quarter of 2010. There was also a decrease in fees that we charged for disconnecting our service of $2,730 due to fewer disconnections, a reduction in revenue of $4,678 from lower customers on international plans due primarily to our Vonage World offering, and a decrease in additional features we provided to customers of $433.

Direct cost of telephony services. For the three months ended March 31, 2010 compared to 2009, the increase in direct cost of telephony services of $10,744, or 21%, was primarily due to increased costs of $7,924 from higher international call volume associated with Vonage World, an increase of USF and related fees imposed by government agencies of $5,770 and an increase in other cost of $77. These increases were offset by a decrease in termination costs of $2,374, which are costs that we pay other phone companies for terminating phone calls, a decrease in our network costs of $174, which includes costs for co-locating in other carriers’ facilities, for leasing phone numbers, routing calls on the Internet, and transferring calls to and from the Internet to the public switched telephone network and E-911 costs, a decrease in local number portability costs of $387 due to fewer customer additions and a decrease of taxes that we pay on our purchase of telecommunications services from our suppliers of $91.

Customer Equipment and Shipping Revenue and Direct Cost of Goods Sold

(in thousands, except percentages)


	Three Months Ended March 31,
	2010			2009			Dollar Change			Percent Change
Customer equipment and shipping revenue	$	3,424		$	8,362		$	(4,938	)	(59	%)
Direct cost of goods sold		16,647			20,512			(3,865	)	(19	%)

Customer equipment and shipping gross loss	$	(13,223	)	$	(12,150	)	$	(1,073	)	(9	%)

Customer equipment and shipping revenue. For the three months ended March 31, 2010 compared to 2009, our customer equipment and shipping revenue decreased by $4,938, or 59%, primarily due to the impact of less period over period customer additions and the introduction of a new promotion in May 2009 that eliminated equipment and shipping fees for customers who signed up for our residential unlimited plan which resulted in a decrease in customer equipment sales net of rebates of $2,789 and a decrease in customer shipping revenue of $2,149.

Direct cost of goods sold. For the three months ended March 31, 2010 compared to 2009, the decrease in direct cost of goods sold of $3,865, or 19%, was primarily due to a decrease in customer equipment costs of $1,523 resulting from fewer period over period customer additions and lower promotional activity and a corresponding decrease in shipping costs of $815. There was also a decrease in amortization costs on deferred customer equipment of $955 which included an offset of $2,628 due to the change of our customer life from 44 months to 38 months in the first quarter of 2010 and a decrease in waived activation fees for new customers of $572.

Selling, General and Administrative

(in thousands, except percentages)


	Three Months Ended March 31,
	2010		2009		Dollar Change			Percent Change
Selling, general and administrative	$	60,787	$	68,051	$	(7,264	)	(11	%)

Selling, general and administrative. For the three months ended March 31, 2010 compared to 2009, there was a decrease in selling, general and administrative expenses of $7,264, or 11%. This decrease was primarily due to a decrease in salaries, recruiting and outsourced temporary labor of $3,141, shared based cost of $1,590 and facility and other costs of $1,055. Additionally, we reduced the number of kiosks locations, which decreased our retail kiosk costs by $951 and had a decrease in tax expense of $976. We also had a decrease in professional fees of $471, primarily related to consulting, and a decrease in credit card fees of $668. These decreases were partially offset by an increase in litigation settlement reserves of $1,588.

Marketing

(in thousands, except percentages)


	Three Months Ended March 31,
	2010		2009		Dollar Change			Percent Change
Marketing	$	49,240	$	65,695	$	(16,455	)	(25	%)

Marketing. For the three months ended March 31, 2010 compared to 2009, marketing expense decreased by $16,455, or 25%, primarily related to a decrease in online advertising of $5,778, in direct mail costs of $4,891, in alternative media of $3,697, in retail advertising of $2,383 and other marketing of $1,722. These decreases were offset by an increase in television advertising of $2,016. We reduced marketing spending in part to cover the cost of new promotional offers and due to lower than planned customer targeting and acquisition effectiveness.

Depreciation and Amortization

(in thousands, except percentages)


	Three Months Ended March 31,
	2010		2009		Dollar Change		Percent Change
Depreciation and amortization	$	13,768	$	12,896	$	872	7	%

Depreciation and amortization. The increase in depreciation and amortization of $872, or 7%, for the three months ended March 31, 2010 compared to 2009, was primarily due to an increase in depreciation of network equipment, computer equipment and software amortization, partially offset by lower patent amortization and impairment charge. The impairment charge was $200 and $724 for the three months ended March 31, 2010 and 2009, respectively, for assets that no longer had future benefit.

Other Income (Expense)

(in thousands, except percentages)


	Three Months Ended March 31,
	2010			2009			Dollar Change			Percent Change
Interest income	$	53		$	110		$	(57	)	(52	%)
Interest expense		(13,211	)		(13,542	)		331		2	%
Change in fair value of embedded conversion option and stock warrant		835			12,970			(12,135	)	(94	%)
Gain on extinguishment of notes		1,038			—			1,038		*
Other, net		103			801			(698	)	(87	%)

	$	(11,182	)	$	339		$	(11,521	)

Interest income. For the three months ended March 31, 2010 compared to 2009, the decrease in interest income of $57, or 52%, was due to lower interest rates.

Interest expense. For the three months ended March 31, 2010 compared to 2009, the decrease in interest expense of $331, or 2%, was due to lower interest on our first lien credit facility due to reduced principal and on our Convertible Notes due to conversions, partially offset by higher interest on our second lien credit facility due to an increase in the principal balance as interest is paid in kind.

Change in fair value of embedded conversion option and stock warrant. The decrease in the change in fair value of embedded conversion option and stock warrant is due to fluctuations in our common stock price and fewer convertible notes remaining outstanding at March 31, 2010 compared to March 31, 2009 due to conversions.

Other. We recognized $792 in other income for the three months ended March 31, 2009 for the net proceeds we received from a key-man term life insurance policy related to the passing of a former executive.

Income Tax Benefit (Expense)

(in thousands, except percentages)


	Three Months Ended March 31,
	2010		2009			Dollar Change		Percent Change
Income tax benefit (expense)	$	136	$	(168	)	$	304	181	%

Income tax benefit (expense). The provision for each year represents state and local income taxes currently payable offset by sales of net operating loss carryforwards through participation in the State of New Jersey’s corporation business tax benefit certificate transfer program, which allows certain high technology and biotechnology companies to transfer unused New Jersey net operating loss carryovers to other New Jersey corporation business taxpayers. During 2003 and 2004, we submitted an application to the New Jersey Economic Development Authority, or EDA, to participate in the program and the application was approved. The EDA then issued a certificate certifying our eligibility to participate in the program. The program requires that a purchaser pay at least 75% of the amount of the surrendered tax benefit. In the three months ended March 31, 2010 and 2009, we sold $2,194 and $0, respectively, of our New Jersey State net operating loss carry forwards for a recognized benefit of $168 in 2010 and $0 in 2009. Collectively, all transactions represent approximately 85% of the surrendered tax benefit each year and have been recognized in the year received.

Recognition of deferred tax assets will require generation of future taxable income. There can be no assurance that we will generate sufficient taxable income in future years. Therefore, we established a full valuation allowance on all net deferred tax assets.

Net Income

(in thousands, except percentages)


	Three Months Ended March 31,
	2010		2009		Dollar Change		Percent Change
Net income	$	13,968	$	5,271	$	8,697	165	%

Net Income. Based on the explanations described above, our net income of $13,968 for the three months ended March 31, 2010 increased by $8,697, or 165%, from $5,271 for the three months ended March 31, 2009.

Liquidity and Capital Resources

Overview

The following table sets forth a summary of our cash flows for the periods indicated:


	Three Months Ended March 31,
	2010			2009
	(in thousands)
Net cash provided by operating activities	$	51,248		$	6,563
Net cash used in investing activities		(31,098	)		(6,951	)
Net cash used in financing activities		(648	)		(869	)

For the three months ended March 31, 2010, we generated income from operations and positive operating cash flow. Historically, we have generated negative or breakeven cash flows from operations. Our primary sources of funds have been proceeds from private placements of our preferred stock, private placements of convertible notes and borrowings under credit facilities, an initial public offering of our common stock, operating revenues and borrowings under notes payable from our principal stockholder and Chairman, which were subsequently converted into shares of our preferred stock. We have used these proceeds for working capital, capital expenditures, funding operating losses, IP litigation settlements, repaying our prior convertible notes and other general corporate purposes.

The Company has recently achieved profitability. We expect to continue to balance efforts to grow our customer base with maintaining profitability. To grow our customer base, we continue to make investments in marketing, application development as we seek to launch new products and services, network quality and expansion, and customer care. Although we believe we will achieve consistent profitability in the future, we ultimately may not be successful and we may never achieve consistent profitability. We believe that cash flow from operations and cash on hand will fund our operations for at least the next twelve months.

November 2008 Financing

On October 19, 2008, we entered into definitive agreements (collectively, the “Credit Documentation”) for a financing, which we completed on November 3, 2008, with Silver Point Finance, LLC (“Silver Point”), certain of its affiliates, other third parties and affiliates of us. The financing consisted of (i) a $130,300 senior secured first lien credit facility (the “First Lien Senior Facility”), (ii) a $72,000 senior secured second lien credit facility (the “Second Lien Senior Facility”) and (iii) the sale of the Convertible Notes (together with the First Lien Senior Facility and the Second Lien Senior Facility, the “Financing”).

Amounts borrowed under the Financing are secured by substantially all of the assets of us and our U.S. subsidiaries (the “Credit Parties”). The collateral secures the First Lien Senior Facility on a first lien basis, the Second Lien Senior Facility on a second lien basis and the Convertible Notes on a third lien basis, subject to an inter creditor agreement.

Commencing October 1, 2009, all specified unrestricted cash above $30,000, subject to certain adjustments, has been swept into a concentration account (the “Concentration Account”), and until the balance in the Concentration Account is at least equal to $30,000, we may not access or make any withdrawals from the Concentration Account. Thereafter, with limited exceptions, we have the right to withdraw funds from the Concentration Account in excess of $30,000. As of March 31, 2010, we funded $41,285 into the Concentration Account with additional funding of $7,625 through April 30, 2010.

The Credit Documentation includes customary representations and warranties of the Credit Parties. In addition, Credit Documentation for the Financing contains affirmative and negative covenants that affect, and in many respects may significantly limit or prohibit, among other things, the Credit Parties’ ability to incur, prepay, refinance or modify indebtedness; enter into acquisitions, investments, sales, mergers, consolidations, liquidations and dissolutions; invest in foreign subsidiaries; repurchase and redeem stock; modify material contracts; engage in transactions with affiliates and 5% stockholders; change lines of business; and make marketing

expenditures under contracts with a duration in excess of one year that exceed for each quarter, an amount equal to 20% of consolidated pre-marketing operating income for the four quarters immediately preceding such quarter. Board approval must be obtained for any long-term commitment or series of related long-term commitments that would result in aggregate marketing expenditures by any of the Credit Parties of more than $25,000 during the term of the Financing. In addition, we must comply with certain financial covenants, which include a total leverage ratio, senior lien leverage ratios, minimum consolidated adjusted EBITDA, a fixed charge coverage ratio, maximum consolidated capital expenditures, minimum consolidated liquidity and minimum consolidated pre-marketing operating income. As of March 31, 2010, we were in compliance with all covenants, including financial covenants, under the Credit Documentation.

The Credit Documentation contains events of default that may permit acceleration of the debt under the Credit Documentation and a default interest rate of 3% above the interest rate which would otherwise be applicable. If an event of default has occurred, and the debt under the Financing becomes due and payable as a result, such payment will be subject to a make-whole (or the prepayment premium, if applicable to the First Lien Senior Facility in years 4 and 5) and, in the case of the Convertible Notes, liquidated damages payable in the form of shares of common stock for any loss of the option to convert in whole or in part. Conversion rights will continue to exist while the Convertible Notes are outstanding notwithstanding acceleration or maturity, including as a result of a voluntary or involuntary bankruptcy.

We used the net proceeds of the Financing of $213,133, plus cash on hand of $40,327, to repurchase $253,460 of our previous convertible notes in a tender offer that expired on November 3, 2008. We also incurred $27,051 of debt related costs in connection with the Financing.

We continually assess our capital structure and from time to time discuss with lenders opportunities to repay, refinance or revise the terms of our credit agreements. Such efforts may or may not be successful on terms acceptable to us or them.

First and Second Lien Senior Facility

The loans under the First Lien Senior Facility will mature in October 2013 and were issued at an original issuance discount of $7,167. Principal amounts under the First Lien Senior Facility are repayable in quarterly installments of $326 for each quarter ending December 31, 2008 through September 30, 2011 and $3,258 for each quarter ending December 31, 2011 through September 30, 2013, with the balance due in October 2013. Amounts under the First Lien Senior Facility, at our option, bear interest at:

•

Certain events trigger prepayment obligations under the First Lien Senior Facility. Beginning as of the end of the quarter ended March 31, 2010, because it was the first quarter during which we had more than $75,000 of specified unrestricted cash in any quarter, we are obligated to offer to prepay without premium certain amounts each quarter. Accordingly, as required under the Credit Documentation, on April 22, 2010, we offered to prepay loans under the First Lien Senior Facility in an aggregate amount equal to 50% of Consolidated Excess Cash Flow (as defined in the Credit Documentation). Consolidated Excess Cash Flow for the three months ended March 31, 2010 was $48,064. While certain holders of loans under the First Lien Senior Facility waived their right to receive the prepayment as permitted under the Credit Documentation, the $24,032 offered was paid on April 27, 2010 to holders that did not waive the prepayment. Of this amount, $23,187 was applied to the outstanding principal balance and $845 was applied to accrued but unpaid interest. This prepayment will reduce interest expense by approximately $2,500 for the remainder of 2010 and approximately $3,700 annually. We expect Consolidated Excess Cash Flow will be generated from operations during the three-month period ending June 30, 2010, and that we will make a similar prepayment offer. To the extent we obtain proceeds from asset sales, insurance/condemnation recoveries or extraordinary receipts, certain prepayments may be required that will be subject to a premium of 8% in year 1, 7% in year 2, 6% in year 3, 5% in year 4 and 3% in the first 9 months of year 5 and no premium thereafter. In addition, any voluntary prepayments or any mandatory prepayments that may be required from proceeds of debt and equity issuances will be subject to a make-whole during the first three years, and thereafter a premium of 5% in year 4 and 3% in the first 9 months of year 5, with the First Lien Senior Facility callable at par thereafter.

After payment-in-full of amounts under the First Lien Senior Facility or in the event mandatory payments are waived by lenders under the First Lien Senior Facility, the Second Lien Senior Facility will be subject to prepayment obligations and premiums consistent with those for the First Lien Senior Facility. Voluntary prepayments for the Second Lien Senior Facility may be made at any time subject to a make-whole.

Third Lien Convertible Notes

Subject to conversion, repayment or repurchase of the Convertible Notes, the Convertible Notes mature in October 2015. Subject to customary anti-dilution adjustments (including triggers upon the issuance of common stock below the market price of the common stock or the conversion price of the Convertible Notes), the Convertible Notes are convertible into shares of our common stock at a rate equal to 3,448.2759 shares for each $1,000 principal amount of Convertible Notes, or approximately $0.29 per share. A permanent increase in the conversion rate, resulting in the issuance of additional shares, may occur if a fundamental change occurs. During the three months ended March 31, 2010, we received Notices of Conversion from certain note holders indicating their desire to convert their Convertible Notes. In the aggregate, $3,095 principal amount of Convertible Notes were converted into 10,672 shares of our common stock during the first quarter of 2010. As of March 31, 2010, there were $2,600 principal amount of Convertible Notes outstanding.

Amounts under the Convertible Notes bear interest at 20% that accrues and compounds quarterly until October 30, 2011 at which time such accrued interest may be paid in cash. Any accrued interest not paid in cash on such date will continue to bear interest at 20% that accrues and compounds quarterly and is payable in cash on the maturity date of the Convertible Notes. After October 30, 2011, principal on Convertible Notes will bear interest at 20% payable quarterly in arrears in cash. However, if the First Lien Senior Facility has not been refinanced in full by October 31, 2011, then until such refinancing occurs, the cash interest will be capped at 14% with the balance of 6% accruing and compounding interest quarterly at 20%, to be paid in cash on the maturity date of the Convertible Notes. The amount of accrued and compounding interest as of March 31, 2010 was $859. In connection with note conversions during 2010, $958 was paid for accrued interest.

