VONAGE HOLDINGS CORP

Transcription

1 VONAGE HOLDINGS CORP FORM 10-K (Annual Report) Filed 02/26/10 for the Period Ending 12/31/09 Address 23 MAIN STREET HOLMDEL, NJ Telephone CIK Symbol VG SIC Code Telephone Communications, Except Radiotelephone Industry Communications Services Sector Services Fiscal Year 12/31 Copyright 2010, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

2 Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Commission file number VONAGE HOLDINGS CORP. (Exact name of registrant as specified in its charter) (732) Registrant s telephone number, including area code or Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 2009 For the transition period from to Delaware (State or other jurisdiction of incorporation or organization) 23 Main Street, Holmdel, New Jersey (Address of principal executive offices) (Zip Code) (IRS Employer Identification No.) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, Par Value $0.001 Per Share Name of each exchange on which registered The New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Yes No 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 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 Regulations S-T ( of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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: Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes The aggregate market value of the common equity held by non-affiliates of the registrant at June 30, 2009 was $24,105,982. The number of shares outstanding of the registrant s common stock as of January 31, 2010 was 199,995,701. No Documents Incorporated By Reference Selected portions of the Vonage Holdings Corp. definitive Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2009, are incorporated by reference in Part III of this Form 10-K.

3 Table of Contents VONAGE HOLDINGS CORP. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 TABLE OF CONTENTS Page PART I Item 1. Business 2 Item 1A. Risk Factors 10 Item 1B. Unresolved Staff Comments 18 Item 2. Properties 18 Item 3. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 22 Executive Officers and Directors of the Registrant 22 PART II Item 5. Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 24 Item 6. Selected Financial Data 26 Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations 28 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44 Item 8. Financial Statements and Supplementary Data 44 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 44 Item 9A. Controls and Procedures 45 Item 9B. Other Information 45 PART III Item 10. Directors, Executive Officers and Corporate Governance 46 Item 11. Executive Compensation 46 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 46 Item 13. Certain Relationships and Related Transactions, and Director Independence 46 Item 14. Principal Accountant Fees and Services 46 PART IV Item 15. Exhibits, Financial Statement Schedules 47 Signatures 51 Index to Financial Statements F-1 VONAGE ANNUAL REPORT 2009

4 Table of Contents FORWARD-LOOKING STATEMENTS From time to time, we may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K, which are deemed to be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 (the Litigation Reform Act ). These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available. The words anticipate, believe, estimate, expect, intend, will, should and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended or using other similar expressions. We do not intend to update these forward-looking statements, except as required by law. In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. Such factors 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; 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 section, and other sections of this Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. FINANCIAL INFORMATION PRESENTATION For the financial information discussed in this Annual Report on Form 10-K, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted. 1

5 Table of Contents PART I ITEM 1. Business 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 December 31, While customers in the United States represented 94% of our subscriber lines at December 31, 2009, we also serve customers in Canada and in the United Kingdom. Our residential, 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. In August 2009, we launched Vonage World, a residential plan that includes unlimited calling to more than 60 countries, including India, Mexico and China for the current flat monthly rate of $ In addition, the Vonage World offer includes unlimited Vonage Visual Voic , which provides readable voic delivered via or short message service (SMS) text message. 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. 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. Information on our revenues, operating income, and identifiable assets appears in Note 1 to our consolidated financial statements included in Item 8 hereof. OUR STRATEGY Vonage is rapidly evolving into a company that provides high quality voice and integrated messaging services on multiple devices, over fixed and mobile broadband networks, connecting customers around the world. In this evolution, we continue to leverage the following factors that have been instrumental in building our customer base: > Attractive Value Proposition. We offer our customers an attractive value proposition through our Vonage World and Vonage World Mobile plans, which provide unlimited calling around the world to more than 60 countries, for a low, flat rate. These portable land-line phone replacement and mobile calling applications offer unique and compelling features that differentiate our service from the competition at prices for domestic and international calling and messaging considerably lower than those of traditional telephone services and wireless providers. > Strong Brand Identity. We believe our strong brand recognition has enhanced our ability to sell our services through direct and retail distribution channels, allowing us to capitalize on growing market demand for broadband, VoIP and mobile applications. > Innovative, Low-Cost Technology Platform. Vonage maintains and operates a robust, high quality VoIP network that supports over six billion communications per year. We believe our innovative software and network technology platform not only provides us with a competitive advantage over many other VoIP service providers but also allows us to maintain a low cost structure relative to traditional telephone and cable companies that need to build or lease costly last-mile networks. Our network is unique in its scale, versus many other VoIP networks, and permits our customers to communicate virtually everywhere. Our network and services 2 VONAGE ANNUAL REPORT 2009

6 Table of Contents We have also made progress with six strategic imperatives that we believe positively impacted our business in 2009 and will continue to drive efficiencies and improve our business performance in 2010 and beyond: For 2010, we have added an additional strategic imperative that we believe will positively impact our business: We offer our broadband telephone services to customers through several service plans with different pricing structures. The service plans include an array of both basic and enhanced features, and customers have the opportunity to purchase a number of premium features at an additional fee. In order to access our residential, small and home office services, a customer need only connect a standard telephone to a broadband Internet connection through a small Vonage-enabled device. After connecting the device, our customers can use their telephone to make and receive calls. Our mobile calling application is available for download on the iphone, BlackBerry and ipod touch and permits calling while on wireless (Wi-Fi) or cellular networks, depending on the device. Plans also provide the foundation for some unique opportunities to partner with applications developers, device manufacturers, and network providers, to enable voice, video, and varied forms of messaging over new mediums, including social networks and Internet-connected gaming. > Onboarding and Early Life Satisfaction. Delivery of a frictionless experience from the time of sale through the customer s active use of service. In 2009, we implemented an onboarding queue, which provides specialized assistance to new customers. As of December 31, 2009, these agents supported nearly all of new customer call volume resulting in improved early life satisfaction. > Distribution and Marketing Effectiveness. Increasing our gross line additions without increasing our year-over-year investment in marketing. With our continued focus on delivering value to international callers as part of our Vonage World plan, we are developing and delivering targeted marketing and in-language advertising to ethnic calling segments, while lowering mass marketing spending. > Network, Product and Platform Reliability and Quality. Ensuring our services deliver a consistent, high quality experience. We have developed call quality metrics that enable us to collect more robust data on the frequency and breadth of customer issues at a geographic and subscriber level. This information has helped us to make improvements in call quality and reliability. > New and Enhanced Products and Services. Developing differentiated products that meet the needs of specific customer segments and promote frequent usage and brand loyalty. In the second half of 2009, we launched several new service offerings including Vonage World and Vonage Mobile. > Cost Optimization. Achieving a reduction in per line operating costs that more than offsets inflationary pricing and potential compression in average revenue per line. We continue to reduce our cost of telephony services per line as we leverage higher international calling volume to negotiate lower rates with carriers to mitigate increased costs associated with our Vonage World offer. We reduced our total operating expenses by 8% in 2009 from the prior year, including significant reductions in selling, general and administrative expense and marketing expense. In addition, we continue to focus on reducing hardware costs and costs for devices that enable our service. > Organizational Capacity and Skills Enhancement. Increasing the organization s productivity through talent management, employee development and improved management tools. New members of our senior leadership team in 2009 included heads of customer care, product development and information technology, product management, network operations and legal. > Focus on Technology Transformation. Transforming our technology infrastructure to deliver flexibility, improved time-to-market for new products and a superior online experience. SERVICE OFFERINGS In the United States, we market three residential calling plans, two mobile plans and two small office and home office plans: > Vonage World. For a monthly fee, this plan includes unlimited calling to landline phones in all cities and locations in more than 60 countries, including India, Mexico and China, and unlimited calling to cellular phones in certain of those countries. In addition, the Vonage World offer includes unlimited Vonage Visual Voic , which provides readable voic delivered via or short message service (SMS) text message. > Vonage World Mobile. This mobile calling plan provides unlimited outbound calling to landline phones in all cities and locations in more than 60 countries, including India, Mexico and China, and unlimited calling to cellular phones in certain of those countries, for a flat monthly rate. > Residential Premium Unlimited. Subject to certain restrictions, this plan, which we no longer market to new customers, includes unlimited local and long distance calling anywhere in the U.S., Canada and Puerto Rico. It also includes free calls to five select European countries. > Residential Basic 500. This plan includes 500 minutes per month of local and long distance calling anywhere in the U.S., Canada, and Puerto Rico. Customers are charged 3.9 per minute after the first 500 monthly minutes used. > Vonage Pro Plan. This plan combines the Residential Premium Unlimited Plan with certain premium services described below like Vonage Companion and Vonage Visual Voic . > World Plans. For a monthly fee, Residential Premium Unlimited Plan customers can choose to add an international calling plan where they can make unlimited calls to a region of their choice. > Small Business Premium Unlimited. Subject to certain restrictions, this plan includes unlimited local and long distance calling anywhere in the U.S., Canada and Puerto Rico for business customers. It also includes free calls to five select European countries and a free dedicated fax line. > Small Business Basic 1500 Minutes. This plan includes 1,500 minutes per month of local and long distance calling any - 3