State and Local Sales Taxes

We also have contingent liabilities for state and local sales taxes. As of March 31, 2010, we had a reserve of $4,336. If our ultimate liability exceeds this amount, it could affect our liquidity unfavorably. However, we do not believe it would significantly impair our liquidity.

Capital expenditures

For the three months ended March 31, 2010, capital expenditures were primarily for the implementation of software solutions and purchase of network equipment as we continue to expand our network. Our capital expenditures for the three months ended March 31, 2010 were $4,000, of which $2,041 was for software acquisition and development. For 2010, we believe our capital expenditures will be approximately $45,000.

Operating Activities

Cash provided by operating activities increased to $51,248 during the year ended December 31, 2009 compared to $6,563 for the prior year period, primarily due to lower marketing expenditures and overall tighter controls on costs.

Changes in working capital requirements include changes in accounts receivable, prepaid and other assets, accounts payable, accrued and other liabilities and deferred revenue and costs. Cash provided by working capital requirements increased by $27,234 during the three months ended March 31, 2010 compared to the prior year period primarily due to timing of payments.

Investing Activities

Cash used in investing activities for the three months ended March 31, 2010 of $31,098 was attributable to capital expenditures of $1,959, development of software assets of $2,041 and an increase in restricted cash of $27,098, primarily due to funding of the Concentration Account.

Cash used in investing activities for the three months ended March 31, 2009 of $6,951 was attributable to capital expenditures of $2,519, development of software assets of $3,995 and $437 for the increase in restricted cash.

Financing Activities

Cash used in financing activities for the three months ended March 31, 2010 of $648 was attributable to $352 in capital lease payments and $326 in first lien facility principal payment.

Cash used in financing activities for the three months ended March 31, 2009 of $869 was attributable to $292 in capital lease payments, $326 in first lien facility principal payment and $251 in additional debt related cost.

Summary of Critical Accounting Policies and Estimates

Our significant accounting policies are summarized in Note 1 to our consolidated financial statements. The following describes our critical accounting policies and estimates:

Use of Estimates

On an ongoing basis, we evaluate our estimates, including the following:

•

those related to the average period of service to a customer (the “customer life”) used to amortize deferred revenue and deferred customer acquisition costs associated with customer activation;

•

the useful lives of property and equipment, software costs and intangible assets;

•

Revenue Recognition

Operating revenues consist of telephony services revenues and customer equipment (which enables our telephony services) and shipping revenues. The point in time at which revenues are recognized is determined in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, Revenue Recognition .

Substantially all of our operating revenues are telephony services revenues, which are derived primarily from monthly subscription fees that customers are charged under our service plans. We also derive telephony services revenues from per minute fees for international calls and for any calling minutes in excess of a customer’s monthly plan limits. Monthly subscription fees are automatically charged to customers’ credit cards, debit cards or electronic check payments or ECP in advance and are recognized over the following month when services are provided. Revenues generated from international calls and from customers exceeding allocated call minutes under limited minute plans are recognized as services are provided, that is, as minutes are used, and are billed to a customer’s credit cards, debit cards or ECP in arrears. As a result of our multiple billing cycles each month, we estimate the amount of revenues earned from international calls and from customers exceeding allocated call minutes under limited minute plans but not billed from the end of each billing cycle to the end of each reporting period. These estimates are based primarily upon historical minutes and have been consistent with our actual results.

We also generate revenue by charging a fee for activating service but from time to time we may forgo collecting this fee. For example, since May 2009 we have waived activation fees for almost all new customers. In these instances when no activation fee is being collected, no customer acquisition costs are deferred. Customer activation fees when collected, along with the related incremental direct customer acquisition amounts for customer equipment in the direct channel and for rebates and retailer commissions in the retail channel, up to but not exceeding the activation fee, are deferred and amortized over the estimated average customer life. The amortization of deferred customer equipment is recorded to direct cost of goods sold. The amortization of deferred rebates is recorded as a reduction of telephony services revenues. The amortization of deferred retailer commissions is recorded as marketing expense. We estimate customer life by analyzing historical trends and applying those trends to future periods. This customer life is solely used to amortize deferred activation fees collected, along with the related incremental customer acquisition costs. The customer life is 38 months for 2010 and was 44 months in 2009. The impact of the change to the customer life in 2010 is not material to the consolidated results of operations.

We also provide rebates to customers who purchase their customer equipment from retailers and satisfy minimum service period requirements. These rebates in excess of activation fees are recorded as a reduction of revenues over the service period based upon the estimated number of customers that will ultimately earn and claim the rebates.

Customer equipment and shipping revenues include sales to our retailers, who subsequently resell this customer equipment to customers. Revenues were reduced for payments to retailers and rebates to customers, who purchased their customer equipment through these retailers, to the extent of customer equipment and shipping revenues.

Inventory

Inventory consists of the cost of customer equipment and is stated at the lower of cost or market, with cost determined using the average cost method. We provide an inventory allowance for customer equipment that has been returned by customers but may not be able to be re-issued to new customers or returned to the manufacturer for credit.

Income Taxes

We recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using tax rates in effect for the year the differences are expected to reverse. We have recorded a valuation allowance on the assumption that it is more likely than not that we will not generate taxable income in the future.

Net Operating Loss Carryforwards

As of December 31, 2009, we had net operating loss carry forwards for U.S. federal and state tax purposes of $762,322 and $723,095, respectively, expiring at various times from years ending 2012 through 2028. In addition, we had net operating loss carry forwards for Canadian tax purposes of $50,128 expiring through 2027. We also had net operating loss carry forwards for United Kingdom tax purposes of $38,078 with no expiration date.

Under Section 382 of the Internal Revenue Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change of control net operating loss carry forward and other pre-change tax attributes against its post-change income may be limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change net operating loss carryforwards to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. Due to the cumulative impact of our equity issuances over the three year period ended April 2005, a change of ownership occurred upon the issuance of our previously outstanding Series E Preferred Stock at the end of April 2005. As a result, $171,147 of the total U.S. net operating losses were subject to an annual base limitation of $39,374.

Share-Based Compensation

We account for share-based compensation in accordance with FASB ASC 718, “Compensation-Stock Compensation” . Under the fair value recognition provisions of this pronouncement, share-based compensation cost is measured at the grant date based on the fair value of the award, reduced as appropriate based on estimated forfeitures, and is recognized as expense over the applicable vesting period of the stock award using the accelerated method.

Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”) “Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force (“EITF”). This ASU provides amendments to the criteria in FASB ASC 605-25 for separating consideration in multiple-deliverable arrangements. ASU 2009-13 changes existing rules regarding recognition of revenue in multiple deliverable arrangements and expands ongoing disclosures about the significant judgments used in applying its guidance. It will be effective for revenue arrangements entered into or materially modified in the fiscal year beginning on or after June 15, 2010. Early adoption is permitted on a prospective or retrospective basis. We are currently evaluating the impact of ASU 2009-13 on our financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to financial market risks, including changes in currency exchange rates and interest rates.

Foreign Exchange Risk

We sell our products and services in the United States, Canada and the United Kingdom. Changes in currency exchange rates affect the valuation in our financial statements of the assets and liabilities of these operations. We also have a portion of our sales denominated in Euros, the Canadian dollar and the British Pound, which are also affected by changes in currency exchange rates. Our financial results could be affected by changes in foreign currency exchange rates, although foreign exchange risks have not been material to our financial position or results of operations to date.

Interest Rate and Debt Risk

Our exposure to market risk for changes in interest rates relates primarily to our long-term debt and to a lesser degree investments.

On October 19, 2008, we entered into definitive agreements for a financing consisting of (i) a $130,300 First Lien Senior Facility, (ii) a $72,000 Second Lien Senior Facility and (iii) the sale of $18,000 of our Convertible Notes. The funding for this transaction was completed on November 3, 2008. We are exposed to interest rate risk since amounts under the First Lien Senior Facility, at our option, bear interest at:

•

The interest rate on the Second Lien Senior Facility and Convertible Notes are fixed. As of March 31, 2010, if the interest rate on the Company’s variable rate debt changed by 1%, the Company’s annual debt service payment would change by approximately $1,300.

We have no investments at March 31, 2010. Historically, we invested in a variety of securities that consisted primarily of investments in interest-bearing demand deposit accounts with financial institutions, money market funds and highly liquid debt securities of corporations and municipalities. By policy, we limited the amount of credit exposure to any one issuer.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) required by Securities Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Controls. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II—Other Information

Item 1.

Legal Proceedings

We are subject to a number of lawsuits, government investigations and claims arising out of the conduct of our business. See a discussion of our litigation matters in Note 2 of Notes to our Consolidated Financial Statements, which is incorporated herein by reference.

Item 1A.

Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. This information should be read in conjunction with the risk factors in such Annual Report.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Use of Proceeds from Initial Public Offering

On May 23, 2006, the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (File No. 333-131659) relating to our initial public offering (“IPO”). After deducting underwriting discounts and commissions and other offering expenses, our net proceeds from the offering equaled approximately $491,144, which includes $1,896 of costs incurred in 2005. We have invested the net proceeds of the offering in short-term, interest bearing securities pending their use to fund our expansion, including funding marketing expenses and operating losses. Except for payments in connection with IP litigation settlements and debt repayment, there has been no material change in our planned use of proceeds from our IPO as described in our final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b). We did not use any of the net proceeds from the IPO until after the year ended December 31, 2006. Through March 31, 2010, we used $489,261 of the net proceeds from the IPO to fund operating activities of $290,426 including $221,975 for IP litigation settlements, $40,327 to pay note holders of our previously issued convertible notes, $27,051 for debt related costs related to the Financing and $131,457 for capital expenditures, software development and patent purchases.

Item 3.

Defaults Upon Senior Securities

None

Item 5.

Other Information

None

Item 6.

Exhibits



10.1*		Employment Agreement dated as of February 24, 2010 by and between Vonage Holdings Corp. and Barry Rowan(1)

10.2*		Indemnification Agreement dated as of May 6, 2010 by and between Vonage Holdings Corp. and Barry Rowan(1)

10.3*		Amendment of Employment Agreement, dated as of February 23, 2010 between John S. Rego and Vonage Holdings Corp.(2)

10.4*		Separation Agreement and General Release, dated as of February 23, 2010 between John S. Rego and Vonage Holdings Corp.(2)

10.5*		Form of Nonqualified Stock Option Agreement under the Vonage Holdings Corp. 2006 Incentive Plan(1)

31.1		Certification of the Company’s Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

31.2		Certification of the Company’s Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

32.1		Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)

(1)	Filed herewith.

(2)	Incorporated by reference to Amendment No. 1 to Vonage Holding Corp.’s Current Report on Form 8-K/A (File No. 001-32887) filed on March 1, 2010.

*	Management contract or compensatory plan or arrangement.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	VONAGE HOLDINGS CORP.

Dated: May 6, 2010	By:	/s/ BARRY ROWAN
		Barry Rowan
		Executive Vice President, Chief Financial Officer,
		Chief Administrative Officer and Treasurer
		(Principal Financial and Accounting Officer and Duly Authorized Officer)

EXHIBIT INDEX



10.1*		Employment Agreement dated as of February 24, 2010 by and between Vonage Holdings Corp. and Barry Rowan(1)

10.2*		Indemnification Agreement dated as of May 6, 2010 by and between Vonage Holdings Corp. and Barry Rowan(1)

10.3*		Amendment of Employment Agreement, dated as of February 23, 2010 between John S. Rego and Vonage Holdings Corp.(2)

10.4*		Separation Agreement and General Release, dated as of February 23, 2010 between John S. Rego and Vonage Holdings Corp.(2)

10.5*		Form of Nonqualified Stock Option Agreement under the Vonage Holdings Corp. 2006 Incentive Plan(1)

31.1		Certification of the Company’s Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

31.2		Certification of the Company’s Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)

32.1		Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)

(1)	Filed herewith.

(2)	Incorporated by reference to Amendment No. 1 to Vonage Holding Corp.’s Current Report on Form 8-K/A (File No. 001-32887) filed on March 1, 2010.

*	Management contract or compensatory plan or arrangement.

Exhibit 10.1

EXECUTION COPY

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (“ Agreement ”), is entered into this February [ ], 2010, by and between VONAGE HOLDINGS CORP., a Delaware corporation (the “ Company ”), and Barry Rowan (the “ Executive ”).

NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, the parties hereto agree as follows:

1. Employment and Duties .

(a) General . The Executive shall serve as Executive Vice President, Chief Financial Officer and Chief Administrative Officer of the Company, reporting to the chief executive officer (the “ CEO ”) of the Company and, as requested by the Board of Directors of the Company (the “ Board ”), to the Board. The Executive shall have the duties, responsibilities, and authority customarily held by the chief financial officer of a public corporation and, in his capacity as the chief administrative officer of the Company, such other duties, responsibilities and authority, which initially may include investor relations, strategic planning and corporate development, and facilities, and which may be increased or decreased at the discretion of the CEO and may change from time to time. The Executive shall also perform such other duties as the CEO or Board may from time to time require, and such other duties consistent with the general level and type of duties and responsibilities customarily associated with the positions of chief financial officer and chief administrative officer. The Executive’s principal place of employment shall be the principal offices of the Company, currently located in the Holmdel, New Jersey area; provided , however , that the Executive understands and agrees that he shall be required to travel from time to time for business reasons.

(b) Exclusive Services . For so long as the Executive is employed by the Company, the Executive shall devote his full-time working time to his duties hereunder, shall conform to and use his good faith efforts to comply with the lawful and good faith directions and instructions given to him by the CEO and, upon its request, the Board, and shall use his good faith efforts to promote and serve the interests of the Company. Further, the Executive shall not, directly or indirectly, render services to any other person or organization without the consent of the Company or otherwise engage in activities that would interfere with the faithful performance of his duties hereunder. Notwithstanding the foregoing, the Executive may (i) serve on corporate boards, with the prior consent of the CEO, and Chairman and Lead Independent Director of the Board, (ii) serve on civic or charitable boards or engage in charitable activities without remuneration therefor, and (iii) manage his personal investments, and serve as an executor, trustee, or in a similar fiduciary capacity in connection therewith, provided that such activities do not, individually or in the aggregate, conflict materially with the performance of the Executive’s duties under this Agreement.

2. Employment “At-Will” . The Executive’s employment shall commence on March 8, 2010 (the “ Effective Date ”) and the period from the Effective

EXECUTION COPY

Date through the date of the Executive’s termination of employment, as provided herein, shall be the “ Term .” Continuation of the Executive’s employment with the Company throughout the Term shall be deemed an employment “at will” and the Executive’s employment may be terminated “at will” by either Executive or the Company.

3. Compensation and Other Benefits . Subject to the provisions of this Agreement, the Company shall pay and provide the following compensation and other benefits to the Executive during the Term as compensation for services rendered hereunder:

(a) Base Salary . The Company shall pay to the Executive an annual base salary (the “ Base Salary ”) of not less than $450,000, payable in substantially equal installments at such intervals as may be determined by the Company in accordance with its regular payroll practices for similarly situated employees, but in no event less frequently than biweekly in arrears. The Base Salary shall be reviewed for increase by the Compensation Committee of the Board in good faith, based upon the Executive’s performance, not less often than annually. The Base Salary may be increased, but not decreased below its then current level, from time to time by the Board, and as so increased shall thereafter be the “ Base Salary .”

(b) One-Time Payment . The Executive shall be paid a one-time sign on bonus equal to $175,000 (the “ Sign-On Bonus ”), of which $87,500 shall be paid within one week following the Effective Date and the remaining $87,500 of which shall be paid no later than August 15, 2010, subject to the Executive’s continued employment with the Company on such payment date. If the Executive’s employment is terminated for Cause or the Executive voluntarily terminates his employment with the Company other than for Good Reason prior to the first anniversary of the Effective Date, the Executive shall be required to repay the entire amount of the Sign-On Bonus paid to the Executive within ten (10) days following the end of the Term.

(c) Sign-On Option Grant and Future Grant Opportunities . In connection with the Executive’s commencement of employment, the Executive shall be awarded, on April 1st, 2010 (the “ Grant Date ”), a one-time sign-on nonqualified stock option grant to purchase three million (3,000,000) shares of the Company’s common stock (the number of shares and exercise price being subject to adjustment based on subsequent stock splits, reverse stock splits, other adjustments, or recapitalizations) (the “ Options ”) at a price per share equal to the closing price of the Company’s common stock on the Grant Date. The Options shall be issued pursuant to the terms and conditions of the Vonage Holdings Corp. 2006 Incentive Plan, as amended or restated from time to time (the “ 2006 Incentive Plan ”) and the Executive’s individual stock option agreement (the “ Stock Option Agreement ”), in forms substantially similar to those attached hereto as Exhibits “A” and “ B .” Notwithstanding anything to the contrary in the 2006 Incentive Plan or any stock option agreement thereunder, the following provisions of this Section 3(c) shall govern the terms of the Options (and all other outstanding options issued by the Company to the Executive to the extent specifically provided). The Options shall vest and become exercisable as to 1/4 ^th of the shares on each of the first,

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second, third and fourth anniversaries of the Grant Date (each, a “ Vesting Date ”), subject to the Executive’s continued employment on the applicable Vesting Date; provided , however , that all outstanding Options shall become fully vested and exercisable upon a “ Change of Control ” of the Company, as such term is defined in the 2006 Incentive Plan; provided , further , that the acquisition of additional securities of the Company by any Person (as defined in the 2006 Incentive Plan) that, together with its Affiliates (as defined in the 2006 Incentive Plan), currently is the Beneficial Owner (as defined in the 2006 Incentive Plan) of twenty (20%) percent or more of the combined voting power of the Company’s outstanding securities shall not constitute a Change of Control. Upon a termination of the Executive’s employment without Cause by the Company or by the Executive for Good Reason (in each case, as defined below and other than in the context of a Change of Control of the Company), an additional amount of the outstanding Options granted by the Company to the Executive shall become vested and immediately exercisable as of the date of such termination in accordance with the provisions of the immediately following sentence. For each outstanding Option, such additional amount shall be equal to the number of Options that would have vested on the next Vesting Date immediately following the date of termination, multiplied by a fraction where (1) the numerator is twelve (12) plus the number of full and fractional months that had elapsed between the Vesting Date immediately prior to such termination and such termination date, and (2) the denominator is twelve (12). Upon a termination of the Executive’s employment by the Company without Cause or by the Executive for Good Reason, all outstanding options granted by the Company to the Executive (whether part of the Options or not) shall (to the extent vested) remain exercisable for at least 180 days after the termination, or until the end of the term of the option, if earlier. Upon a termination of the Executive’s employment by the Executive without Good Reason, all vested outstanding options granted by the Company to the Executive shall remain exercisable for at least 60 days after termination, or until the end of the term of the option, if earlier. The Executive shall be considered for future equity grants based on individual and Company performance (and established in conjunction with the Company’s regular equity review cycle).

(d) Annual Cash Bonus . The Executive shall be eligible to receive an annual, discretionary cash bonus (the “ Annual Bonus ”) with a Target Bonus Opportunity (“ TBO ”) of up to 100% of the Executive’s then current Base Salary for the applicable year. Annual Bonus payouts are not guaranteed and are granted in the Company’s sole discretion based on individual and Company performance. The Company performance targets applicable to the Executive’s Annual Bonus shall be in accordance with the Company’s annual bonus program as applicable to senior executives of the Company, as in effect from time to time. Annual Bonus payouts, if any, are generally paid in March of the calendar year following the calendar year in which such payout is earned, subject to the Executive’s continued employment on such payment date, except as otherwise provided in Section 4.

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(e) Employee Benefit Plans .

(i) The Executive shall be entitled to participate in all employee health and welfare plans, programs and arrangements of the Company, in accordance with their respective terms, as may be amended from time to time, on a basis no less favorable than that made available to other senior executives of the Company; provided , however , that, to the extent it does so for the CEO, the Company will pay the full cost of the following insurance benefits for the Executive and his spouse and dependents: medical, dental, vision, basic life, accidental death and dismemberment, and core long term disability. The Executive shall be eligible to participate in the Vonage 401(k) Retirement Plan on the first day following the completion of three (3) months of employment.

(ii) The Company shall reimburse the Executive for all reasonable out-of-pocket expenses actually incurred or paid by the Executive for the continuation of the Executive’s current medical and dental benefits for the Executive and his spouse and dependents (and excluding all other benefits, including, without limitation, vision benefits) during the sixty (60) day waiting period in the amount of 100% of such costs up to a maximum of $4,000.

(f) Expenses . The Company shall reimburse the Executive for reasonable travel and other business-related expenses incurred by the Executive in the fulfillment of his duties hereunder upon presentation of written documentation thereof, in accordance with the applicable expense reimbursement policies and procedures of the Company as in effect from time to time.

(g) Vacation . The Executive shall be entitled to 20 days paid time off for each fiscal year during the Term, which may be carried over to the next fiscal year during the Term to the extent permitted under the Company’s vacation policy.

(h) Relocation Benefits .

(i) Temporary Housing . The Company shall pay or reimburse the cost of temporary housing (i.e., reasonable furnished housing, including utilities, phone and internet access, whether in an apartment, house or hotel) for the Executive while the Executive is employed at the Company’s principal offices, in an amount not to exceed $6,000 per month, until the earliest of (A) twelve (12) months from the Effective Date, (B) the end of the Term, and (C) such time, if any, as the Executive shall permanently relocate to the New Jersey area. Such housing and relocation expenses shall be paid by the Company or reimbursed to the Executive monthly in arrears, subject to the submission to the Company of reasonable documentation evidencing such expenses and approval by the Vice President of Human Resources of the Company.

(ii) Shipment of Household Goods . In connection with Executive’s relocation, the Company shall pay or reimburse the Executive for the cost of shipment (including packing, loading and unloading) of Executive’s (A) personal belongings and household goods (other than plants, food and other perishable items) and (B) up to two registered automobiles (excluding recreational vehicles, boats, motorcycles,

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jet skis, snowmobiles, all-terrain vehicles or antique vehicles) to the destination location aboard qualified carriers. The Company shall pay or reimburse the Executive for storage of items covered in this Section 3(h)(ii) for up to three (3) months.

(iii) Rental Car . The Company shall provide or reimburse the Executive for the cost of one midsize rental car until the Executive’s automobiles referred to in Section 3(h)(ii) above are shipped to the destination location.

(iv) Home Sale Assistance . The Company shall pay or reimburse the Executive for the normal and customary broker’s commission on the sale of the Executive’s principal residence in an amount up to 6% of the sale price of such principal residence along with reasonable, customary closing costs, transfer tax, state sales tax, documentary stamps, title insurance premiums, recording and inspection fees, and reasonable attorney’s fees paid by the seller for the sale of the Executive’s principal residence.

(v) Home Purchase Benefits . The Company shall pay or reimburse the Executive for a portion of the value of, and eligible closing cost expenses (as defined in the Vonage Relocation Policy) incurred in connection with, the purchase of the Executive’s new home near the Executive’s new principal place of employment, not to exceed the lesser of (A) 1.5% of the value of such new home and (B) $30,000. Reimbursements for customary closing costs shall be submitted pursuant to the terms of the Vonage Relocation Policy and must be approved by the Vice President of Human Resources.

(vi) Travel Benefits . The Company shall pay or reimburse each of the Executive and his wife for up to two round-trip coach air tickets per month from the area of the Executive’s current residence to the Holmdel, New Jersey area, until the earlier of (A) six (6) months from the Effective Date and (B) the Executive’s completed relocation to his residence located near his principal place of employment in Holmdel, New Jersey. Travel and expense reimbursement pursuant to this Section 3(h)(vi) shall be provided in accordance with the Company’s travel and entertainment policy.

(vii) Tax Assistance . The Company shall gross up for income tax purposes any income arising from the payment or reimbursement of expenses provided under this Section 3(h) as to which the Executive does not receive an offsetting income tax deduction so that the economic benefit is the same to the Executive as if such payment or reimbursements were provided on a non-taxable basis to the Executive.

(viii) Repayment of Relocation Benefits . If the Executive is terminated for Cause or resigns other than for Good Reason prior to the twelve (12) month anniversary of the Effective Date, the Executive shall repay to the Company, upon the Company’s written demand, the total amount of payments, reimbursements and any other compensation paid or provided to the Executive under this Section 3(h).

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(i) Legal Fees . Upon presentation of appropriate documentation, the Company shall pay the Executive’s reasonable counsel fees incurred in connection with the negotiation and documentation of this Agreement, up to a maximum of $15,000.

(j) Other Benefits and Perquisites . The Executive shall be entitled to such other benefits and perquisites as may be available generally to other senior executives of the Company.

4. Termination of Employment .

(a) Termination for Cause; Resignation Without Good Reason .

(i) If the Company terminates the Executive’s employment for Cause, or if the Executive resigns from his employment hereunder other than for Good Reason, the Executive shall only be entitled to payment of any unpaid Base Salary through and including the date of termination or resignation, any unpaid expense reimbursement or tax gross ups, any accrued but unused vacation, and any other amounts or benefits required to be paid under this Agreement through the date of termination or resignation, including but not limited to those under Sections 3(f), 3(h), 3(i) and 3(j) hereof (in each case only to the extent earned or accrued prior to such date of termination or resignation and not required to be repaid pursuant to Section 3(h)(viii)), or provided by law or under any plan, program, policy or practice of the Company (the “ Other Accrued Compensation and Benefits ”). The Executive shall have no further right under this Agreement to receive any other compensation or benefits after such termination or resignation of employment.

(ii) For purposes of this Agreement, “ Cause ” shall mean: (A) any act or omission that constitutes a material breach by the Executive of his obligations under this Agreement; (B) the willful and continued failure or refusal of the Executive (not as a consequence of illness, accident or other incapacity) to perform the duties reasonably required of him hereunder; (C) the Executive’s conviction of, or plea of nolo contendere to, (x) any felony or (y) another willful crime involving dishonesty or moral turpitude or which reflects negatively upon the Company in a material manner or otherwise materially impairs or impedes its operations; (D) the Executive’s engaging in any willful misconduct, gross negligence or act of dishonesty with regard to the Company or his material duties, which conduct is injurious to the Company and its subsidiaries or affiliates (collectively, the “ Company Group ”); (E) the Executive’s material breach of either a material written policy of the Company or, to the extent the Executive is aware of such rules or has been informed by the Company’s counsel, the relevant rules of any governmental or regulatory body applicable to the Company; or (F) the Executive’s refusal to follow the lawful directions of the Board; provided, however, that no event or condition described in clauses (A), (B), (E) or (F) shall constitute Cause unless (i) the Company first gives the Executive written notice of its intention to terminate his employment for Cause and the grounds for such termination, and (ii) such grounds for termination (if susceptible to correction) are not corrected by the Executive within thirty

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(30) days of his receipt of such notice (or, in the event that such grounds cannot be corrected within such thirty (30) day period, the Executive has not taken all reasonable steps within such thirty (30) day period to correct such grounds as promptly as practicable thereafter).

(iii) For purposes of this Agreement, “ Good Reason ” shall mean the occurrence of any of the following events without the Executive’s prior written consent: (A) a failure by the Company to timely pay material compensation due and payable to the Executive in connection with his employment; (B) a material diminution in the Executive’s Base Salary or TBO; (C) a material diminution of the authority, duties or responsibilities of the Executive from those set forth in this Agreement, including without limitation, ceasing to be the chief financial and chief administrative officer of the Company (or its ultimate parent following a Change of Control); (D) the Company requiring the Executive to be based at any office or location more than fifty (50) miles from the Holmdel, New Jersey area; or (E) a material breach by the Company of its obligations under this Agreement; provided, however, that no event or condition described in clauses (A) through (E) shall constitute Good Reason unless (x) the Executive gives the Company within sixty (60) days of the occurrence of the Good Reason event, written notice of his intention to terminate his employment for Good Reason and the grounds for such termination, and (y) such grounds for termination (if susceptible to correction) are not corrected by the Company within thirty (30) days of its receipt of such notice (or, in the event that such grounds cannot be corrected within such thirty (30) day period, the Company has not taken all reasonable steps within such thirty (30) day period to correct such grounds as promptly as practicable thereafter). Such termination for Good Reason by the Executive must occur within 120 days of the occurrence of the Good Reason event.

(b) Termination Without Cause; Resignation for Good Reason.

(i) If the Executive’s employment is terminated by the Company without Cause or the Executive resigns for Good Reason, the Company shall pay the Executive, subject to Section 4(e) below: (A) severance pay equal to twelve (12) months of the Executive’s then-current Base Salary and an amount equal to the Executive’s full TBO for the year of termination, each payable by the Company in installments during its regular payroll cycle over the twelve (12) month period following the Executive’s termination of employment, provided that the first payment shall be made on the sixtieth (60 ^th ) day after the Executive’s termination of employment, and such first payment shall include payment of any amounts that would otherwise be due prior thereto, (B) a pro rata portion of the Executive’s Annual Bonus for the year of termination, if and to the extent that the Company achieves its performance metrics for such year, payable when bonuses are normally paid to other senior executives of the Company, but in no event later than March 15th of the year following the year to which such bonus relates, and (C) the Other Accrued Compensation and Benefits. The Executive shall have no further rights under this Agreement to receive any other compensation or benefits after such termination or resignation of employment.

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(ii) If, following a termination of employment without Cause or a resignation for Good Reason, the Executive materially breaches a provision of Section 5 or Section 7 hereof, the Executive shall not be eligible, as of the date of such material breach, for the payments and benefits described in Sections 4(b)(i)(A) or (B) and any and all obligations and agreements of the Company with respect to such payments shall thereupon cease (and the Company shall be entitled to recoup any and all such payments and benefits previously paid or awarded to the Executive).

(c) Termination Due to Death or Disability . The Executive’s employment with the Company shall terminate automatically on the Executive’s death. In the event of the Executive’s disability, the Company shall be entitled to terminate his employment. In the event of termination of the Executive’s employment by reason of the Executive’s death or disability, the Company shall pay to the Executive (or his estate, as applicable), subject to Section 4(e) below, (i) a pro rata portion of the Executive’s Annual Bonus for the year of termination, if and to the extent that the Company achieves its performance metrics for such year, payable when bonuses are normally paid to other senior executives of the Company, but in no event later than March 15th of the year following the year to which such bonus relates, and (ii) the Other Accrued Compensation and Benefits. For purposes of this Agreement, “ disability ” means that the Executive has been unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment for 180 days in any one (1) year period. Notwithstanding the foregoing, in the event that as a result of absence because of mental or physical incapacity the Executive incurs a “separation from service” within the meaning of such term under Section 409A of the Code and the regulations and guidance issued thereunder (“ Section 409A ”), the Executive shall on such date automatically be terminated from employment as a disability termination.

(d) Release and Waiver . The Company shall not be required to make the payments and provide the benefits provided for under Sections 4(b)(i)(A) or (B) or Section 4(c)(i) unless the Executive executes and delivers to the Company a Separation Agreement and General Release in substantially the form attached hereto as Exhibit C (the “ Release ”), and such Release has become effective and irrevocable in its entirety within sixty (60) days of the Executive’s termination of employment.

(e) Payments Subject to Section 409A .

(i) The intent of the parties is that payments and benefits under this Agreement comply with Section 409A (except to the extent exempt as short-term deferrals or otherwise) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. If the Executive notifies the Company (with specificity as to the reason therefor) that the Executive believes that any provision of this Agreement (or of any award of compensation, including equity compensation or benefits) would cause the Executive to incur any additional tax or interest under Section 409A or the Company independently makes such determination, the Company shall, after consulting with the Executive, reform such provision to attempt to comply with Section 409A through good faith modifications to

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the minimum extent reasonably appropriate to conform with Section 409A. To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to the Executive and the Company of the applicable provision without violating the provisions of Section 409A. If the Executive notifies the Company (with specificity as to the reason therefor) that the Executive believes that any of the Company’s plans, programs or payroll practices would cause the Executive to incur any additional tax or interest under Section 409A, the Company shall in good faith discuss with the Executive any proposed modifications to such plans, programs or payroll practices that are reasonably necessary to comply with Section 409A.

(ii) A termination of employment shall not be deemed to have occurred for purposes of this Agreement providing for the payment of any amounts or benefits that are considered “nonqualified deferred compensation” under Section 409A upon or following a termination of employment, unless such termination is also a “separation from service” within the meaning of Section 409A and the payment thereof prior to a “separation from service” would violate Section 409A. As permitted by Treasury Regulation 1.409A-1(h)(1)(ii), 49% shall be substituted in lieu of 20% for the average level of bona fide services performed during the immediately preceding thirty-six (36) month period in order to constitute a “separation from service”. For purposes of any such provision of this Agreement relating to any such payments or benefits, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.”