7 Table of Contents where in the U.S., Canada, and Puerto Rico for business customers. Customers are charged 3.9 per minute after the first 1,500 monthly minutes used. This plan also includes a free dedicated fax line. > Vonage Mobile Pay Per Use. This mobile calling plan provides low per-minute international outbound calling rates on certain mobile devices. As of December 31, 2009, approximately 93% of our U.S. subscriber lines were for residential service. Approximately 49% of those residential subscriber lines were under the Residential Premium Unlimited Plan and 25% were under the Vonage World Plan. We offer similar plans in Canada and the United Kingdom. Please see Note 12 to our consolidated financial statements for financial information about our geographic areas. Basic and Enhanced Features Each of our residential, small office and home office calling plans provides a number of basic features including call waiting, caller ID with name, call forwarding and voic . All of these calling plans include a wide range of enhanced features at no additional charge to our customers, such as: > Area Code Selection. Customers can select from approximately 267 U.S. area codes for their telephone number for use with our service, regardless of physical location. > Service and Number Portability. Our service is portable. Our customers can use their Vonage phone numbers to make and receive calls almost anywhere in the world that a broadband Internet connection is available by taking their Vonage-enabled device with them. > Online Account Management. Customers can view and manage their accounts online. Our service provides capabilities such as real-time feature management, call forwarding options and a lifetime call activity log. > Personalized Web-Enabled Voic . Our service allows customers to receive notification of a voic with the voice message attached to the message as an audio file. Our customers can also check and retrieve voic s online or from any phone. Premium Services We also offer a number of premium services, in some cases for additional fees. These services include: > Vonage Visual Voic . This feature, which is included free as part of the Vonage World plan and Vonage Pro plan, allows a customer to have their voic messages transcribed to text and sent to their address or mobile phone. > Virtual Phone Number. A customer can have additional inbound telephone numbers that ring on a primary subscriber line, each for an additional fee. Each of these inbound telephone numbers can have a different area code. For example, a customer living in New York City with a New York City phone number can purchase a Los Angeles virtual phone number that rings on the customer s primary subscriber line. In this instance, a caller from Los Angeles could call the customer s virtual phone number and be billed as if the customer were in Los Angeles. In addition to U.S. virtual phone numbers, we offer international virtual phone numbers as well. Virtual phone numbers are not included in our subscriber line count. > Toll Free Plus. A customer can have toll free numbers that ring on an existing subscriber line. Toll free numbers are not included in our subscriber line count. > Vonage SoftPhone. A SoftPhone is a software application that can be downloaded and installed on computers, laptops and Wi-Fi-enabled personal digital assistant devices. It enables a user to use a computer as a full-functioning telephone, with its own phone number, through a screen-based interface that works just like a telephone keypad. > Residential Fax Service. For a monthly fee, we offer 250 minutes of outgoing fax service within the United States, Puerto Rico and Canada on a dedicated fax line plus unlimited incoming faxes, with customers charged a per minute fee of 3.9 cents thereafter. > Business Fax Service. We offer 500 minutes of outgoing fax service within the United States, Puerto Rico and Canada on a dedicated fax line plus unlimited incoming faxes, with customers charged a per minute fee of 3.9 cents thereafter. One business fax line is included in each of our business calling plans. Devices We believe that our ability to offer a variety of devices with enhanced features and capabilities differentiates our service offering from that of many of our competitors. Our plug-and-play Vonage-enabled devices permit portability because customers can take their Vonage device to different locations where broadband service is available, including switching between different Internet service providers while continuing to make and receive calls on their Vonage phone number. We offer our customers a range of equipment alternatives for their Vonage-enabled devices based upon our continued relationships with technology companies. > Vonage V-Portal. The Vonage V-Portal can connect up to two Vonage lines through a high-speed Internet connection and includes a networking router. It has a userfriendly LCD display with caller ID and call timer, call logs, language selection, and built-in upstream bandwidth tester. Utilizing Vonage s advanced quality of service software, the Vonage V-Portal allows customers to use the Internet connection for their computer and telephones at the same time while ensuring a high quality calling experience. > Analog Telephone Adapter. Our analog telephone adapters, which convert analog audio signals into digital data packets for transmission over the Internet, are plugged in between the customer s telephone and existing broadband Internet connection. > Integrated Adapter and Wireless Router. Our integrated adapters and wireless routers simplify installation by combining a standard analog telephone adapter, a broadband router and a Wi-Fi access point in one device. > Vonage Bundled Cordless Phone and V-Portal. Our cordless multi-phone system offers customers further simplification of equipment by combining Digital Enhanced Cordless telecommunications, or DECT, cordless phone system, our V-Portal and a router into one easy to install package. These 4 VONAGE ANNUAL REPORT 2009