(iii) For purposes of Section 409A, the Executive’s right to receive any installment payments pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days ( e.g. , “payment shall be made within thirty (30) days following the date of termination”), the actual date of payment within the specified period shall be within the sole discretion of the Company.

(iv) If, as of the date of the “separation from service” of the Executive from the Company, the Executive is a “specified employee” (within the meaning of that term under Section 409A(a)(2)(B), then with regard to any payment or the provision of any benefit that is specified herein as subject to this Section or is otherwise considered “nonqualified deferred compensation” under Section 409A (whether under this Agreement, any other plan, program, payroll practice or any equity grant) and is payable upon the Executive’s separation from service, such payment or benefit shall not be made or provided until the date which is the earlier of (A) the expiration of the six (6)-month-and-one-day period measured from the date of such “separation from service” of the Executive, and (B) the date of the Executive’s death (the “ Delay Period ”) and this Agreement and each such plan, program, payroll practice or equity grant shall hereby be deemed amended accordingly. Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section (whether they

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would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum with interest at the prime rate as published in the Wall Street Journal on the first business day of the Delay Period ( provided that any payment measured by a change in value that continues during the Delay Period shall not be credited with interest for the Delay Period), and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

(v) The determination of whether and when a separation from service of the Executive from the Company has occurred shall be made in a manner consistent with, and based on the presumptions set forth in, Treasury Regulation Section 1.409A-1(h). Solely for purposes of this Section 4(e)(v), “ Company ” shall include all persons with whom the Company would be considered a single employer under Sections 414(b) and 414(c) of the Code.

(vi) All reimbursements and in-kind benefits provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A to the extent that such reimbursements or in-kind benefits are subject to Section 409A. All expenses or other reimbursements paid pursuant herewith that are taxable income to the Executive shall in no event be paid later than the end of the calendar year next following the calendar year in which the Executive incurs such expense or pays such related tax. With regard to any provision herein that provides for reimbursement of costs and expenses or in-kind benefits, except as permitted by Section 409A, the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit, the amount of expenses eligible for reimbursement, of in-kind benefits, provided during any taxable year shall not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, provided that the foregoing clause shall not be violated without regard to expenses reimbursed under any arrangement covered by Section 105(b) of the Code solely because such expenses are subject to a limit related to the period the arrangement is in effect and such payments shall be made on or before the last day of the Executive’s taxable year following the taxable year in which the expense occurred. Any tax gross-up shall be made no later than the end of the calendar year next following the calendar year in which the Executive remits the related tax.

(f) Notice of Termination . Any termination of employment by the Company or the Executive shall be communicated by a written “ Notice of Termination ” to the other party hereto given in accordance with Section 22 of this Agreement. In the event of a termination by the Company for Cause, or resignation by the Executive for Good Reason, the Notice of Termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) specify the date of termination, which date shall not be more than thirty (30) days after the giving of such notice. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive

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any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder to the extent that such fact or circumstance is on the same asserted basis within the definition for the termination. In the event of a termination by the Company without Cause, or resignation by the Executive other than for Good Reason, the Notice of Termination shall specify the date of termination, which date shall not be less than thirty (30) days after the giving of such notice.

(g) Resignation from Directorships and Officerships . The termination of the Executive’s employment for any reason shall constitute the Executive’s resignation from (i) any director, officer, or employee position the Executive has with members of the Company Group, and (ii) all fiduciary positions (including as a trustee) the Executive holds with respect to any employee benefit plans or trusts established by the Company. The Executive agrees that this Agreement shall serve as written notice of resignation in this circumstance.

5. Confidentiality .

(a) Confidential Information . The Executive has entered into and is subject to the Company’s Employee Confidentiality and Innovations Agreement substantially in the form attached hereto as “ Exhibit D .”

(b) Exclusive Property . The Executive confirms that all Confidential Information (as defined in the Employee Confidentiality and Innovations Agreement) is and shall remain the exclusive property of the Company Group. All business records, papers and documents kept or made by the Executive relating to the business of the Company Group shall be and remain the property of the Company Group. Upon the request and at the expense of the Company Group, the Executive shall promptly make all disclosures, execute all instruments and papers, and perform all acts reasonably necessary to vest and confirm in the Company Group, fully and completely, all rights created or contemplated by this Section 5(b). Notwithstanding the foregoing, the Executive shall maintain ownership and use of his rolodex and other address books.

6. Noncompetition . The Executive has entered into and is subject to the Company’s Non-Compete Agreement substantially in the form attached hereto as Exhibit E .

7. Non-Solicitation and Non-Hire . The Executive has agreed and now confirms that for a period commencing on the Effective Date and ending twelve (12) months following the Executive’s termination of employment with the Company (the “ Restricted Period ”), other than in the good faith performance of his duties to the Company as Executive Vice President, Chief Financial Officer & Chief Administrative Officer of the Company, the Executive shall not, directly or indirectly: (a) interfere with or attempt to interfere with the relationship between any person who is, or was during the then-most recent twelve (12) month period, an employee, officer, representative or agent

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of the Company Group, or solicit or induce or attempt to solicit or induce any of them to leave the employ of any member of the Company Group or violate the terms of their respective contracts, or any employment arrangements, with such entities; or (b) hire, recruit or attempt to hire any person who was employed by any member of the Company Group at any time during the then-most recent twelve (12) month period; provided , that this clause (b) shall not apply to the recruitment or hiring of any individual whose employment with any member of the Company Group has been terminated for a period of six (6) months or longer; or (c) induce or attempt to induce any customer, client, supplier, licensee or other business relation of any member of the Company Group to cease doing business with any member of the Company Group, or in any way interfere with the relationship between any member of the Company Group and any customer, client, supplier, licensee or other business relation of any member of the Company Group, provided the foregoing clause (c) shall not apply to consumers. Nothing in this Section 7 shall be violated by the Executive serving upon request as a reference, so long as he does not have a business relationship with the person to whom the reference is being given, and nothing in this Section 7 shall be violated by the Executive engaging in general advertising that is not specifically targeted at the persons referred to in clauses (a), (b) and (c) that have a relationship with a member of the Company Group. As used herein, the term “ indirectly ” shall include, without limitation, the Executive’s authorizing the use of the Executive’s name by any competitor of any member of the Company Group to induce or interfere with any employee or business relationship of any member of the Company Group.

8. Certain Remedies .

(a) Injunctive Relief . Without intending to limit the remedies available to either party hereto, including, but not limited to, those set forth in Section 11 hereof, each of the parties hereto agrees that a breach of any of the covenants contained in Sections 5, 6, or 7 of this Agreement may result in material and irreparable injury to the other party for which there is no adequate remedy at law, that it shall not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, any non-breaching party shall be entitled to seek a temporary restraining order or a preliminary or permanent injunction, or both, without bond or other security, restraining the breaching party from engaging in activities prohibited by the covenants contained in Sections 5, 6, 7 or 10 of this Agreement or such other relief as may be required specifically to enforce any of the covenants contained in this Agreement. Such injunctive relief in any court shall be available to the non-breaching party in lieu of, or prior to or pending determination in, any arbitration proceeding.

(b) Extension of Restricted Period . In addition to the remedies the Company may seek and obtain pursuant to Section 11 hereof, the Restricted Period may, in the court’s discretion, be extended by any and all periods during which the Executive shall be found by a court possessing personal jurisdiction over him to have been in violation of the covenants contained in Sections 5 through 7 of this Agreement.

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9. Defense of Claims . The Executive agrees that, during the Term, and for a period of six (6) months after termination of the Executive’s employment, upon request from the Company, the Executive shall cooperate with the Company in connection with any matters the Executive worked on during his employment with the Company and any related transitional matters. In addition, the Executive agrees to cooperate with the Company in the defense of any claims or actions that are made and/or may be made by or against the Company Group, except if the Executive’s reasonable interests are adverse to the Company Group in such claim or action. The Company agrees to promptly reimburse the Executive for all of the Executive’s reasonable travel and other direct expenses incurred, or to be reasonably incurred, to comply with the Executive’s obligations under this Section 9.

10. Source of Payments . All payments provided under this Agreement, other than payments made pursuant to a plan which provides otherwise, shall be paid in cash from the general funds of the Company, and no special or separate fund shall be established, and no other segregation of assets shall be made, to assure payment. The Executive shall have no right, title or interest whatsoever in or to any investments which the Company may make to aid the Company in meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company.

11. Arbitration . Any dispute or controversy arising under or in connection with this Agreement or otherwise in connection with the Executive’s employment by the Company that cannot be mutually resolved by the parties to this Agreement and their respective advisors and representatives shall be settled exclusively by arbitration in New Jersey in accordance with the rules of the American Arbitration Association before one arbitrator of exemplary qualifications and stature, who shall be selected jointly by an individual to be designated by the Company and an individual to be selected by the Executive, or if such two individuals cannot promptly agree on the selection of the arbitrator, who shall be selected by the American Arbitration Association. Notwithstanding anything to the contrary contained herein, the arbitrator shall allow for discovery sufficient to adequately arbitrate any claims, including access to essential documents and witnesses. The award of the arbitrator with respect to such dispute or controversy shall be in writing with sufficient explanation to allow for such meaningful judicial review as is permitted by law, and that such decision shall be enforceable in any court of competent jurisdiction and shall be binding on the parties hereto. The remedies available in arbitration shall be identical to those allowed at law. The arbitrator shall be entitled to award to the prevailing party in any arbitration or judicial action under this Agreement reasonable attorneys’ fees and any costs of the arbitration payable by such party, consistent with applicable law, provided that no such award shall be made against the Executive unless the arbitrator finds the Executive’s positions in such arbitration or dispute to have been frivolous or taken in bad faith.

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12. Nonassignability; Binding Agreement .

(a) By the Executive . This Agreement and any and all of the Executive’s rights, duties, obligations or interests hereunder shall not be assignable or delegable by the Executive.

(b) By the Company . This Agreement and any and all of the Company’s rights, duties, obligations or interests hereunder shall not be assignable by the Company, except as incident to a reorganization, merger or consolidation, or transfer of all or substantially all of the Company’s assets and then only if the Company’s obligations hereunder are assumed by the assignee.

(c) Binding Effect . This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any successors to or permitted assigns of the Company, and the Executive’s heirs and the personal representatives of the Executive’s estate.

13. Withholding . Any payments made or benefits provided to the Executive under this Agreement shall be reduced by any applicable withholding taxes or other amounts required to be withheld by law or contract.

14. Excise Tax .

(a) In the event it shall be determined that any payment, benefit or distribution (or combination thereof) by the Company, any of the Company’s affiliates, one or more trusts established by the Company for the benefit of its employees, or any other person or entity, to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right, phantom equity awards or similar right, or the lapse or termination of any restriction on the vesting or exercisability of any of the foregoing) (a “ Payment ”) would be subject to the excise tax imposed by Section 4999 of the Code by reason of being “contingent on a change in ownership or control” of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, hereinafter collectively referred to as the “ Excise Tax ”), then the Executive shall be entitled to receive an additional payment or payments (a “ Gross-Up Payment ”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and the Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. For purposes of this Agreement, the term “ Reduced Amount ” shall mean the greatest amount that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax. Notwithstanding anything to the contrary, if it shall be determined that the Executive is otherwise entitled to a Gross-Up Payment, but that the Payments do not exceed 115% of the Reduced Amount, then no Gross-Up Payment shall

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be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. Unless the Executive shall have given prior written notice specifying a different order to the Company to effectuate the Reduced Amount, the Payments to be reduced hereunder will we determined in a manner which has the least economic cost to the Executive, on an after-tax basis, and, to the extent the economic cost is equivalent, will be reduced in the inverse order of when the Payment would have been made to the Executive until the reduction specified herein is achieved. The Executive’s right to specify the order of reduction of the Payments shall apply only to the extent that it does not directly or indirectly alter the time or method of payment of any amount that is deferred compensation subject to (and not exempt from) Section 409A of the Code.

(b) Subject to the provisions of Section 15(a) hereof, all determinations required to be made under this Section 14, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment, the manner in which Payments are to be reduced, if applicable, pursuant to Section 15(a), and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized certified public accounting firm as may be designated by the Company, and reasonably satisfactory to the Executive (the “ Accounting Firm ”), which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the closing of the change in ownership or control of the Company, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 14, shall be paid by the Company to the Executive (or to the appropriate taxing authority on the Executive’s behalf) when due immediately prior to the date the Executive is required to make payment of any Excise Tax or other taxes. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall so indicate to the Executive in writing. Any determination by the Accounting Firm shall be binding upon the Company and the Executive absent a contrary determination by the Internal Revenue Service or a court of competent jurisdiction; provided , however , that no such determination shall eliminate or reduce the Company’s obligation to provide any Gross-Up Payment that shall be due as a result of such contrary determination. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that the amount of the Gross-Up Payment determined by the Accounting Firm to be due to (or on behalf of) the Executive is lower than the amount actually due (“ Underpayment ”). In the event that the Company exhausts its remedies pursuant to Section 15(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred as promptly as possible and notify the Company and the Executive of such calculations, and any such Underpayment (including the Gross-Up Payment to the Executive) shall be promptly paid by the Company to or for the benefit of the Executive within five (5) business days after receipt of such determination and calculations.

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(c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of any Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall (i) give the Company any information which is in the Executive’s possession reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order to effectively contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided , however , that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 14(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided , further , that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall pay the amount of such claim to the Executive, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such payment or with respect to any imputed income with respect to such payment (including the applicable Gross-Up Payment); provided , further , that if the Executive is required to extend the statute of limitations to enable the Company to contest such claim, the Executive may limit this extension solely to such contested amount; provided , further , that the Executive shall not be required to resolve, settle or take any other action with respect to such claim unless the Executive reasonably determines that such resolution, settlement or other action would not materially adversely impact the Executive with respect to any other issue raised by the Internal Revenue Service or other taxing authority. The Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. The

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reimbursement of expenses incurred by the Executive due to a tax contest or litigation addressing the existence or amount of an Excise Tax liability shall be reimbursed promptly, but in no event be made later than the end of the calendar year next following the calendar year in which the taxes that are subject of the contest or litigation are remitted to the taxing authority (or if no taxes are remitted as a result of such audit or litigation, the end of the calendar year next following the calendar year in which the audit is completed or there is a final and nonappealable settlement or other resolution of the litigation). In addition, without extending the time of any obligation in this Section 14, any tax Gross-Up Payment shall be made no later than the end of the calendar year next following the calendar year in which the Executive remits the related tax.

(d) If, after the receipt by the Executive of an amount paid by the Company pursuant to this Section 14, the Executive becomes entitled to receive any refund with respect to a Gross-Up Payment, the Executive shall promptly pay to the Company the amount of such refund received (together with any interest paid or credited thereon after taxes applicable thereto). Notwithstanding the foregoing, in the event that the obligation to refund any amount shall be a violation of the Sarbanes-Oxley Act of 2002, such obligation to refund shall be null and void.

(e) To the extent that the applicable regulations under Code Section 280G permits a later recalculation by the Company, or requires a later recalculation, of whether the Payments are subject to the Excise Tax, the provisions of this Section 14 shall again be applied based upon such recalculation.

15. Amendment; Waiver . This Agreement may not be modified, amended or waived in any manner, except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement.

16. Governing Law . All matters affecting this Agreement, including the validity thereof, are to be governed by, and interpreted and construed in accordance with, the laws of the State of New Jersey applicable to contracts executed in and to be performed in that State.

17. Survival of Certain Provisions . The rights and obligations set forth in Sections 3(c), 3(d), 4(a), 4(b), 4(c), and 4(e), Sections 5 through 11 and Section 14 hereof shall survive any termination or expiration of this Agreement.

18. Entire Agreement; Supersedes Previous Agreements . This Agreement, together with the (i) Employee Confidentiality and Innovations Agreement, (ii) Non-Compete Agreement, (iii) 2006 Incentive Plan, (iv) Stock Option Agreement, and (v) the Indemnification Agreement, dated as of February [ ], 2010, between the Company and the Executive, each as amended from time to time, contains the entire agreement and understanding of the parties hereto with respect to the matters covered

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herein and supersedes all prior or contemporaneous negotiations, commitments, agreements and writings with respect to the subject matter hereof, all such other negotiations, commitments, agreements and writings shall have no further force or effect, and the parties to any such other negotiation, commitment, agreement or writing shall have no further rights or obligations thereunder. The parties hereto confirm that the Original Agreement is hereby terminated and is of no further force or effect.