8 Table of Contents cordless multi-phone systems are designed to appeal to the needs of mainstream consumers who are looking for a whole house solution. > V-Phone. The Vonage V-Phone is a USB compatible device designed for use with our service. Vonage software comes pre-loaded on the V-Phone and updates itself on the device s 256 megabyte flash drive without requiring the customer to install any software on the host laptop or PC. The V-Phone comes with a standard 2.5 millimeter stereo earpiece microphone and customers can make and receive calls by plugging the device into virtually any Windows-based laptop or PC with a high speed broadband Internet connection. > Vonage Companion. Vonage Companion is a downloadable softphone that extends the boundaries of a Vonage home or office phone line, providing more freedom over how to communicate. Vonage Companion has the same phone number as a customer s main Vonage phone line. NETWORK OPERATIONS Our network operations are conducted by a wholly-owned subsidiary that holds our networking equipment and employs the personnel who develop and operate our technology. How Vonage Calls Work The Vonage system uses our customer s existing high-speed broadband Internet service to connect a Vonage-enabled device to our call processing complex over the Internet. Our service is not dependent on any specific type or provider of Internet service, and our customers are free to change the provider of their Internet service as they wish, either because of a competitive alternative, or because they have moved to a different location. The Vonage-enabled adapter adapts our customer s existing telephones to Vonage s VoIP-based system. When a customer places a call on our system, their Vonageenabled adapter signals to our call processing system to deliver the call either to the traditional telephone network, or to another Vonage customer. Our call processing system is scalable and geographically distributed in four distinct Call Processing Centers for robustness and reliability. For our residential, small office and home office services, a Vonage-enabled adapter converts the traditional analog voice signal from our customer s telephone into a series of IP packets that are sent over his high-speed broadband connection, across the Internet, to a VoIP media gateway at one of our Regional Data Connection Points, where the packets are converted back into traditional public switched telephone network telephone signals. Vonage s architecture has VoIP media gateways and connections to our public switched telephone network termination partners at multiple, distributed geographical locations for capacity, scalability and reliability. The voice functionality of the Vonage-enabled adapters are remotely configured and managed by Vonage. We can remotely perform software upgrades to enable new features or address operational issues without requiring an in-home service technician or our customer s involvement. Because Vonage s system is not constrained to use any specific broadband service provider to connect to our customers, we can centrally manage and share resources across our customer base to minimize capital investment when entering new markets. Our web-based customer portal allows our customers to manage most aspects of their Vonage service without requiring the intervention of a customer-care representative. Customers can add and change features, phone numbers, update billing information and review their historical calling and billing records using this self-service portal. Since we remotely manage the Vonage-enabled adapters, customers see a common and consistent interface, regardless of what generation equipment they may have. 5

9 Table of Contents Core Network Elements > Call Processing Centers. Our call processing centers communicate with the equipment at the Vonage customer s location to authenticate and authorize access to our network. The call processing centers are also responsible for all call signaling in our network, such as initiating phone calls, delivering inbound calls to a customer s phone, and other calling features such as call forwarding. The call processing centers are built from our internally-developed software and industry-standard servers and make use of techniques in distributed computing. > Regional Data Connection Points. Calls into or out of our network, where one of the parties is not a Vonage customer, are interconnected with the public switched telephone network at 13 regional data connection points in the United States, Canada, Chile, Mexico and the United Kingdom. Our interconnections with the public switched telephone network are made pursuant to agreements we have with several telecommunications providers. Under these agreements, we transfer calls originated by our customers to other carriers who connect the call to the called party. We pay a per-minute charge for this. The calls are transferred from our equipment to other carriers at connection points that are typically housed in small co-location facilities in which we lease space from other telecommunications providers. We generally pay monthly for this co-location, based on the amount of space we use. This method of connecting to the public switched telephone network allows us to expand capacity quickly, as necessary to meet call volume, and to provide redundancy within our network. These connection points are also used as interconnection with Internet Service Providers to provide the optimal networking path for all calls. Our business is not substantially dependent upon our agreements with other carriers or our interconnection agreements, because we can easily substitute other telecommunications providers in order to obtain the same or similar service at similar cost. > Network Operations Center. We currently maintain a network operations center at our headquarters and redundancies at several points within our network. The network operations center monitors and manages the status and health of our network elements, allowing us to manage our network in real time, respond to alert notifications and re-route network traffic as needed. We pursue a multi-faceted approach to managing our network to ensure high call quality and reliable communications services to our customers. > Back Office Systems. In addition to our network management systems, we have developed a number of software systems that enable us to manage our network and service offering more efficiently and effectively. Key aspects of these systems include: > Customer Device Management System. We have developed a suite of software solutions that enable us to remotely provision, monitor and configure customer devices and services. When we develop new service offerings or software solutions, we can securely update a customer s equipment and software features without the need for costly field visits. > Web Portal. We provide a fully functional customer Web portal that allows our customers to configure and manage almost all aspects of their service on the Internet. In addition, we have developed our own scaleable Web-based billing system that allows our customers to access all of their call usage and billing details. > Reporting Tools. To enhance our network operations efforts, we utilize an industry standard monitoring tool and also have a series of internally developed monitoring and reporting tools that enable us to quantify the quality of all calls within our network and quickly and efficiently recognize and respond to potential issues. > Emergency Calling Service and Enhanced 911 Service. We have deployed E-911 service to approximately 98.9% of our U.S. customer base that is comparable to the emergency calling services provided to customers of traditional wire line telephone companies in the same area. For customers in areas where our E-911 service is available, emergency calls are routed, subject to the limitations discussed below, directly to an emergency services dispatcher at the public safety answering point, or PSAP, in the area of the customer s registered location. The dispatcher will have automatic access to the customer s telephone number and registered location information. However, if a customer places an emergency call using the customer s Vonage-enabled device in a location different from the one registered with us, the emergency call will be routed to a PSAP in the customer s registered location, not the customer s actual location at the time of the call. Every time a customer moves his or her Vonage-enabled device to a new location, the customer s registered location information must be updated and verified. Until this occurs, the customer will have to verbally advise the emergency dispatcher of his or her actual location at the time of the call and wait for the call to be transferred, if possible, to the appropriate local emergency response center before emergency assistance can be dispatched. In some cases, even under our 911 service, emergency calls may be routed to a PSAP in the area of the customer s registered location, but such PSAP may not be capable of receiving our transmission of the caller s registered location information and, in some cases, the caller s phone number. Where the emergency call center is unable to process the information, the caller is provided a service that is similar to the basic 911 services offered to some wire line telephone customers and some wireless customers. In these instances, the emergency caller may be required to verbally advise the operator of their location at the time of the call and, in some cases, provide a call back number so that the call can be handled or forwarded to an appropriate emergency dispatcher. The emergency calls of customers located in areas where we currently do not provide either E-911 or the basic 911 described above are either routed directly to the PSAP in the area of the customer s location or supported by a national call center that is run by a third party provider and operates 24 hours a day, seven days a week. In these cases, a caller must provide the operator with his or her physical location and call back number. If a customer reaches the call center, the operator will coordinate connecting the caller to the appropriate PSAP or emergency services provider. Our E-911 service does not support the calls of our V-Phone, Wi-Fi phone, Vonage Companion and Vonage SoftPhone users. The emergency calls of our V-Phone, Wi-Fi phone, Vonage 6 VONAGE ANNUAL REPORT 2009