19. Counterparts . This Agreement may be executed by either of the parties hereto in counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.

20. Headings . The headings of sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.

21. Notices . All notices or communications hereunder shall be in writing, addressed as follows:

To the Company:

23 Main Street

Holmdel, N.J. 07733

Attention: Chief Legal Officer

To the Executive:

Barry Rowan

at the last address on record with the Company

All such notices shall be conclusively deemed to be received and shall be effective (i) if sent by hand delivery, upon receipt, or (ii) if sent by electronic mail or facsimile, upon confirmation of receipt by the sender of such transmission, or (iii) if sent by courier or certified or registered U.S. mail, upon receipt.

22. Severability . In the event that any court having jurisdiction shall determine that any restrictive covenant or other provision contained in this Agreement shall be unreasonable or unenforceable in any respect, then such covenant or other provision shall be deemed limited to the extent that such other court deems it reasonable or enforceable, and as so limited shall remain in full force and effect. In the event that such court shall deem any such covenant or other provision wholly unenforceable, the remaining covenants and other provisions of this Agreement shall nevertheless remain in full force and effect.

[Remainder of page intentionally left blank.]

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IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer pursuant to the authority of its Board, and the Executive has executed this Agreement, as of the day and year first written above.


VONAGE HOLDINGS CORP.

By		/s/ Marc P. Lefar
Name:
Title:


ACCEPTED AND AGREED:

/s/ Barry Rowan
Barry Rowan

Date:		2/24/10

[ SIGNATURE PAGE TO ROWAN EMPLOYMENT AGREEMENT ]

Exhibit A

Vonage Holdings Corp. 2006 Incentive Plan

Note: Previously filed with the Securities and Exchange Commission as Exhibit 10.1 to Vonage’s Quarterly Report on Form 10-Q (File No. 001-32887) filed on November 6, 2009

Exhibit B

VONAGE HOLDINGS CORP.

2006 INCENTIVE PLAN

NONQUALIFIED STOCK OPTION AGREEMENT

“ Participant ”: Barry Rowan

“ Date of Award ”: April 1, 2010

This Agreement (the “ Agreement ”), effective as of the Date of Award set forth above, represents the grant of Nonqualified Stock Options by Vonage Holdings Corp., a Delaware corporation (the “ Company ”), to the Participant named above, pursuant to the provisions of the Vonage Holdings Corp. 2006 Incentive Plan, as amended or restated from time to time, (the “ Plan ”). Capitalized terms have the meanings ascribed to them under the Plan, unless specifically set forth herein.

The parties hereto agree as follows:

1. Grant of Options

The Company hereby grants to the Participant Nonqualified Stock Options to purchase Shares in the manner and subject to the terms and conditions of the Plan and this Agreement as follows:

(a) Number of Shares Covered by the Options : 3,000,000.

(b) “ Option Price ”: $1.37 per Share.

(c) Option Term ”: The Options have been granted for a period of ten years, ending on the tenth anniversary of the Date of Award.

2. Vesting of Options

(a) Except as otherwise provided in this Section 2, the Options shall vest and become exercisable as to 1/4 ^th of the Shares on each of the first, second, third and fourth anniversaries of the Date of the Award (each, a “ Vesting Date ”), subject to the Participant’s continued employment with the Company on the applicable Vesting Date, except as otherwise provided for herein.

(b) To the extent not previously vested in accordance with this Section 2, in the event of a Change of Control (which, for purposes of this Agreement, shall have the meaning set forth in Section 3(c) (or any successor section thereto) of that certain Employment Agreement, dated as of February 24, 2010, by and between the Company and the Participant, as such agreement may be amended from time to time (the “Employment Agreement” )), the Options will fully vest and become exercisable upon such Change of Control.

(c) To the extent not previously vested in accordance with this Section 2, in the event of a termination of the Participant’s employment without “Cause” by the

Company or by the Participant for “Good Reason” , (i) an additional amount of the then outstanding Options granted by the Company to the Participant pursuant to this Agreement shall become vested and immediately exercisable as of the date of such termination in accordance with the provisions of the immediately following sentence and (ii) remain exercisable until they terminate in accordance with Section 4 below. For each outstanding Option, such additional amount shall be equal to the number of Options that would have vested on the next Vesting Date immediately following the date of termination, multiplied by a fraction where (1) the numerator is 12 plus the number of full and fractional months that had elapsed between the Vesting Date immediately prior to such termination and such termination date, and (2) the denominator is 12.

(d) To the extent not previously vested in accordance with this Section 2, in the event of the Participant’s death, the Options will (i) vest and become exercisable as of the date thereof as to one-half the number of unvested Shares covered thereby and (ii) remain exercisable until they terminate in accordance with Section 4 below.

(e) To the extent not previously vested in accordance with this Section 2, in the event of the Participant’s disability, the Options will (i) vest and become exercisable as of the date thereof as to one-half the number of unvested Shares covered thereby and (ii) remain exercisable until they terminate in accordance with Section 4 below.

(f) Notwithstanding anything to the contrary herein, if the Participant’s employment with the Company is terminated by the Company with Cause, the Options will terminate immediately and be of no force or effect.

(g) To the extent vested in accordance with this Section 2, the Options will remain exercisable until they terminate in accordance with Section 4 below.

(i) For purposes of this Section 2, the terms “ Cause ,” “ Good Reason ” and “ disability ” shall have the respective meanings ascribed to them in the Employment Agreement.

3. Exercise of Options

The Options may be exercised by any means specified in Section 7(d) of the Plan, as well as by a broker cashless exercise procedure, all of which the Committee hereby approves.

4. Termination of Options

To the extent vested in accordance with Section 2 above, the Options will terminate, and be of no force or effect, upon the earliest of:

(a) the date of termination of the Participant’s employment if such termination of employment is for Cause,

(b) 180 days following termination of Participant’s employment by the Company without Cause or by the Participant for Good Reason,

(c) 60 days following termination of Participant’s employment due to the Participant’s resignation without Good Reason, and

(d) the expiration of the Option Term.

5. Rights as Stockholder

The Participant shall have no rights as a stockholder of the Company with respect to the Shares covered by the Options until such time as the Option Price has been paid and the Shares have been issued and delivered to the Participant.

6. Transferability

Unless permitted by the Committee in accordance with the terms of the Plan, the Options may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, and, during the Participant’s lifetime, may be exercised only by the Participant or in the event of the Participant’s legal incapacity, the Participant’s legal guardian or representative.

7. Miscellaneous

(a) This Agreement and the rights of the Participant hereunder are subject to the terms and conditions of the Plan, as the same may be amended from time to time, as well as to such rules and regulations as the Committee may adopt for administration of the Plan. If there is any inconsistency between the terms of this Agreement and the terms of the Plan, the Plan’s terms shall completely supersede and replace the conflicting terms of this Agreement.

(b) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required or, the Committee determines are advisable. The Participant agrees to take all steps the Company determines are necessary to comply with all applicable provisions of federal and state securities law in exercising his rights under this Agreement. The Committee shall have the right to impose such restrictions on any Shares acquired pursuant to the exercise of the Option as it deems necessary or advisable under applicable federal securities laws, the rules and regulations of any stock exchange or market upon which Shares are then listed or traded, and/or any blue sky or state securities laws applicable to Shares. It is expressly understood that the Committee is authorized to administer, construe, and make all determinations necessary or appropriate to the administration of the Plan and this Agreement, all of which shall be binding upon the Participant.

contravenes Section 409A of the Code or could cause the Participant to incur any tax, interest or penalties under Section 409A of the Code, the Committee may, in its sole discretion and without the Participant’s consent, modify such provision in order to comply with the requirements of Section 409A of the Code or to satisfy the conditions of any exception therefrom, or otherwise to avoid the imposition of the additional income tax and interest under Section 409A of the Code, while maintaining, to the maximum extent practicable, the original intent and economic benefit to the Participant, without materially increasing the cost to the Company, of the applicable provision.

(d) Delivery of the Shares underlying the Options upon exercise will be subject to the Participant satisfying all applicable federal, state, local and foreign taxes. The Company shall have authority to deduct or withhold from all amounts payable to the Participant in connection with the Options, or require the Participant to remit to the Company, an amount sufficient to satisfy any applicable taxes required by law. The Participant shall have the right to cover the minimum statutory withholding by directing the Company to withhold Shares that would otherwise be received by him, by utilization of a cashless broker transaction or by any other means permitted by Section 18 of the Plan.

(e) To the extent not preempted by federal law, this Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.

[ SIGNATURE PAGES FOLLOW ]

IN WITNESS WHEREOF, the Company and the Participant have executed this Agreement as of the Date of Award.


VONAGE HOLDINGS CORP.

By:
Name:
Title:

PARTICIPANT


Name:		Barry Rowan
Title:		Executive Vice President, Chief Financial Officer and Chief Administrative Officer

[ SIGNATURE PAGE TO BARRY ROWAN NONQUALIFIED STOCK OPTION AWARD AGREEMENT ]

EXHIBIT C

CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE

This CONFIDENTIAL SEPARATION AGREEMENT and GENERAL RELEASE (hereinafter referred to as this “Agreement”) is made and entered into by and between Barry Rowan (“Executive”) and Vonage Holdings Corp. (defined herein to include its affiliates, subsidiaries, predecessors and successors and hereinafter referred to as “Vonage” or “the Company”), effective as of [ ] (the “Effective Date”). Executive and Vonage are hereafter referred to as the “Parties.”

WHEREAS, Executive was employed by Vonage as its Executive Vice President, Chief Financial Officer and Chief Administrative Officer;

WHEREAS, Executive and Vonage entered into an Employment Agreement, dated as of [ ] (the “Employment Agreement”);

WHEREAS, [description of nature of termination];

WHEREAS, Vonage and Executive have read this Agreement and have had the opportunity to review it with their respective legal counsel; and

WHEREAS, Vonage and Executive desire to resolve any and all issues and claims between them, including without limitation Executive’s employment and his separation therefrom, as well as any and all issues and claims arising from or relating to the Employment Agreement, and to reach an amicable accord and settlement concerning their future relationship.

NOW, THEREFORE, in consideration of the premises and mutual promises herein contained, it is agreed as follows:

1. Separation and Post-Employment Benefits . Executive ceased performing duties for Vonage on [ ] (the “Termination Date”), and Executive’s services on any and all boards of directors, boards of trustees and executive and/or management committees of Vonage of which he was a member ended on such date. The terms of Executive’s separation from Vonage are now being agreed to, as described herein.

2. Salary . Executive agrees that Vonage has no obligation to make, and will not make, any additional salary payments to Executive that have not already been paid, except for any and all earned, accrued or owed amounts, but not yet paid, to which Executive is entitled up to and including the Termination Date, including any unpaid expense reimbursement or tax gross ups, any accrued but unused vacation and any other amounts or benefits required to be paid under the Employment Agreement or provided by law or under any plan, program, policy or practice of Vonage and not including the payments or benefits described in Paragraph 5 below (“Other Accrued Compensation and Benefits”), payable in a lump sum within five (5) days after the revocation period described in Paragraph 18(d) below. Any further entitlement that Executive may have to compensation or benefits, such as the payments and benefits described in Paragraph 5 below, shall be governed by the terms of this Agreement.

3. Non-Admission . It is specifically understood and agreed that this Agreement does not constitute and is not to be construed as an admission or evidence of (a) any violation by Vonage or Executive, of any federal, state or municipal law, statute or regulation, or principle of common law or equity, (b) the commission by Executive or Vonage of any other actionable wrong, or (c) any wrongdoing of any kind whatsoever on the part of Executive or Vonage, and shall not be offered, argued or used for that purpose.

4. General Release .

(a) In exchange for the consideration provided in this Agreement, and as a material inducement for both Parties entering into this Agreement, Executive for himself, his heirs, executors, administrators, trustees, legal representatives, successors and assigns (hereinafter collectively referred to for purposes of this Paragraph 4 as “Executive”) hereby irrevocably and unconditionally waives, releases and forever discharges Vonage and its past, present and future affiliates and related entities, parent and subsidiary corporations, divisions, shareholders, predecessors, future officers, directors, trustees, fiduciaries, administrators, executives, agents, representatives, successors and assigns (hereinafter collectively referred to for purposes of this Paragraph 4 as “Vonage”) for any and all waivable claims, charges, demands, sums of money, actions, rights, promises, agreements, causes of action, obligations and liabilities of any kind or nature whatsoever, at law or in equity, whether known or unknown, existing or contingent, suspected or unsuspected, apparent or concealed, foreign or domestic (hereinafter collectively referred to as “claims”) which he has now or in the future may claim to have against Vonage based upon or arising out of any facts, acts, conduct, omissions, transactions, occurrences, contracts, claims, events, causes, matters or things of any conceivable kind or character existing or occurring or claimed to exist or to have occurred prior to the Effective Date in any way whatsoever relating to or arising out of Executive’s employment with Vonage or the termination thereof. Such claims include, but are not limited to, claims arising under the Age Discrimination in Employment Act, 29 U.S.C. § 621 et seq .; Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq .; the Americans with Disabilities Act of 1990, 42 U.S.C. § 12101 et seq .; the Family and Medical Leave Act of 1993, 29 U.S.C. § 2601 et seq .; the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq .; the Equal Pay Act of 1963, 29 U.S.C. § 206(d); Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. § 1681 et seq .; the Fair Credit Reporting Act, 15 U.S.C. §1681 et seq .; any other federal, state or local statutory laws relating to employment, discrimination in employment, termination of employment, wages, benefits or otherwise, including, but not limited to, the New Jersey Law Against Discrimination, the Conscientious Employee Protection Act, the New Jersey Wage Payment Law, the New Jersey Family Leave Act,

all as amended; the common law of the State of New Jersey; any claim under any local ordinance, including, but not limited to, any ordinance addressing fair employment practices; any claims for employment or reemployment by the Company; any common law claims, including but not limited to actions in tort, defamation and breach of contract; any claim or damage arising out of Executive’s employment with or separation from Vonage (including a claim for retaliation) under any common law theory or any federal, state or local statute or ordinance not expressly referenced above; and any and all claims for counsel fees and costs.

(b) To the fullest extent permitted by law, and subject to the provisions of Paragraphs 4(d) and 4(e) below, Executive represents and affirms that he has not filed or caused to be filed on his behalf any claim for relief against Vonage or any releasee and, to the best of his knowledge and belief, no outstanding claims for relief have been filed or asserted against Vonage or any releasee on his behalf.

(c) In waiving and releasing any and all waivable claims whether or not now known, Executive understands that this means that, if he later discovers facts different from or in addition to those facts currently known by him, or believed by him to be true, the waivers and releases of this Agreement will remain effective in all respects — despite such different or additional facts and his later discovery of such facts, even if he would not have agreed to this Agreement if he had prior knowledge of such facts.

(d) Nothing in this Paragraph, or elsewhere in this Agreement, prevents or prohibits Executive from filing a claim with a government agency, such as the U.S. Equal Employment Opportunity Commission, that is responsible for enforcing a law on behalf of the government. However, Executive understands that, because Executive is waiving and releasing, among other things, any and all claims for monetary damages and any other form of personal relief (per Paragraph 4(a) above), Executive may only seek and receive non-monetary forms of relief through any such claim.

(e) Nothing in this Paragraph, or elsewhere in this Agreement, is intended as, or shall be deemed or operate as, a release by Executive of his rights under the Parties’ Indemnification Agreement, dated as of [ ], as amended from time to time (the “Indemnification Agreement”), or any other rights to indemnification relating to his performance of services as an officer and/or director of Vonage, including but not limited to those rights to indemnification set forth in Vonage’s Certificate of Incorporation as in effect on the date hereof (the “Certificate of Incorporation”). Notwithstanding the foregoing, the provisions of this Paragraph 4(e) are intended as recitals only and are not

intended to provide Executive with any additional contractual rights beyond those contained in the Indemnification Agreement or the Certificate of Incorporation. Furthermore, nothing herein shall affect Executive’s rights to Other Accrued Compensation and Benefits in accordance with the terms of this Agreement or as provided in Section 6 hereof.

5. Consideration and Post-Employment Benefits .

(a) Vonage, for and in consideration of the undertakings of Executive set forth herein and pursuant to Paragraph 4(b)(i) of the Employment Agreement, and intending to be legally bound, and provided that Executive does not revoke this Agreement pursuant to Paragraph 18(d) below, agrees that Vonage will pay or provide the following to Executive, subject to Section 4(d) of the Employment Agreement: (1) severance pay equal to twelve (12) months of the Executive’s Base Salary and an amount equal to the Executive’s full Target Bonus Opportunity (as defined in Paragraph 3(d) of the Employment Agreement) for the year of termination, each payable by the Company in installments during its regular payroll cycle over the twelve (12) month period following the Executive’s termination of employment, provided that the first payment shall be made on the sixtieth (60th) day after the Executive’s termination of employment, and such first payment shall include payment of any amounts that would otherwise be due prior thereto, and (2) a pro rata portion of the Executive’s Annual Bonus for the year of termination, if and to the extent that the Company achieves its performance metrics for such year, payable when bonuses are normally paid to other senior executives of the Company, but in no event later than March 15th of the year following the year to which such bonus relates. All payments are subject to applicable tax withholding. Executive shall be solely responsible for all taxes on the payments under this Agreement.

(b) Notwithstanding anything to the contrary herein, if Executive materially breaches provisions of Vonage’s Employee Confidentiality and Innovations Agreement, dated as of [ ] (the “Confidentiality Agreement”), or Section 7 of the Employment Agreement, Executive shall not be eligible, as of the date of such material breach, for the payments and benefits described in Paragraph 5(a) above, and any and all obligations and agreements of Vonage with respect to such payments shall thereupon

cease (and Vonage shall be entitled to recoup any and all such payments and benefits previously paid or awarded to Executive), provided , however , that no event or condition described in the Confidentiality Agreement or Section 7 of the Employment Agreement shall constitute a breach unless (i) Vonage first gives Executive written notice of its intention to terminate his payments and benefits described in Paragraph 5(a) above and the grounds for such loss of eligibility for payments and benefits, and (ii) such grounds for termination of payments and benefits (if susceptible to correction) are not corrected by Executive within 30 days of his receipt of such notice (or, in the event that such grounds cannot be corrected within such 30-day period, Executive has not taken all reasonable steps within such 30-day period to correct such grounds as promptly as practicable thereafter).

(c) In accordance with the provisions of Section 3(c) of the Employment Agreement, the Vonage Holdings Corp. 2006 Incentive Plan, as amended or restated from time to time (the “2006 Incentive Plan”) and the Executive’s individual stock option agreement (the “Stock Option Agreement”), the Parties agree that the equity described in those agreements shall vest and become exercisable (the “Vested Equity”) in accordance with Section 3(c) of the Employment Agreement. Other than the Vested Equity, all equity awarded by Vonage to Executive has terminated and is of no further force or effect.

6. Prior Agreements . This Agreement supersedes all prior agreements entered into by Vonage and Executive, except for the following: (1) Sections 3(c), 3(d), 4(a), 4(b), 4(c), and 4(e), Sections 5 through 11 and Section 14 of the Employment Agreement, which terms survive the termination of the Employment Agreement pursuant to Section 17 thereof, (2) the Non-Compete Agreement, (3) the Confidentiality Agreement, (4) the Stock Option Agreement, and (5) the Indemnification Agreement. [List other appropriate agreements between Vonage and Executive.]

7. Resignation from Directorships and Officerships . Pursuant to Paragraph 4(g) of the Employment Agreement, Executive affirms that the termination of Executive’s employment by the Executive or the Company for any reasons shall constitute the Executive’s resignation from (i) any director, officer or employee position the Executive has with the Company, and (ii) all fiduciary positions (including as a trustee) the Executive holds with respect to any employee benefit plans or trusts established by the Company.

8. Confidentiality of Agreement . Executive agrees to keep secret and strictly confidential the terms of this Agreement (except to the extent this Agreement is publicly filed) and further represents and warrants that he will not disclose, make known, discuss or relay any information concerning this Agreement, or any of the discussions leading up to this Agreement, to anyone (other than members of his immediate family, accountants or attorneys who have first agreed to keep said information confidential and to not disclose it to others), and that he has not done so. The foregoing shall not prohibit or restrict such disclosure as required by law or in connection with Vonage’s filings with the Securities and Exchange Commission or any other governmental or regulatory body or as may be necessary for the prosecution or defense of claims relating to the performance or enforcement of this Agreement or prohibit or restrict Executive (or Executive’s attorney)

or Vonage from responding to any such inquiry about this settlement or its underlying facts and circumstances by the Securities and Exchange Commission, the New York Stock Exchange, any other self-regulatory organization, or in response to a duly served and effective subpoena or discovery request in the course of any litigation. Prior to making any disclosure other than to his immediate family, accountants or attorneys, Executive shall provide Vonage with as much notice as practicable that he has been requested or compelled to make disclosure and shall cooperate with Vonage to maintain the confidentiality of this Agreement to the fullest extent possible.

9. Return of Property and Documents . Executive represents and warrants that he has returned, or will immediately return, to Vonage all Vonage property (including, without limitation, any and all computers, BlackBerries, identification cards, card key passes, corporate credit cards, corporate phone cards, files, memoranda, keys and software) in Executive’s possession and that he has not, and will not, retain any duplicates or reproductions of such items. Executive further represents and warrants that he has delivered to Vonage all copies of any Confidential Information (as defined in the Confidentiality Agreement) in his possession or control and has destroyed all copies of any analyses, compilations, studies or other documents in his possession that contain any Confidential Information. Notwithstanding the foregoing, Executive shall maintain ownership and use of his rolodex and other address books, and Vonage agrees to cooperate with Executive in the transfer to Executive of cell phone and BlackBerry numbers used by Executive if such numbers are registered in Vonage’s name.

10. Notices . All notices, requests, demands and other communications hereunder to Vonage shall be in writing and shall be delivered, either by hand, by facsimile, by overnight courier or by certified mail, return receipt requested, duly addressed as indicated below or to such changed address as Vonage may subsequently designate:

Vonage Holdings Corp.

23 Main Street

Holmdel, New Jersey 07733

Attention: Office of Chief Legal Officer

Any such notice, request, demand or other communication to Vonage delivered in the manner specified above shall be deemed duly given only upon receipt by Vonage.

All notices, requests, demands and other communications hereunder to Executive shall be in writing and shall be delivered, either by hand, by facsimile, by overnight courier, or by certified mail, return receipt requested, duly addressed as indicated below or to such changed address as Executive may subsequently designate:

Barry Rowan

at the last address on record with Vonage

Any such notice, request, demand or other communication to Executive delivered in the manner specified above shall be deemed duly given only upon receipt by Executive.

11. Severability . If, at any time after the Effective Date, any provision of this Agreement shall be held by any court of competent jurisdiction or arbitrator to be illegal, void or unenforceable, such provision shall be of no force and effect. The illegality or unenforceability of such provision, however, shall have no effect upon, and shall not impair the enforceability of, any other provision of this Agreement, provided , however , that upon finding that Paragraph 4(a) is illegal and/or unenforceable, Vonage shall be released from any obligation to make any payment pursuant to Paragraph 5 of this Agreement, and Executive shall repay to Vonage any and all amounts already received pursuant to Paragraph 5.

12. Choice of Law; Arbitration . The terms of this Agreement and all rights and obligations of the Parties, including its enforcement, shall be interpreted and governed by the laws of the State of New Jersey, without regard to conflicts of law principles. Pursuant to Section 11 of the Employment Agreement, which is incorporated by operation thereof and reference herein, any disputes arising out of this Agreement and which are mandatorily arbitrable shall be settled exclusively by arbitration before the American Arbitration Association at a location in New Jersey.

13. Injunctive Relief . Notwithstanding the limited agreement to arbitrate set forth in Paragraph 12 of this Agreement, any claim alleging breach of Paragraph 8 of this Agreement, alleging breach of Sections 5, 6 or 7 of the Employment Agreement, or alleging breach of the Confidentiality Agreement or Non-Compete Agreement may be brought in any federal or state court of competent jurisdiction in the State of New Jersey, where the parties consent to jurisdiction and agree not to argue that it is an inconvenient forum for resolution of the claim. In accordance with Section 8 of the Employment Agreement and this Paragraph 13 of the Agreement, a material breach of Section 5, 6 or 7 of the Employment Agreement, of Paragraph 8 of this Agreement, or of the Confidentiality Agreement or Non-Compete Agreement shall be considered to be irreparable harm, where no adequate remedy at law would be available in respect thereof. The Parties agree that neither Party will have any obligation to post a bond to obtain said injunctive relief.

14. Modification of Agreement . No provision of this Agreement may be modified, altered, waived or discharged unless such modification, alteration, waiver or discharge is agreed to in writing and signed by the Parties hereto. No waiver by either Party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

15. Withholding . Vonage may withhold from amounts payable or benefits provided under this Agreement any and all federal, state and local taxes that are required

to be withheld and reported by any applicable laws and regulations. Vonage may also withhold and report any amounts necessary pursuant to the benefit plans, policies or arrangements of Vonage or otherwise, in accordance with any applicable Vonage policies, laws and/or regulations.

16. Entire Agreement; Headings . Other than as set forth in Paragraph 6 hereof, this Agreement sets forth the entire agreement between the Parties hereto and any and all prior and contemporaneous agreements, discussions or understandings between the Parties pertaining to the subject matter hereof, including relating to severance payments or compensation, have been and are merged into and superseded by this Agreement. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

17. Counterparts . This Agreement may be executed in several counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument.

18. EXECUTIVE ACKNOWLEDGES AND WARRANTS THAT:

(a) he has read the terms of this Agreement and that he understands its terms and effects, including the fact that he has agreed to release and forever discharge Vonage or any releasee from any legal action arising out of his employment relationship with Vonage, the terms and conditions of that employment relationship, and the termination of that employment relationship;

(b) he has signed this Agreement voluntarily and knowingly in exchange for the consideration described and referenced herein, which he acknowledges as adequate and satisfactory to him;

(c) he has been informed that he has the right to consider this Agreement for a period of twenty-one (21) days from receipt prior to entering into this Agreement and he has signed on the date indicated below after concluding that this Agreement is satisfactory;

(d) he has been informed that he has the right to revoke this Agreement for a period of seven (7) days following his execution of this Agreement by giving written notice to Vonage, to the attention of office of Chief Legal Officer, Vonage Holdings Corp., 23 Main Street, Holmdel, New Jersey 07733. This Agreement shall not be effective or enforceable until Executive’s right to revoke this Agreement has lapsed;

(e) he has been and is hereby advised in writing by Vonage to consult with an attorney prior to signing this Agreement and he has consulted with his attorney and fully discussed and reviewed the terms of this Agreement with his attorney;

(f) neither Vonage, nor any of its agents, representatives or attorneys have made any representations to Executive concerning the terms or effects of this Agreement other than those contained and referenced herein; and

(g) this Agreement shall be governed, interpreted and enforced by and under the laws of the State of New Jersey, without regard to choice of law principles.


		VONAGE HOLDINGS CORP.

By:		By:
	BARRY ROWAN

Dated:		Dated:

Exhibit D

Employee Confidentiality & Innovations Agreement

In consideration of my employment with Vonage Holdings Corp. (“Vonage”) (if such employment has not yet commenced) or my continued employment with Vonage, as the case may be, I agree to be bound by the terms of this Employee Confidentiality & Innovations Agreement (this “Agreement.”). I understand that as a result of my employment with Vonage (“Employment”), I may have access to information of a confidential nature about Vonage’s business, through the delivery of documents and permitted visits to Vonage’s premises. I understand that Vonage needs to maintain the confidentiality of that information, and I agree, as set forth below, to treat such information confidentially.

In addition, I understand and agree that if I develop Innovations (as defined in this Agreement) as a result of or in connection with my Employment, Vonage will have rights in those Innovations as set forth in this Agreement.

Terms of Agreement

A. Confidential Information

“Confidential Information” means all information, whether written or oral, tangible or intangible, and including trade secrets and data of whatever nature, disclosed by Vonage or any of its representatives or agents, whether before or after the date of this Agreement, or which may otherwise be made available or become known to me, which is either expressly designated by Vonage as being confidential or is disclosed under circumstances that should reasonably indicate to me that the disclosed information ought to be treated as confidential. “Confidential Information” shall not include information which

(i)

becomes or has been generally available to the public other than as a result of disclosure by Vonage or its officers, advisors or employees,

(ii)

was in my possession from a third-party source prior to its disclosure by Vonage or its representatives,

(iii)

becomes available to myself from a third-party source other than Vonage or its representatives, or

(iv)

is independently developed by myself without use of any of the Confidential Information. The burden of establishing the availability of the foregoing exceptions shall be on myself;

provided , however , that in (ii) and (iii) above the third-party source obtained the information without violation of the rights of Vonage and all restrictions on use or disclosure of such information from that third-party source are observed by myself.

2.	I agree to use Confidential Information only for purposes directly related to my Employment. Without prior written consent of Vonage, I agree not to disclose any Confidential Information in any manner whatsoever, in whole or in part.

If I am requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose Confidential Information supplied to it, I shall promptly notify Vonage of such request(s). If, in the opinion of my legal counsel, I am compelled to disclose Confidential Information to any tribunal or else stand liable for contempt or suffer other censure or penalty, I may do so without liability under this Agreement, provided I make reasonable efforts to have my disclosure limited to the narrowest scope practicable under the circumstances, including cooperation in any request for a protective order and seeking to have any proceedings held in camera , with a sealed record.

Upon termination of my Employment for any reason, I shall, upon request, promptly deliver to Vonage all copies of any Confidential Information in my possession or control and shall destroy all copies of any analyses, compilations, studies or other documents in my possession that contain any Confidential Information.

B. Innovations

“ Innovations ” means discoveries, developments, concepts and ideas, whether or not protectable under law, relating to Vonage’s present and prospective business activities, the nature and extent of those business activities being known to me by reason of my Employment, such as (but not limited to) inventions, know-how, discoveries, improvements, original works of authorship, designs, software, source code, object code, programs, formulas, processes, developments, trade secrets, trademarks, copyrights, service marks, logos and related proprietary information and materials, whether patentable, copyrightable, subject to trademark registration, or not, and all drafts, proposals, sketches, revisions and demonstration and “beta” versions thereof, written, created, developed or produced or to be written, created, developed or produced.

2.	In consideration of my Employment, I acknowledge and agree that all Innovations created by me (either working alone or as part of a group)

(i)

during the term of my Employment, and

(ii)

within six months after the end of the term if they (a) were made using equipment, supplies, facilities or trade secret information of Vonage, or (b) were developed at least in part on the Vonage’s time, or (c) relate either to Vonage’s present or prospective business activities known to me when the Innovation was conceived, or (d) result from any work that I perform in the course of my employment, shall be the property of Vonage, free of any reserved or other rights of any kind on my part. To achieve that result:

(i)

I hereby permanently, irrevocably, exclusively and absolutely assign to Vonage all right, title and interest in and to all Innovations and all right, title and interest in and to all patents, domain names, trade secrets, trademarks and other intellectual property derived therefrom, effective when each Innovation first becomes capable of being so assigned, transferred or vested;

(ii)

I agree to deliver all Innovations to Vonage no later than the end of the term of my Employment, unless Vonage requests otherwise;

(iii)

As to any Innovation that is a copyrightable work, I agree that such Innovation constitutes and shall constitute a work made-for-hire as defined in the United States Copyright Act of 1976; that Vonage is and shall be the author of said work made-for hire and the owner of all rights in and to such Innovation throughout the universe, in perpetuity and in all languages, for all now known or hereafter existing uses, media and forms, including, without limitation, the copyrights therein and thereto throughout the universe for the initial term and any and all extensions and renewals thereof; and that Vonage shall have the right to make such changes therein and such uses thereof as it may deem necessary or desirable. To the extent that such copyrightable Innovation is not recognized as a work-made-for-hire, I hereby permanently, irrevocably, exclusively and absolutely assign, transfer and convey to Vonage, without reservation, all of my right, title and interest throughout the universe in perpetuity in such Innovation, including, without limitation, all rights of copyright and copyright renewal in such Innovation or any part thereof; and

(iv)

I hereby waive all rights of “droit moral” or “moral rights of authors” or any similar rights or principles of law which I may now or later have in the Innovations. I warrant and represent that I have the right to execute this certificate, that each Innovation is and shall be new and original with me and not an imitation or copy of any other material, and that each of the Innovations does not and shall not violate or infringe upon any common law or statutory right of any party including, without limitation, contractual rights, copyrights, trademarks, patents, service marks and rights of privacy, publicity, or any other right of any person or entity and is not the subject of any litigation or claim that might give rise to litigation.