10 Table of Contents Companion and Vonage SoftPhone users are supported by the national call center. > Agreements with E-911 Service Providers. To enable us to effectively deploy and provide our E-911 service, we maintain an agreement with a provider that assists us in delivering emergency calls to an emergency service dispatcher at the PSAP in the area of the customer s registered location and terminating E-911 calls. We also contract for the national call center that operates 24 hours a day, seven days a week to receive certain emergency calls. We also maintain agreements with several companies that maintain PSAP databases for the purpose of deploying and operating E-911 services. The databases include contact, technical infrastructure, boundary and routing information for delivery of calls to a PSAP or emergency service providers in the United States. > Other Agreements. We have entered into agreements with several service providers to assist us with operations. In particular, we contract with third parties to support local number portability for our customers, which allow new customers to retain their existing telephone numbers when subscribing to our services. > We rely on an agreement with a provider to facilitate the transfer of customer telephone numbers. > Third Party Verification, Inc. performs the third party verification of pertinent local number portability information from our subscribers. This verification is an integral process step prior to porting a customer from one local telephone company to us. Our agreement with Third Party Verification, Inc. will continue through April > Security. We have developed a service architecture and platform that use industry-standard security techniques and allow us to remotely manage customer devices. Any Vonage-enabled device used by our customers can be securely managed by us, and these devices use authentication mechanisms to identify themselves to our service in order to place and receive calls. We regularly update our protocols and systems to protect against unauthorized access. MARKETING Our marketing objective is to grow subscriber lines by cost-effectively acquiring and retaining customers. We employ an integrated multi-channel approach to marketing. We make use of broad-reach and highly-targeted media channels including television, online, direct mail, alternative media, telemarketing, partner marketing and customer referral programs. As a national provider, we believe we are able to buy online and traditional media in a highly efficient manner. Our customers have a variety of vehicles to purchase our services and products, through the internet, by phone, in a retail store or at a kiosk. In addition, we accept multiple forms of payment such as credit cards, debit cards, and electronic check payments ( ECP ). We monitor the results of our marketing efforts closely in a number of ways, including the cost of acquiring new subscriber lines, to evaluate which approaches produce the best results and deploy our marketing resources accordingly. All of our testing follows disciplined direct marketing tactics, which help us isolate the variables that are driving performance. Because we track performance beyond the gross sale, we are able to prioritize those programs that bring in high value, long-term customers. We make use of marketing research to gain consumer insights into brand, product and service performance. We also monitor brand strength among VoIP, broadband and dial-up customers. Market research is also leveraged in the areas of testing, retention marketing and product marketing. We believe gaining insights into customer needs, wants and preferences is a key marketing asset. We augment these marketing efforts with Refer-a-Friend, our online customer referral program. Under this program, existing customers can use the Vonage website to send s to their friends that describe our service offerings and track their responses. Referrers may also use their Vonage telephone number as a type of coupon code. We also introduced a referral feature that allows an existing customer to place a promotional banner on the customer s social networking page. In return for referring a new customer, both the new and the existing customer receive a service credit. SALES AND DISTRIBUTION Direct Sales The primary sales channels for our service historically have been through in-bound telemarketing and online direct sales. Customers can subscribe to our services at our websites, and or through multiple toll free numbers including VONAGE. We complement these sales channels with marketing vehicles including television, direct mail, alternative media, outbound telemarketing, partner marketing, social marketing and media efforts along with customer referral programs. We are increasing targeting efforts to focus on ethnic calling segments. Retail Sales In addition to our direct sales channel, we also offer sales through our retail channel. Our service currently is available at the outlets of leading regional and national retailers, including Wal-Mart, Brandsmart and Fry s Electronics. We believe that the availability of our devices through premier retailers enhances and reinforces the Vonage brand with consumers and that the retail channel increases our ability to acquire mainstream consumers by reaching them in a familiar and interactive shopping environment. National and regional retailers provide Vonage with a wide footprint to distribute our service. In looking at ways to increase control in the sales channel, we opened Vonage kiosks throughout the United States in 2006 and 2007 and continue to look at ways to optimize sales performance at each kiosk location while looking at growth opportunities in favorable geographic markets. We had 16 kiosks in operation at the end of 2009 compared to 31 at the end of Customer Service We offer our customers support 24 hours a day, seven days a week through both our comprehensive online account management website and our toll free number. We believe that many customers use our self-service website when they have a question or problem with their service and that many of them are able to resolve their concerns online without needing to speak to a customer care representative. Our customers can manage almost all aspects of their accounts online. This capability both 7

11 Table of Contents empowers our customers through self-service and reduces our customer care expenses. Customers who cannot or do not wish to resolve their questions through our website can contact a live customer care representative through our toll free number. We staff our customer care organization through a combination of our own employees and outsourced customer care representatives. All new customer care representatives are trained through an established program developed by Vonage. We also have a separate team called Advanced Technical Support for resolving customers complex issues that could not be handled by our other representatives and an onboarding queue, which provides specialized assistance to new customers. We use extensive monitoring of call quality and customer satisfaction scores to determine additional training or coaching requirements for individual associates. Billing All customer billing is automated through our website. We automatically collect all fees from our customers credit card, debit card or ECP. 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 exposure, which is recorded as a reduction to revenue. If a customer s credit card, debit card or ECP is declined, we generally suspend international calling. 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 cannot be successfully processed during three billing cycles (i.e. the current and two subsequent monthly billing cycles), we terminate the account. In December 2009, we entered into a contract with Amdocs, Inc. pursuant to which Amdocs, Inc. will (i) license to us billing and ordering software, (ii) provide professional services relating to the implementation, operation, support and maintenance of the licensed systems and (iii) transition support services in connection with migration to the licensed systems. We expect this software to provide us with enhanced ordering and billing capabilities to better suit the current and future needs of the business. The initial term of the agreement with Amdocs, Inc. extends for five years following the earlier to occur of (i) the date on which a specified number of subscribers are successfully migrated from our current billing and order systems to the licensed system or (ii) the first new subscriber is added to the licensed system. INTELLECTUAL PROPERTY We believe that our technological position depends primarily on the experience, technical competence and the creative ability of our engineering and technology staff. We review our technological developments with our technology staff and business units to identify the features of our core technology that provide us with a technological or commercial advantage and file patent applications as necessary to protect these features in the United States and internationally. Our company policies require our employees to assign their intellectual property rights to us and to treat all technology as our confidential information. We have been issued three patents and have filed several other patent applications to protect our technology, which are currently pending. In addition to developing technology, we evaluate the licensing and acquisition of intellectual property of others in order to identify technology that provides us with a technological or commercial advantage. In 2006, we acquired three patents from Digital Packet Licensing Inc. that enable VoIP technology. The patents are related to the compression of packetized digital signals commonly used in VoIP technology. Two of the patents have expired, and the other patent expires in We were named as a defendant in several suits that relate to patent infringement and entered into settlement agreements in 2007 and 2008 to settle certain of the suits, which in certain cases include payments, patent licenses and covenants not to sue. We are the owner of numerous trademarks and service marks and have applied for registration of our trademarks and service marks in the United States and abroad to establish and protect our brand names as part of our intellectual property strategy. Some of our registered marks are Vonage, Vonage Mobile and Vonage Visual Voic . We endeavor to protect our internally developed systems and maintain our trademarks and service marks. Typically, we enter into confidentiality or license agreements with our employees, consultants, customers and vendors in an effort to control access to and distribution of our technology, software, documentation and other information. COMPETITION We face strong competition from incumbent telephone companies, cable companies, alternative voice communication providers and wireless companies. Because most of our target customers are already purchasing communications services from one or more of these providers, our success is dependent upon our ability to attract these customers away from their existing providers. We believe that the principal competitive factors affecting our ability to attract and retain customers are price, call quality, customer service and enhanced services and features. Incumbent telephone companies The incumbent telephone companies are our primary competitors and have historically dominated their regional markets. These competitors include AT&T, Qwest Communications and Verizon Communications as well as rural incumbents, such as Frontier Communications. These competitors are substantially larger and better capitalized than we are and have the advantage of a large existing customer base. In many cases, we charge prices that are significantly lower than prices charged by the incumbent phone companies. We believe that we currently compete successfully with the incumbent phone companies on the basis of the features we offer that they do not (such as area code selection and virtual phone numbers) and features we offer at no extra charge. The incumbent phone companies own networks that include a last mile connection to substantially all of our existing and potential customers as well as the places our customers call. As a result, the vast majority of the calls placed by a Vonage customer are carried over the last mile by an incumbent phone company, and we indirectly pay access charges to these competitors for each of these calls. In contrast, traditional wire line providers do not pay us when their customers call our customers. Their last 8 VONAGE ANNUAL REPORT 2009

12 Table of Contents mile connections enable these competitors to bundle phone service with Internet access and television at prices we may find difficult to compete with. The incumbent phone companies, as well as the cable companies, have long-standing relationships with regulators, legislators, lobbyists and the media. This can be an advantage for them because legislative, regulatory or judicial developments in our rapidly evolving industry could have a negative impact on us. Cable companies These competitors include companies such as Cablevision, Charter Communications, Comcast Corporation, Cox Communications and Time Warner Cable. Cable companies have significant financial resources and have made and are continuing to make substantial investments in delivering broadband Internet access and phone service to their customers. Providing Internet access and cable television to many of our existing and potential customers allows them to engage in highly targeted, low-cost direct marketing and may enhance their image as trusted providers of services. Similar to incumbent phone companies, cable companies are also aggressively using their existing customer relationships to bundle services. For example, they bundle Internet access, cable television and phone service with an implied price for the phone service that may be significantly below ours. They are able to advertise on their local access channels with no significant out-of-pocket cost and through mailings in bills with little marginal cost. They also receive advertising time as part of their relationships with television networks, and they are able to use this time to promote their telephone service offerings. Many cable companies routinely send technicians to customers premises to initiate service. Although this is expensive, it also can be more attractive to customers than installing their own router. In addition, these technicians may install an independent source of power, which can give customers assurance that their phone service will not be interrupted during power outages. Cable companies ownership of Internet connections to our customers could enable them to detect and interfere with the completion of our customers calls. While we are not aware of any occurrence, it is unclear whether current regulations would permit these companies to degrade the quality of, give low priority to or block entirely the information packets and other data we transmit over their lines. In addition, these companies may attempt to charge their customers more for using our services. This could also apply to phone companies that connect our customers to the Internet. We believe our ability to successfully compete with cable companies is enhanced by the value and features we offer that cable companies do not offer (such as unlimited international calling, portable service and wide choice of area codes). Wireless telephone companies We also compete with wireless phone companies, such as AT&T, Sprint, T-Mobile and Verizon Wireless. Some consumers use wireless phones, instead of VoIP phones, as a replacement for a wire line phone. Also, wireless phone companies increasingly are providing wireless broadband Internet access to their customers. As wireless providers offer more minutes at lower prices and other services that improve calling quality, their services have become more attractive to households as a competing replacement for wire line service. For example, many wireless phone companies now offer dual mode phones, which permit voice communications over a Wi-Fi network when available and which do not count against mobile plan minutes. Certain wireless phone companies have also made available products incorporating femtocells that utilize broadband connections to act as a miniature cellular tower, listening for and enhancing signals from a subscriber s cell phone, improving call quality at a subscriber s residence or other location. Wireless telephone companies have a strong retail presence and have significant financial resources. We believe our ability to successfully compete with wireless telephone companies is enhanced by our delivery of voice and messaging services over the Internet, enabling us to deliver value to customers. Alternative voice communication providers We also compete against established 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. While not all of these competitors currently offer the ability to call or be called by anyone not using their service, line portability and customer service, in the future they may integrate such capabilities into their service offerings. 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. In addition, a continuing trend toward consolidation of telecommunications companies and the formation of strategic alliances within the telecommunications industry, as well as the development of new technologies, could give rise to significant new competition. EMPLOYEES As of December 31, 2009, we had 1,225 employees. None of our employees are subject to a collective bargaining agreement. AVAILABLE INFORMATION We were incorporated in Delaware in May 2000 and changed our name to Vonage Holdings Corp in February We maintain a website with the address The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor s own Internet access charges, we make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission. 9

13 Table of Contents ITEM 1A. Risk Factors You should carefully consider the risks below, as well as all of the other information contained in this Annual Report on Form 10-K and our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K, in evaluating our company and our business. Any of these risks could materially adversely affect our business, financial condition and results of operations and the trading price of our common stock. For the financial information discussed in this Annual Report on Form 10-K, other than per share and per line amounts, dollar amounts are presented in thousands, except where noted. If we are unable to compete successfully, we could lose market share and revenue. The telecommunications industry is highly competitive. We face intense competition from traditional telephone companies, wireless companies, cable companies and alternative voice communication providers. Our competitors include the traditional telephone service providers, including AT&T, Qwest Communications and Verizon Communications, which provide telephone service based on the public switched telephone network. Some of these traditional providers also have added VoIP services to their existing telephone and broadband offerings. We also face competition from cable companies, such as Cablevision, Charter Communications, Comcast Corporation, Cox Communications, and Time Warner Cable, which have added VoIP services to their existing cable television and broadband offerings. Further, as wireless providers, including AT&T, Sprint, T-Mobile and Verizon Wireless, offer more minutes at lower prices, better coverage and companion landline alternative services, including through products such as dual mode phones and femtocells, their services have become more attractive to households as a replacement for wire line service. 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. Because most of our target customers are already purchasing communications services from one or more of these providers, our success is dependent upon our ability to attract target customers away from their existing providers. Our competitors financial resources may allow them to offer services at prices below cost or even for free in order to maintain and gain market share or otherwise improve their competitive positions. Our competitors also could use their greater financial resources to offer VoIP services with more attractive features and more robust customer service. In addition, because of the other services our competitors provide, they often choose to offer VoIP 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. This bundle may enable our competitors to offer VoIP service at prices with which we may not be able to compete or to offer functionality that integrates VoIP service with their other offerings, both of which may be more desirable to consumers. Any of these competitive factors could make it more difficult for us to attract and retain customers, reduce our market share and revenues or cause us to lower our prices or offer additional features that may result in additional costs without commensurate price increases. We also compete against established 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. In order to compete with such service providers, we may have to reduce our prices, which would impair our profitability, or offer additional features that may cause us to incur additional costs without commensurate price increases. We also are subject to the risk of future disruptive technologies. If new technologies develop that are able to deliver competing voice and messaging services at lower prices, better or more conveniently, it could have a material adverse effect on us. If we fail to adapt to rapid changes in the market for voice and messaging services, then our products and services could become obsolete. The market for our products is constantly and rapidly evolving, as we and our competitors introduce new and enhanced products and services, and react to changes in VoIP and messaging technology and customer demands. We may not be able to develop or acquire new products and plans or product and plan enhancements that compete effectively with present or emerging VoIP and messaging technologies or differentiate our products and plans based on functionality and performance. In addition, we may not be able to establish or maintain strategic alliances that will permit enhancement opportunities or innovative distribution methods for our products and plans. New products based on new technologies or new industry standards could render our existing products obsolete and unmarketable. To succeed, we believe that we need to enhance our current products and plans and develop new products and plans on a timely basis to keep pace with market needs and satisfy the increasingly sophisticated requirements of customers. VoIP and messaging technology is complex, and new products and plans and product and plan enhancements can require long development and testing periods. Any delays in developing and releasing new or enhanced products and plans, including as a result of any limitations with our internal systems, could cause us to lose revenue opportunities and customers. Any technical flaws in products we release could diminish the innovative impact of the products and have a negative effect on customer adoption and our reputation. Net customer losses as a result of customer churn or inability to attract new customers could negatively affect our business by reducing our revenue or requiring us to spend more money to grow our customer base. Our rate of customer terminations, or average monthly customer churn, was 3.1% for the year ended December 31, During 2009, we added 705,790 customers while 810,728 of our customers terminated resulting in a net customer decrease of 104,938 for In the fourth quarter of 2009, our average monthly customer churn was 2.8%. Our churn rate could increase in the future if customers are not satisfied with the quality and 10 VONAGE ANNUAL REPORT 2009