3.	I agree to execute such further documents and do such other act as may be required by Vonage or its successors, licensees, or assignees to evidence or effectuate Vonage’s rights under this Agreement. Vonage’s rights in the Innovations may be assigned, licensed, or otherwise transferred.

I hereby irrevocably constitute and appoint Vonage with full power of substitution, to be my true and lawful attorney to execute, acknowledge, swear and file all instruments and documents, and to take any action which shall be deemed necessary, appropriate or desirable to perfect its rights in any Innovation created by me (working alone or as part of a group). This appointment shall be deemed to be coupled with an interest and shall be irrevocable and survive my death, disability or bankruptcy.

5.	Except as the context otherwise requires, “Vonage” also includes all Affiliates of Vonage. “Affiliate” means any person that directly or indirectly, controls, is controlled by, or is under common control with Vonage.

This Agreement shall be construed under and governed by the laws of the State of New Jersey applicable to contracts executed and wholly performed in that state. This Agreement constitutes the entire agreement of the parties with respect to its subject matter and may not be amended or modified except by a written instrument executed by each of the parties. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.

This Agreement may be executed in any number of counterparts, each of which shall constitute an original and all of which shall constitute one and the same instrument. This Agreement shall become effective when signed by each of the parties on any counterpart, whether or not all of the parties have signed any one counterpart.

Execution

MY SIGNATURE below SIGNIFIES THAT I have COMPLETELY READ, and FULLY UNDERSTAND and AGREE to this CONFIDENTIALITY AND INNOVATIONS AGREEMENT.




Signature of Applicant				Home Address of Applicant


Print Name				Date


Human Resources Signature				Date

Execution Copy

EXHIBIT E

NON-COMPETE AGREEMENT

AGREEMENT , dated this day of March, 2010, by and between Vonage Holdings Corp. and its subsidiaries, a Delaware corporation with principal executive offices at 23 Main Street, Holmdel, New Jersey 07733 (“Vonage”), and Barry Rowan (“Employee”).

In consideration of Employee’s employment with Vonage or continued employment with Vonage, as the case may be, Employee agrees to be bound by the terms of this Non-Compete Agreement (“Agreement”) as follows:

Restriction on Competition . During the period of Employee’s employment with Vonage and for a period of twelve (12) months thereafter, Employee will not provide services to the portion of any entity that sells and markets residential/home broadband connectivity or broadband voice service (a “Competitive Entity”) as an employee thereof or as a direct individual consultant thereto (or through an entity specifically formed for the purpose of evading the limitations hereof) anywhere within the “Territory,” that term meaning within the United States and Canada in those States and provinces (or States and provinces contiguous thereto) in which Vonage conducts or is substantially prepared to conduct its business on the date of Employee’s employment termination. Nothing contained in this Section 1 shall be deemed to prohibit Employee from acquiring or holding, solely for investment, publicly traded securities of a Competitive Entity, provided such securities do not, in the aggregate, constitute more than five percent (5%) of any class or series of outstanding securities of such Competitive Entity.

Specific Remedies . If Employee commits a breach of any of the provisions of Section 1, Vonage shall have the right to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach will cause irreparable injury to Vonage and that money damages will not provide an adequate remedy.

Independence, Severability and Non-Exclusivity . The right enumerated in Section 2 shall be in addition to and not in lieu of any other rights and remedies available to Vonage at law or in equity. If any of the covenants contained in Section 1 (“Covenants”) or any part of any of them, is found by a court of competent jurisdiction to be invalid or unenforceable, this shall not affect the remainder, or rights or remedies under this Agreement, which shall be given full effect without regard to the invalid portions. The parties intend to and do hereby confer jurisdiction on courts located within the geographical scope of the Covenants. If any of the Covenants is held to be invalid or unenforceable because of the duration or geographical area, the parties agree that the court making such determination shall have the power to reduce the duration and/or area and, in its reduced form, such Covenant shall then be enforceable. No such holding of

invalidity or unenforceability in one jurisdiction shall bar or in any way affect Vonage’s right to the relief provided in Section 2 or otherwise in the courts of any other jurisdiction within the geographical scope of the Covenants.

Successors; Binding Agreement . This Agreement and all obligations of Employee hereunder shall inure to the benefit of, and be enforceable by, Vonage and Vonage’s successors in interest.

Entire Agreement . This Agreement constitutes the entire understanding between the parties hereto relating to its subject matter hereof, and supersedes all prior negotiations, discussions, preliminary agreements and agreements relating to that subject matter.

Law Governing . This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey (without giving effect to conflicts of law provisions).

IN WITNESS WHEREOF , the parties hereto have executed this Agreement on the day and year set forth above.


Vonage Holdings Corp.						AGREED AND ACCEPTED:

By:
						Employee Signature

Name:

Title:
						Date

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EXHIBIT 10.2

Execution Copy

INDEMNIFICATION AGREEMENT

This Agreement is made as of the 24 ^th day of March, 2010, by and between Vonage Holdings Corp., a Delaware corporation (the “Corporation), and Barry L. Rowan (the “Indemnitee”), a director or officer of the Corporation.

WHEREAS, it is essential to the Corporation to retain and attract as directors and officers the most capable persons available, and

WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expensive litigation risks at the same time that the availability of directors’ and officers’ liability insurance has been severely limited, and

WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its directors and officers, and

WHEREAS, the Indemnitee does not regard the protection available under the Corporation’s Certificate of Incorporation and insurance as adequate in the present circumstances, and may not be willing to serve or continue to serve as a director or officer without adequate protection, and

WHEREAS, the Corporation desires the Indemnitee to serve, or continue to serve, as a director or officer of the Corporation.

NOW THEREFORE, the Corporation and the Indemnitee do hereby agree as follows:

1. Agreement to Serve . The Indemnitee agrees to serve or continue to serve as a director or officer of the Corporation for so long as the Indemnitee is duly elected or appointed or until such time as the Indemnitee tenders a resignation in writing.

2. Definitions . As used in this Agreement:

(a) The term “Change in Control” shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any “person” (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation, becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Corporation representing more than 50% of the total voting power represented by the Corporation’s then outstanding Voting Securities (as defined below), (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation and any new director whose election by the Board of Directors or nomination for election by the Corporation’s stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so

approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Corporation approve a merger or consolidation of the Corporation with any other entity other than a merger or consolidation which would result in the Voting Securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of (in one transaction or a series of related transactions) all or substantially all of the Corporation’s assets.

(b) The term “Corporate Status” shall mean the status of a person who is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer, fiduciary, partner, trustee, member, employee or agent of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan).

(c) References to the “Corporation” shall include, in addition to Vonage Holdings Corp., any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which Vonage Holdings Corp. (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had the power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if the Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, the Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as the Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

(d) The term “Expenses” shall include, without limitation, attorneys’ fees, retainers, court costs, transcript costs, fees and expenses of experts, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and other disbursements or expenses of the types customarily incurred in connection with actions, suits, proceedings, alternative dispute resolution mechanisms, hearings, inquiries or investigations, including any costs or expenses incurred defending, being a witness in or participating in, or preparing to defend, to be a witness in or to participate in, such actions, suits, proceedings, alternative dispute resolution mechanisms, hearings, inquiries or investigations, including any federal, state, local or foreign taxes imposed on the Indemnitee as a result of actual or deemed receipt of payments for the foregoing, but shall not include the amount of judgments, fines or penalties against the Indemnitee or amounts paid in settlement in connection with such matters.

(e) References to “other enterprise” shall include employee benefit plans; references to “fines” shall include any excise tax assessed with respect to any employee benefit plan; references to “serving at the request of the Corporation” shall include any service as a director, officer, employee, agent or fiduciary of the Corporation which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an

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employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Agreement.

(f) The term “Proceeding” shall include any threatened, pending or completed action, suit, arbitration, alternative dispute resolution mechanism, hearing, inquiry, investigation or other proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, and any appeal therefrom.

(g) The term “Special Independent Counsel” shall mean a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither currently is, nor in the past three years has been, retained to represent: (i) the Corporation or the Indemnitee in any matter material to either such party or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Special Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or the Indemnitee in an action to determine the Indemnitee’s rights under this Agreement.

(h) The term “Voting Securities” shall mean any securities of the Corporation that vote generally in the election of directors.

3. Indemnity of Indemnitee . Subject to Sections 6, 7 and 9, the Corporation shall indemnify the Indemnitee in connection with any Proceeding as to which the Indemnitee is, was or is threatened to be made a party (or is a witness or participant in or otherwise involved with) by reason of the Indemnitee’s Corporate Status, to the fullest extent permitted by law (as such may be amended from time to time). To the extent that a change in applicable law (whether by statute or judicial decision) permits greater indemnification than would be afforded currently hereunder, the Indemnitee shall enjoy the greater benefits so afforded by such change without any further action by the Corporation. In furtherance of the foregoing and without limiting the generality thereof:

(a) Indemnification in Third-Party Proceedings . The Corporation shall indemnify the Indemnitee in accordance with the provisions of this Section 3(a) if the Indemnitee was or is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor or a Proceeding referred to in Section 6 below) by reason of the Indemnitee’s Corporate Status or by reason of any action alleged to have been taken or omitted in connection therewith, against all Expenses, liabilities, losses, judgments, fines, ERISA taxes or penalties and amounts paid in settlement actually and reasonably incurred by or on behalf of the Indemnitee in connection with such Proceeding, if the Indemnitee acted in good faith and in a manner which the Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal Proceeding, had no reasonable cause to believe that his or her conduct was unlawful.

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(b) Indemnification in Proceedings by or in the Right of the Corporation . The Corporation shall indemnify the Indemnitee in accordance with the provisions of this Section 3(b) if the Indemnitee was or is a party to or threatened to be made a party to or otherwise involved in any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the Indemnitee’s Corporate Status or by reason of any action alleged to have been taken or omitted in connection therewith, against all Expenses and, to the extent permitted by law, amounts paid in settlement actually and reasonably incurred by or on behalf of the Indemnitee in connection with such Proceeding, if the Indemnitee acted in good faith and in a manner which the Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that, if applicable law so provides, no indemnification shall be made under this Section 3(b) in respect of any claim, issue or matter as to which the Indemnitee shall have been adjudged to be liable to the Corporation, unless, and only to the extent, that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such Expenses as the Court of Chancery or such other court shall deem proper.

4. Indemnification of Expenses of Successful Party . Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee has been successful, on the merits or otherwise, in defense of any Proceeding or in defense of any claim, issue or matter therein (other than a Proceeding referred to in Section 6), the Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by or on behalf of the Indemnitee in connection therewith. Without limiting the foregoing, if any Proceeding or any claim, issue or matter therein is disposed of, on the merits or otherwise (including a disposition without prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of guilty or nolo contendere by the Indemnitee, (iv) an adjudication that the Indemnitee did not act in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation, and (v) with respect to any criminal proceeding, an adjudication that the Indemnitee had reasonable cause to believe his or her conduct was unlawful, the Indemnitee shall be considered for the purposes hereof to have been wholly successful with respect thereto.

5. Indemnification for Expenses of a Witness . To the extent that the Indemnitee is, by reason of the Indemnitee’s Corporate Status, a witness in any Proceeding to which the Indemnitee is not a party, the Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by or on behalf of the Indemnitee in connection therewith.

6. Exceptions to Right of Indemnification . Notwithstanding anything to the contrary in this Agreement, except as set forth in Section 10, the Corporation shall not indemnify the Indemnitee in connection with a Proceeding (or part thereof) initiated by the Indemnitee unless (a) the initiation thereof was approved by the Board of Directors of the Corporation or (b) the Proceeding was commenced following a Change in Control. Notwithstanding anything to the contrary in this Agreement, the Corporation shall not indemnify the Indemnitee to the extent the Indemnitee is reimbursed from the proceeds of insurance, and in the event the Corporation makes any indemnification payments to the Indemnitee and the Indemnitee is subsequently reimbursed from the proceeds of insurance, the Indemnitee shall promptly refund such indemnification payments to the Corporation to the extent of such insurance reimbursement.

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7. Notification and Defense of Claim . As a condition precedent to the Indemnitee’s right to be indemnified, the Indemnitee must notify the Corporation in writing as soon as practicable of any Proceeding for which indemnity will or could be sought. With respect to any Proceeding of which the Corporation is so notified, the Corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee. After notice from the Corporation to the Indemnitee of its election so to assume such defense, the Corporation shall not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with such Proceeding, other than as provided below in this Section 7. The Indemnitee shall have the right to employ his or her own counsel in connection with such Proceeding, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and the Indemnitee in the conduct of the defense of such Proceeding or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such Proceeding, in each of which cases the fees and expenses of counsel for the Indemnitee shall be at the expense of the Corporation, except as otherwise expressly provided by this Agreement. The Corporation shall not be entitled, without the consent of the Indemnitee, to assume the defense of any claim brought by or in the right of the Corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. The Corporation shall not be required to indemnify the Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding effected without its written consent. The Corporation shall not settle any Proceeding in any manner that would impose any penalty or limitation on the Indemnitee without the Indemnitee’s written consent. Neither the Corporation nor the Indemnitee will unreasonably withhold or delay their consent to any proposed settlement.

8. Advancement of Expenses . In the event that the Corporation does not assume the defense pursuant to Section 7 of any Proceeding of which the Corporation receives notice under this Agreement, any Expenses actually and reasonably incurred by or on behalf of the Indemnitee in defending such Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceeding; provided, however, that the payment of such Expenses incurred by or on behalf of the Indemnitee in advance of the final disposition of such Proceeding shall be made only upon receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined by final judicial decision from which there is no further right of appeal that the Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Agreement. Such undertaking shall be accepted without reference to the financial ability of the Indemnitee to make repayment. Any advances and undertakings to repay pursuant to this Section 8 shall be unsecured and interest-free. The parties agree that for the purposes of any advancement of Expenses for which the Indemnitee has made written demand to the Corporation in accordance with this Agreement, all Expenses included in such advancement that are certified by affidavit of the Indemnitee’s counsel as being reasonable shall be presumed conclusively to be reasonable.

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9. Procedures .

(a) In order to obtain indemnification or advancement of Expenses pursuant to this Agreement, the Indemnitee shall submit to the Corporation a written request, including in such request such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification or advancement of Expenses. Subject to Section 29 hereof, any such indemnification or advancement of Expenses shall be made as soon as practicable after written demand by the Indemnitee therefor is presented to the Corporation, and in any event within (i) in the case of indemnification under Sections 4, 5 or 9(d) or advancement of Expenses, 20 business days after receipt by the Corporation of the written request of the Indemnitee, or (ii) in the case of all other indemnification, 45 business days after receipt by the Corporation of the written request of the Indemnitee, unless with respect to requests under this clause (ii) the Corporation determines, by clear and convincing evidence, within the 45 business-day period referred to above that the Indemnitee did not meet the applicable standard of conduct. Such determination, and any determination that advanced Expenses must be repaid to the Corporation, shall be made as follows:

(x) if a Change in Control shall have occurred, by Special Independent Counsel in a written opinion to the Board of Directors of the Corporation, a copy of which shall be delivered to the Indemnitee (unless the Indemnitee shall request that such determination be made by the Board of Directors of the Corporation, in which case the determination shall be made in the manner provided below in clauses (y)(1) or (y)(2)).

(y) in all other cases, in the discretion of the Board of Directors of the Corporation, (1) by a majority vote of the directors of the Corporation consisting of persons who are not at that time parties to the Proceeding (“disinterested directors”), whether or not a quorum, (2) by a committee of disinterested directors designated by a majority vote of disinterested directors, whether or not a quorum, (3) if there are no disinterested directors, or if the disinterested directors so direct, by independent legal counsel in a written opinion to the Board, or (4) by the stockholders of the Corporation.

(b) In the event that a Change in Control shall have occurred and the determination of entitlement to indemnification is to be made by Special Independent Counsel, the Special Independent Counsel shall be selected as provided in this Section 9(b). The Special Independent Counsel shall be selected by the Indemnitee, unless the Indemnitee shall request that such selection be made by the Board of Directors of the Corporation. The party making the determination shall give written notice to the other party advising it of the identity of the Special Independent Counsel so selected. The party receiving such notice may, within seven days after such written notice of selection shall have been given, deliver to the other party a written objection to such selection. Such objection may be asserted only on the ground that the Special Independent Counsel so selected does not meet the requirements of “Special Independent Counsel” as defined in Section 2, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as

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Special Independent Counsel. If a written objection is made, the Special Independent Counsel so selected may not serve as Special Independent Counsel unless and until a court has determined that such objection is without merit. If, within 20 business days after submission by the Indemnitee of a written request for indemnification, no Special Independent Counsel shall have been selected or if selected, shall have been objected to, in accordance with this paragraph either the Corporation or the Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Corporation or the Indemnitee to the other’s selection of Special Independent Counsel and/or for the appointment as Special Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom an objection is favorably resolved or the person so appointed shall act as Special Independent Counsel. The Corporation shall pay the reasonable and necessary fees and expenses of Special Independent Counsel incurred in connection with its acting in such capacity. The Corporation shall pay any and all reasonable and necessary fees and expenses incident to the procedures of this paragraph, regardless of the manner in which such Special Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding pursuant to Section 10 of this Agreement, any Special Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

(c) The termination of any Proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Indemnitee did not act in good faith and in a manner that the Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal Proceeding, had reasonable cause to believe that his or her conduct was unlawful.