14 Table of Contents reliability of our network, the value proposition of our products and the ability of our customer service to meet the needs and expectations of our customers. Other factors, including increased competition from other providers, including increasing wireless substitution, disruptive technologies, general economic conditions and our ability to activate and register new customers on the network, also influence our churn rate. Because of churn, we have to acquire new customers on an ongoing basis just to maintain our existing level of customers and revenues. As a result, marketing expense is an ongoing requirement of our business. If our churn rate increases, we will have to acquire even more new customers in order to maintain our existing revenues. We incur significant costs to acquire new customers, and those costs are an important factor in maintaining profitability. Therefore, if we are unsuccessful in retaining customers, are required to spend significant amounts to acquire new customers beyond those budgeted or our marketing and advertising efforts are not effective in targeting specific customer segments, our revenue could decrease and our net losses could increase. Current economic conditions may adversely affect our industry, business and results of operations. The United States economy has experienced a period of slowdown and very high volatility and the future economic environment may continue to be unfavorable. A substantial portion of our revenues comes from residential, small office and home office customers whose spending patterns may be affected by prevailing economic conditions. While we believe that the weakening economy had a modest effect on our net subscriber additions and ability of our customers to pay us during 2009, if these economic conditions deteriorate, the growth of our business and results of operations may be more severely impacted. Economic conditions may accelerate the trend of households relying solely on a mobile phone for home telecommunications, while eliminating landline connections, which is known as wireless substitution. In addition, reduced consumer spending may drive us and our competitors to offer certain services at promotional prices, which could have a negative impact on our operating results. The debt agreements governing our November 2008 financing contain restrictions that may limit our flexibility in operating our business. On November 3, 2008, we consummated 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 collectively, the Financing ). The First Lien Senior Facility, the Second Lien Senior Facility and the Note Purchase Agreement governing the Convertible Notes contain various covenants and other restrictions that limit our ability and/or the ability of certain of our subsidiaries to engage in specified types of transactions, including obtaining additional financing, if necessary. These covenants and other restrictions may under certain circumstances limit, but not necessarily preclude, our and certain of our subsidiaries ability to, among other things: > incur, prepay, refinance or modify indebtedness; > create liens; > pay dividends on or repurchase our capital stock or make other restricted payments; > make investments; > enter into acquisitions, sales and mergers; > enter into sale and leaseback transactions; > amend our organizational documents, or amend, modify or waive litigation settlements, key employment agreements or other material contracts; > incur marketing expenses in excess of specified thresholds; > change the nature of our business or enter into additional lines of business; and > enter into transactions with our stockholders and affiliates. Under the Financing agreements, we are required to maintain a specified minimum fixed charge coverage ratio, maximum leverage ratio and senior secured debt leverage ratio. In addition, these agreements require us to maintain minimum levels of consolidated adjusted EBIDTA, liquidity and pre-marketing operating income and limit our capital expenditures. Upon the repayment of our obligations under the First Lien Senior Facility and the Second Lien Senior Facility, the covenants will fall-away, but the Note Purchase Agreement for the Convertible Notes will continue to limit our ability to incur indebtedness and make restricted payments. Our ability to comply with such financial and other covenants can be affected by events beyond our control, so we may not be able to comply with these covenants. A breach of any such covenant could result in a default under these agreements. In that case, the lenders and the note holders could elect to declare due and payable immediately all amounts due under the Financing agreements, including principal, accrued interest, a make-whole premium and, in the case of the Convertible Notes, liquidated damages, and may take action to foreclose upon the collateral securing the indebtedness. Flaws in our technology and systems could cause delays or interruptions of service or permit third parties to commit fraud using our services, which could damage our reputation, cause us to lose customers and limit our growth. Although we have designed our service network to reduce the possibility of disruptions or other outages, our service may be disrupted by problems with our technology and systems, such as malfunctions in our software or other facilities and overloading of our network. Our customers and potential customers subscribing to our services have experienced interruptions in the past and may experience interruptions in the future as a result of these types of problems. Interruptions have caused and may in the future cause us to lose customers and offer substantial customer credits, which could adversely affect our revenue and profitability. Network interruptions may also impair our ability to sign-up new customers. During 2009, we had multiple outages that affected groups of customers at various times, some of which affected large groups of customers for several hours. In addition, because our systems and our customers ability to use our services are Internet-dependent, our services may be subject to hacker attacks from the Internet, which could have a significant impact on our systems and services. If service interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting and retaining customers and our brand reputation and growth may suffer. In addition, third parties have fraudulently accessed customer accounts or used our services to commit fraud. If we are unable to detect and prevent such fraud, our 11

15 Table of Contents brand reputation and growth may suffer and we may incur additional costs or be required to credit significant amounts to customers. We are and in the future may be subject to damaging and disruptive intellectual property litigation that could materially and adversely affect our business, results of operations and financial condition, as well as the continued viability of our company. We are named as a defendant in a suit that relates to patent infringement and from time to time we receive letters from third parties initiating an opportunity for us to obtain patent licenses to patents that may be relevant to our business. See Item 3. Legal Proceedings IP Matters. In addition, we have been subject to other infringement claims in the past, including suits that we settled in 2007 and 2008 for a total of $243,825 with Verizon, Sprint, AT&T, Nortel Networks and others, and, given the rapid technological change in our industry and our continual development of new products and services, we may be subject to infringement claims in the future. We may be unaware of filed patent applications and issued patents that could include claims covering our products and services. Parties making claims of infringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our services and could cause us to pay substantial royalties, licensing fees or damages. The defense of any lawsuit could divert management s efforts and attention from ordinary business operations and result in time-consuming and expensive litigation, regardless of the merits of such claims. These outcomes may: > result in the loss of a substantial number of existing customers or prohibit the acquisition of new customers; > lead to an event of default under the terms of our Financing documents, which could permit the lenders and note holders to declare due and payable immediately all amounts due under the Financing agreements, including principal, accrued interest, a make-whole premium and, in the case of the Convertible Notes, liquidated damages and take action to foreclose upon the collateral securing the indebtedness; > cause us to accelerate expenditures to preserve exiting revenues; > cause existing or new vendors to require prepayments or letters of credit; > cause our credit card processors to demand additional reserves or letters of credit or make holdbacks; > result in substantial employee layoffs; > materially and adversely affect our brand in the market place and cause a substantial loss of goodwill; > cause our stock price to decline significantly or otherwise cause us to fail to meet the continued listing requirements of the NYSE, which could distract management and result in the delisting of our common stock from the exchange; > materially and adversely affect our liquidity, including our ability to pay debts and other obligations as they become due; and > lead to our bankruptcy or liquidation. We may incur significant costs and harm to our reputation from lawsuits and regulatory inquiries related to our business practices, which may also divert the attention of our management from other aspects of our business. We were named in several purported class actions in California, New Jersey, and Washington alleging a wide variety of deficiencies with respect to our business practices, marketing disclosures, marketing and quality issues for both phone and fax service. We have also been subject to periodic regulatory inquiries regarding our business practices, including a recently settled investigation by a group of 32 states attorney generals into certain of our business practices. There was no finding of any violation or wrongdoing by us, and the 32 states participating in the settlement have released us and our affiliates from the matters investigated. In connection with the settlement, we agreed to pay an aggregate of $3.0 million to the participating states, including amounts to cover legal and investigation fees incurred. To improve the customer experience and promote continued customer satisfaction, we also agreed to implement certain enhancements to our business practices, many of which we implemented prior to completion of the settlement. We also agreed to provide refunds for certain affected consumers. Any such claims or regulatory inquiries, whether successful or not, could require us to devote significant amounts of monetary or human resources to defend ourselves and could harm our reputation. We may need to spend significant amounts on our legal defense, senior management may be required to divert their attention from other portions of our business, new product launches may be deferred or canceled as a result of any proceedings, and we may be required to make changes to our present and planned products or services. If, as a result of any proceedings, a judgment is rendered or a decree is entered against us, it may materially and adversely affect our business, financial condition and results of operations and harm our reputation. Our ability to provide our service is dependent upon third-party facilities and equipment, the failure of which could cause delays or interruptions of our service, damage our reputation, cause us to lose customers and limit our growth. Our success depends on our ability to provide quality and reliable telephony service, which is in part dependent upon the proper functioning of facilities and equipment owned and operated by third parties and is, therefore, beyond our control. Unlike traditional wire line telephone service or wireless service, our service requires our customers to have an operative broadband Internet connection and an electrical power supply, which are provided by the customer s Internet service provider and electric utility company, respectively, and not by us. The quality of some broadband Internet connections may be too poor for customers to use our services properly. In addition, if there is any interruption to a customer s broadband Internet service or electrical power supply, that customer will be unable to make or receive calls, including emergency calls, using our service. We outsource several of our network functions to third-party providers. For example, we outsource the maintenance of our regional data connection points, which are the facilities at which our network interconnects with the public switched telephone network. If our third-party service providers fail to maintain these facilities properly, or fail to respond quickly to problems, our cus - 12 VONAGE ANNUAL REPORT 2009

16 Table of Contents tomers may experience service interruptions. Interruptions in our service caused by third-party facilities have in the past caused and may in the future cause us to lose customers, or cause us to offer substantial customer credits, which could adversely affect our revenue and profitability. If interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting new customers and our brand, reputation and growth will be negatively impacted. We also rely on third parties for some of our back office functions. For example, in December, 2009, we entered into an agreement to license billing and ordering systems. Any failure of the systems to properly function may negatively impact the customer experience. We rely on third parties to provide a portion of our customer service representatives, initiate local number portability for our customers and provide aspects of our E-911 service. If these third parties do not provide our customers with reliable, high-quality service, our reputation will be harmed and we may lose customers. We offer our customers support 24 hours a day, seven days a week through both our comprehensive online account management website and our toll free number. We rely on multiple third parties outside of the U.S. to provide a significant portion of the customer service representatives that respond to customer inquiries. These third-party providers generally represent us without identifying themselves as independent parties. Many of the customer service representatives that respond to our customers inquiries are based in the Philippines and India. The ability of third party providers to provide these representatives may be disrupted by natural disasters, civil unrest and other adverse events that may impact the Philippines and India. We also maintain an agreement with an E-911 provider to assist us in routing emergency calls directly to an emergency service dispatcher at the PSAP in the area of the customer s registered location and terminating E-911 calls. We also contract with a provider for the national call center that operates 24 hours a day, seven days a week to receive certain emergency calls and with several companies that maintain PSAP databases for the purpose of deploying and operating E-911 services. Interruptions in service from these vendors could cause failures in our customers access to E-911 services and expose us to liability and damage our reputation. We also have agreements with companies that initiate our local number portability, which allow new customers to retain their existing telephone numbers when subscribing to our services. We will need to work with these companies to attain compliance with a new one-day porting requirement that becomes effective for us on February 2, If Vonage, or third parties it relies upon for porting, have difficulty complying with the new one-day porting requirement after the effective date, we could be subject to FCC enforcement action. If any of these third parties do not provide reliable, high-quality service, our reputation and our business will be harmed. In addition, industry consolidation among providers of services to us may impact our ability to obtain these services or increase our expense for these services. We are dependent on a small number of individuals, and if we lose key personnel upon whom we are dependent, our business will be adversely affected. Many of the key responsibilities of our business have been assigned to a relatively small number of individuals. Our future success depends to a considerable degree on the vision, skills, experience and effort of our senior management, especially Marc P. Lefar, our Chief Executive Officer. The loss of the services of these officers could have a material adverse effect on our business. In addition, our continued growth depends on our ability to attract and retain experienced key employees. If we do not meet the New York Stock Exchange continued listing requirements, our common stock may be delisted. The New York Stock Exchange ( NYSE ) listing standards require us, among other things, to maintain an average closing price of at least $1.00 per share of common stock and a minimum average global market capitalization of at least $100,000 during any consecutive 30-trading-day period. On October 24, 2008, we were notified by the NYSE that we were not in compliance with the NYSE listing standard relating to minimum average share price. We regained compliance with the minimum average share price listing standard on September 28, On February 9, 2009, we were notified by the NYSE that we had fallen below the NYSE s continued listing standard relating to minimum average global market capitalization. We subsequently submitted a plan that was accepted by the NYSE that demonstrates our ability to regain compliance within 18 months. We are subject to ongoing monitoring for compliance with this plan and submit quarterly operational updates to the NYSE. We could regain compliance either at the end of the 18-month plan period or based on two consecutive quarterly monitoring periods in compliance. A delisting of our common stock could negatively impact us by: (i) reducing the liquidity and market price of our common stock; (ii) reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; (iii) limiting our ability to use a registration statement to offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets; (iv) impairing our ability to provide equity incentives to our employees and (v) causing an increase in the conversion rate under the Convertible Notes, resulting in the issuance of additional shares upon conversion. A delisting of our common stock is not an event of default under the documents governing our senior credit facilities and Convertible Notes. We have incurred losses since our inception, and we may continue to incur losses in the future. The first and second quarters of 2009 were the first quarters that we achieved profitability under accounting principles generally accepted in the United States ( GAAP ), although we incurred a net loss of $42,598 for the year ended December 31, For the period from our inception through December 31, 2009, our accumulated deficit was $1,088,236. Our net losses initially were driven primarily by start-up costs and the cost of developing our technology and later by patent litigation settlements and marketing expenses. Most recently, our net losses have been driven principally by marketing expenses, investments in developing new products and customer care, increased interest expense as a result of the Financing that we completed in November 2008 and non-cash charges associated with the conversion feature of the Convertible Notes. Although we believe we will achieve profitability in the future, we ultimately may not be successful and we may not again achieve profitability. 13