(d) The Indemnitee shall cooperate with the person, persons or entity making such determination with respect to the Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to the Indemnitee and reasonably necessary to such determination. Any Expenses actually and reasonably incurred by the Indemnitee in so cooperating shall be borne by the Corporation (irrespective of the determination as to the Indemnitee’s entitlement to indemnification), and the Corporation hereby indemnifies the Indemnitee therefrom.

10. Remedies . The right to indemnification or advancement of Expenses as provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within the applicable periods referred to in Section 9. Unless otherwise required by law, the burden of proving that indemnification or advancement of Expenses is not appropriate shall be on the Corporation. Neither the failure of the Corporation to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable

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standard of conduct. Indemnitee’s Expenses (including attorneys’ fees) reasonably incurred in connection with any action instituted by the Indemnitee to enforce or interpret its right to indemnification, in whole or in part, shall also be indemnified by the Corporation, regardless of whether the Indemnitee is ultimately successful in such action, unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous; provided, however, that until such final judicial determination is made, the Indemnitee shall be entitled under Section 8 to advancement of Expenses with respect to such action.

11. Partial Indemnification . If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some or a portion of the Expenses, liabilities, losses, judgments, fines, ERISA taxes or penalties or amounts paid in settlement actually and reasonably incurred by or on behalf of the Indemnitee in connection with any Proceeding but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify the Indemnitee for the portion of such Expenses, liabilities, losses, judgments, fines, ERISA taxes or penalties or amounts paid in settlement to which the Indemnitee is entitled.

12. Subrogation . In the event of any payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights.

13. Contribution .

(a) If the indemnification provided for in this Agreement for any reason is held by a court of competent jurisdiction to be unavailable to the Indemnitee in respect of any Expenses, losses, claims, damages or liabilities referred to herein, then the Corporation, in lieu of indemnifying the Indemnitee hereunder, shall contribute to the amount paid or payable by the Indemnitee as a result of such Expenses, losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Corporation and the Indemnitee, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Corporation and the Indemnitee in connection with the action or inaction which resulted in such Expenses, losses, claims, damages or liabilities, as well as any other relevant equitable considerations. In connection with the registration of the Corporation’s securities, the relative benefits received by the Corporation and the Indemnitee shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Corporation and the Indemnitee, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Corporation and the Indemnitee shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Corporation or the Indemnitee and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

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(b) The Corporation and the Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 13 were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In connection with the registration of the Corporation’s securities, in no event shall the Indemnitee be required to contribute any amount under this Section 13 in excess of the lesser of (i) that proportion of the total securities sold under such registration statement which is being sold by the Indemnitee or (ii) the proceeds received by the Indemnitee from its sale of securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act of 1933, as amended) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation.

14. Notice to Insurers . If, at the time of the receipt by the Corporation of a notice of a claim for indemnification or advancement of Expenses by the Indemnitee, the Corporation has liability insurance in effect which may cover such claim, the Corporation shall give prompt notice of the commencement of such claim to the insurers in accordance with the procedures set forth in the respective policies. The Corporation shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such claim in accordance with the terms of such polices.

15. Mutual Acknowledgment . Both the Corporation and the Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Corporation from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. The Indemnitee understands and acknowledges that the Corporation has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Corporation’s right under public policy to indemnify the Indemnitee.

16. Liability Insurance . To the extent the Corporation maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, the Indemnitee shall be covered by such policies in such a manner as to provide the Indemnitee the same rights and benefits as are provided to the most favorably insured of the Corporation’s directors, if the Indemnitee is a director; or of the Corporation’s officers, if the Indemnitee is not a director of the Corporation but is an officer.

17. Indemnification Hereunder Not Exclusive . The indemnification and advancement of Expenses provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Certification of Incorporation, the By-laws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of Delaware, any other law (common or statutory), or otherwise, both as to action in the Indemnitee’s official capacity and as to action in another capacity while holding office for the Corporation. Nothing contained in this Agreement shall be deemed to prohibit the Corporation from purchasing and maintaining insurance, at its expense, to protect itself or the Indemnitee against any expense, liability or loss incurred by it or the Indemnitee in any such capacity, or arising out of the Indemnitee’s status as such, whether or not the Indemnitee would be indemnified against such expense, liability or loss under this Agreement; provided that the Corporation shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that the Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

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18. No Special Rights . Nothing herein shall confer upon the Indemnitee any right to continue to serve as an officer or director of the Corporation for any period of time or at any particular rate of compensation.

19. Savings Clause . If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify the Indemnitee as to Expenses, liabilities, losses, judgments, fines, ERISA taxes and penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated and to the fullest extent permitted by applicable law.

20. Counterparts . This Agreement may be executed in any number of counterparts, each of which shall constitute the original.

21. Binding Effect; Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Corporation), spouses, heirs and personal and legal representatives. The Corporation shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Corporation, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent of fiduciary (as applicable) of the Corporation or of any other enterprise at the Corporation’s request.

22. Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

23. Modification and Waiver . This Agreement may be amended from time to time to reflect changes in Delaware law or for other reasons. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof nor shall any such waiver constitute a continuing waiver.

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24. Notices . All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been given (i) when delivered by hand or (ii) if mailed by certified or registered mail with postage prepaid, on the third day after the date on which it is so mailed:


(a) if to the Indemnitee, to:		Barry L. Rowan 1050 91 ^ST Avenue NE Bellevue, Washington 98004

(b) if to the Corporation, to:		Vonage Holdings Corp. 23 Main Street Holmdel, New Jersey 07733 Attn: Chief Executive Officer

or to such other address as may have been furnished to the Indemnitee by the Corporation or to the Corporation by the Indemnitee, as the case may be.

25. Applicable Law . This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to principles of conflicts of law. The Indemnitee may elect to have the right to indemnification or reimbursement or advancement of Expenses interpreted on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the applicable Proceeding, to the extent permitted by law, or on the basis of the applicable law in effect at the time such indemnification or reimbursement or advancement of Expenses is sought. Such election shall be made, by a notice in writing to the Corporation, at the time indemnification or reimbursement or advancement of Expenses is sought; provided, however, that if no such notice is given, and if the General Corporation Law of Delaware is amended, or other Delaware law is enacted, to permit further indemnification of the directors and officers, then the Indemnitee shall be indemnified to the fullest extent permitted under the General Corporation Law, as so amended, or by such other Delaware law, as so enacted.

26. Enforcement . The Corporation expressly confirms and agrees that it has entered into this Agreement in order to induce the Indemnitee to continue to serve as an officer or director of the Corporation, and acknowledges that the Indemnitee is relying upon this Agreement in continuing in such capacity.

27. Entire Agreement . This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled. For avoidance of doubt, the parties confirm that the foregoing does not apply to or limit the Indemnitee’s rights under Delaware law or the Corporation’s Certificate of Incorporation or By-laws.

28. Consent to Suit . In the case of any dispute under or in connection with this Agreement, the Indemnitee may only bring suit against the Corporation in the Court of Chancery of the State of Delaware in and for New Castle County. The Indemnitee hereby consents to the

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exclusive jurisdiction and venue of the courts of the State of Delaware in and for New Castle County, and the Indemnitee hereby waives any claim the Indemnitee may have at any time as to forum non conveniens with respect to such venue. The Corporation shall have the right to institute any legal action arising out of or relating to this Agreement in any court of competent jurisdiction. Any judgment entered against either of the parties in any proceeding hereunder may be entered and enforced by any court of competent jurisdiction.

29. Section 409A . It is intended that any indemnification payment or advancement of Expenses made hereunder shall be exempt from Section 409A of the Internal Revenue Code of 1986, as amended, and the guidance issued thereunder (“Section 409A”) pursuant to Treasury Regulation Section 1.409A-1(b)(10). Notwithstanding the foregoing, if any indemnification payment or advancement of Expenses made hereunder shall be determined to be “nonqualified deferred compensation” within the meaning of Section 409A, then (i) the amount of the indemnification payment or advancement of Expenses during one taxable year shall not affect the amount of the indemnification payments or advancement of Expenses during any other taxable year, (ii) the indemnification payments or advancement of Expenses must be made on or before the last day of the Indemnitee’s taxable year following the year in which the expense was incurred, and (iii) the right to indemnification payments or advancement of Expenses hereunder is not subject to liquidation or exchange for another benefit.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.


VONAGE HOLDINGS CORP.

/s/ Marc P. Lefar
Name:		Marc P. Lefar
Title:		Chief Executive Officer

INDEMNITEE:

/s/ Barry L. Rowan
Barry L. Rowan

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EXHIBIT 10.5

VONAGE HOLDINGS CORP.

2006 INCENTIVE PLAN

NONQUALIFIED STOCK OPTION AGREEMENT

“ Participant ” : ____________________

“ Date of Award ” : _______________

This Agreement, effective as of the Date of Award set forth above, represents the grant of Nonqualified Stock Options by Vonage Holdings Corp., a Delaware corporation (the “ Company ”), to the Participant named above, pursuant to the provisions of the Vonage Holdings Corp. 2006 Incentive Plan (the “ Plan ”). Capitalized terms have the meanings ascribed to them under the Plan, unless specifically set forth herein.

The parties hereto agree as follows:

Grant of Options

The Company hereby grants to the Participant Nonqualified Stock Options to purchase Shares in the manner and subject to the terms and conditions of the Plan and this Agreement as follows:

(a) Number of Shares Covered by the Options : ____________

(b) “ Option Price ”: $_______ per Share

(c) “ Option Term ”: The Options have been granted for a period of ten years, ending on the tenth anniversary of the Date of Award.

Vesting of Options

(a) Subject to Section 2(e) below, the Options vest and become exercisable as to 1/4 ^th of the Shares on each of the first, second, third and fourth anniversaries of the Date of the Award.

(b) To the extent not previously vested in accordance with this Section 2, in the event that the Participant’s employment terminates on or prior to the first anniversary of a Change of Control, due to termination by the Company without Cause or by the Participant for Good Reason, the Options will vest and become exercisable as of the date of termination of employment.

(c) To the extent not previously vested in accordance with this Section 2, in the event of the Participant’s death, the Options will (i) vest and become exercisable as of the date thereof as to one-half the number of unvested Shares covered thereby and (ii) remain exercisable until they terminate in accordance with Section 4 below.

(d) To the extent not previously vested in accordance with this Section 2, in the event of the Participant’s Disability, the Options will (i) vest and become exercisable as of the date thereof as to one-half the number of unvested Shares covered thereby and (ii) remain exercisable until they terminate in accordance with Section 4 below.

(e) To the extent not previously vested in accordance with Section 2(a) above, if the Participant’s employment with the Company terminates for a reason other than as set forth in Section 2(b), 2(c) or 2(d) above, the Options will terminate immediately and be of no force or effect.

(f) To the extent vested in accordance with this Section 2, the Options will remain exercisable until they terminate in accordance with Section 4 below.

(g) For purposes of this Section 2, the following terms have the meanings set forth below:

“ Cause ” means any cause for unilateral termination of employment by the Company based on employee misconduct, as specified in the Participant’s employment agreement with the Company, or, if the Participant is not party to an employment agreement with the Company, means (i) material failure to perform employment duties (not as a consequence of any illness, accident or other disability), (ii) continued, willful failure to carry out any reasonable lawful direction of the Company, (iii) diverting or usurping a corporate opportunity of the Company, (iv) gross negligence or recklessness in performance of employment duties, (v) other serious willful misconduct which causes material injury to the Company or its reputation, including, but not limited to, willful or gross misconduct toward any of the Company’s other employees, and (vi) commission of a felony or a crime involving moral turpitude.

“ Disability ” means the Participant (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefit for a period of not less than three months under an accident and health plan covering employees of the Company.

“ Good Reason ” means, without the Participant’s consent, a (i) reduction by the Company in the Participant’s title, compensation, duties and/or responsibilities or (ii) relocation by the Company following a Change of Control of the Participant’s principal place of employment to a location more than 30 miles distant from its location at the time of the Change of Control.

Exercise of Options

(a) The Options may be exercised by written notice to the Company, specifying the number of Shares the Participant then desires to purchase, accompanied by the Option Price of such Shares, and as soon as practicable after receipt of such notice and payment, such Shares will be issued in the Participant’s name. The Committee reserves the right to modify the exercise procedures from time to time.

(b) Except as otherwise provided in this Section 3, the Participant must submit a check payable to the order of Vonage Holdings Corp. for an amount in United States dollars equal to the Option Price of such Shares, or tender Shares to the Company having an aggregate Fair Market Value on the date of exercise equal to such Option Price, or a combination thereof. If permitted by the Committee, the Participant may direct the Company to withhold a number of Shares covered by the Option having an aggregate Fair Market Value on the date of exercise equal to such Option Price.

Termination of Options

To the extent vested in accordance with Section 2 above, the Options will terminate, and be of no force or effect, upon the earlier of:

(a) the date of termination of the Participant’s employment if such termination is for Cause, the first anniversary of such date if the Participant’s employment terminates for a reason as set forth in Section 2(b), 2(c) or 2(d) above, 30 days following such date if such termination is due to the Participant’s resignation, or 90 days following such date if such termination is for any other reason; and

(b) the expiration of the Option Term.

Rights as Stockholder

Transferability

Miscellaneous

(b) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required or, the Committee determines are advisable. The Participant agrees to take all steps the Company determines are necessary to comply with all applicable provisions of federal and state securities law in exercising his or her rights under this Agreement. The Committee shall have the right to impose such restrictions on any Shares acquired pursuant to the exercise of the Option as it deems necessary or advisable under applicable federal securities laws, the rules and regulations of any stock exchange or market upon which Shares are then listed or traded, and/or any blue sky or state securities laws applicable to Shares. It is expressly understood that the Committee is authorized to administer, construe, and make all determinations necessary or appropriate to the administration of the Plan and this Agreement, all of which shall be binding upon the Participant.

(c) The Options are intended not to provide for a “deferral of compensation” within the meaning of Section 409A of the Code. Notwithstanding the forgoing or any provision of the Plan or this Agreement, if any provision of this Agreement or the Plan contravenes Section 409A of the Code or could cause the Participant to incur any tax, interest or penalties under Section 409A of the Code, the Committee may, in its sole discretion and without the Participant’s consent, modify such provision in order to comply with the requirements of Section 409A of the Code or to satisfy the conditions of any exception therefrom, or otherwise to avoid the imposition of the additional income tax and interest under Section 409A of the Code, while maintaining, to the maximum extent practicable, the original intent and economic benefit to the Participant, without materially increasing the cost to the Company, of the applicable provision.

(e) To the extent not preempted by federal law, this Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.

IN WITNESS WHEREOF, the Company and the Participant have executed this Agreement as of the Date of Award.


VONAGE HOLDINGS CORP.

By:
		Name:
		Title:


Participant

EXHIBIT 31.1

CERTIFICATION

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Marc P. Lefar, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Vonage Holdings Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 6, 2010		/s/ Marc P. Lefar
		Marc P. Lefar
		Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Barry L. Rowan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Vonage Holdings Corp.;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 6, 2010		/s/ Barry L. Rowan
		Barry L. Rowan
		Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Marc P. Lefar, certify to my knowledge pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Vonage Holdings Corp. on Form 10-Q for the quarterly period ended March 31, 2010, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Vonage Holdings Corp.


Date: May 6, 2010		/s/ Marc P. Lefar
		Marc P. Lefar
		Chief Executive Officer

I, Barry L. Rowan, certify to my knowledge pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Vonage Holdings Corp. on Form 10-Q for the quarterly period ended March 31, 2010, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Vonage Holdings Corp.


Date: May 6, 2010		/s/ Barry L. Rowan
		Barry L. Rowan
		Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer

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