17 Table of Contents If we require additional capital, we may not be able to obtain additional financing on favorable terms or at all. We may need to pursue additional financing to respond to new competitive pressures or pay extraordinary expenses such as litigation settlements or judgments. Because of our past significant losses and our limited tangible assets, we do not fit traditional credit lending criteria, which, in particular, could make it difficult for us to obtain loans or to access the capital markets. In addition, the credit documentation for our recent financing contains affirmative and negative covenants that affect, and in many respects may significantly limit or prohibit, among other things, our and certain of our subsidiaries ability to incur, prepay, refinance or modify indebtedness and create liens. Certain aspects of our landline replacement service are not the same as traditional telephone service, which may limit the acceptance of our services by mainstream consumers and our potential for growth. For certain users, aspects of our service are not the same as traditional telephone service. Our continued growth is dependent on the adoption of our services by mainstream customers, so these differences are important. For example: > Both our E-911 and emergency calling services are different, in significant respects, from the 911 service associated with traditional wire line and wireless telephone providers and, in certain cases, with other VoIP providers. > Our customers may experience lower call quality than they are used to from traditional wire line telephone companies, including static, echoes and delays in transmissions. > Our customers may experience higher dropped-call rates than they are used to from traditional wire line telephone companies. > Customers who obtain new phone numbers from us do not appear in the phone book and their phone numbers are not available through directory assistance services offered by traditional telephone companies. > Our customers cannot accept collect calls. > Our customers cannot call premium-rate telephone numbers such as numbers and 976 numbers. > In the event of a power loss or Internet access interruption experienced by a customer, our service is interrupted. Unlike some of our competitors, we have not installed batteries at customer premises to provide emergency power for our customers equipment if they lose power, although we do have backup power systems for our network equipment and service platform. If customers do not accept the differences between our service and traditional telephone service, they may choose to remain with their current telephone service provider or may choose to return to service provided by traditional telephone companies. Our emergency and E-911 calling services may expose us to significant liability. The Federal Communications Commission ( FCC ) rules for the provision of 911 service by interconnected VoIP providers, such as the VoIP service we provide, require that for all geographic areas covered by the traditional wire line E-911 network, interconnected VoIP providers must provide E-911 service as defined by the FCC s rules. Under the FCC s rules, E-911 service means that interconnected VoIP providers must transmit the caller s telephone number and registered location information to the appropriate public safety answering point ( PSAP ) for the caller s registered location. Vonage provides E-911 service, under the FCC s rules, to approximately 98.9% of its subscriber lines. The remaining subscriber lines do not have E-911 service for a variety of reasons including refusal by PSAPs to accept VoIP 911 calls, the inability of PSAPs to receive the registered location data from us, and the failure by third party companies with whom we contract to provide aspects of our E-911 service to obtain the necessary access or complete implementation of the necessary interfaces to the traditional wire line E-911 infrastructure. In addition, certain of our services designed to be highly mobile including soft phone service, which is software that enables a customer to make telephone calls from a computer, route callers to a national emergency call center that in turns routes the call to the appropriate PSAP. We could be subject to enforcement action by the FCC for our subscriber lines that do not have E-911 service. This enforcement action could result in significant monetary penalties and restrictions on our ability to offer non-compliant services. Delays our customers may encounter when making emergency services calls and any inability of a PSAP to automatically recognize the caller s location or telephone number can have devastating consequences. Customers have attempted, and may in the future attempt, to hold us responsible for any loss, damage, personal injury or death suffered as a result. In July 2008, the New and Emerging Technologies 911 Improvement Act of 2008 became law and provided that interconnected VoIP providers have the same protections from liability for the operation of 911 service as traditional wire line and wireless providers. Limitations on liability for the provision of 911 service are normally governed by state law and these limitations typically are not absolute. Thus, for example, we could be subject to liability for a problem with our 911 service where our failures are greater than mere negligence. It is also unclear under the FCC s rules whether the limitations on liability would apply to those subscriber lines where Vonage does not provide E-911 service. Our business may be harmed if we are unable to maintain data security and meet Payment Card Industry data security standards. We are dependent upon automated information technology processes. Any failure to maintain the security of our data and our employees and customers confidential information, including via the penetration of our network security and the misappropriation of confidential information, could result in financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs. Any such failure also could put us at a competitive disadvantage and result in deterioration in our employees and customers confidence in us, which may have a material adverse impact on our business, financial condition and results of operations. In early 2009, we completed the process of upgrading our network, systems and procedures to meet Payment Card Industry ( PCI ) data security standards, which requires periodic audits, including an initial audit that was completed in the first quarter of 2009, by independent third parties to assess compliance. PCI 14 VONAGE ANNUAL REPORT 2009

18 Table of Contents data security standards are a comprehensive set of requirements for enhancing payment account data security that was developed by the PCI Security Standards Council including American Express, Discover Financial Services, JCB International, MasterCard Worldwide and VISA Inc., to help facilitate the broad adoption of consistent data security measures. Failure to comply with the security requirements as identified in subsequent audits or rectify a security issue may result in fines. While we believe it is unusual, restrictions on accepting payment cards, including a complete restriction, may be imposed on companies that are not compliant. Our credit card processors have the ability to take significant holdbacks or increase existing reserves in certain circumstances. The initiation of such holdbacks or increased reserves likely would have a material adverse effect on our liquidity. 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 $22,423 and a cash collateralized letter of credit for $10,500 as of December 31, Under our credit card processing agreements with our Visa/MasterCard, American Express, Barclays and Discover credit card processors, the credit card processor has the right, in certain circumstances, including adverse events affecting our business, to impose a holdback of our advanced payments purchased using a Visa/MasterCard, American Express, Barclays or Discover credit card, as applicable, or demand additional reserves or other security. If circumstances were to occur that would allow any of these processors to initiate a holdback or considerably increase reserves, the negative impact on our liquidity likely would be significant. In addition, our Visa/MasterCard credit card processing agreement may be terminated by the credit card processor at its discretion if we are deemed to be financially insecure. As a significant portion of payments to us are made through Visa and MasterCard credit cards, if the credit card processor does not assist in transitioning our business to another credit card processor, the negative impact on our liquidity likely would be significant. The success of our business relies on customers continued and unimpeded access to broadband service. Providers of broadband services may be able to block our services or charge their customers more for also using our services, which could adversely affect our revenue and growth. Our customers must have broadband access to the Internet in order to use our service. Some providers of broadband access, including outside of the U.S., may take measures that affect their customers ability to use our service, such as degrading the quality of the data packets we transmit over their lines, giving those packets low priority, giving other packets higher priority than ours, blocking our packets entirely or attempting to charge their customers more for also using our services. In the U.S., it is not clear whether suppliers of broadband Internet access have a legal obligation to allow their customers to access and use our service without interference. As a result of recent decisions by the U.S. Supreme Court and the FCC, providers of broadband services are subject to relatively light regulation by the FCC. Consequently, federal and state regulators might not prohibit broadband providers from limiting their customers access to VoIP or otherwise discriminating against VoIP providers. In August 2008, however, the FCC found that it had the authority to order a major cable operator to cease using network management practices that interfered with its broadband service users ability to use certain types of applications. The cable operator has sought judicial review of the FCC s decision. Interference with our service or higher charges for also using our service could cause us to lose existing customers, impair our ability to attract new customers and harm our revenue and growth. These problems could also arise in international markets. Because much of our potential success and value lies in our use of internally developed systems and software, if we fail to protect them, it could negatively affect us. Our ability to compete effectively is dependent in large part upon the maintenance and protection of systems and software that we have developed internally based on open standards. While we have three internally developed issued patents, a number of pending patent applications, and acquired three patents from Digital Packet Licensing, Inc., we cannot patent much of the technology that is important to our business. To date, we have relied on copyright, trademark and trade secret laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our rights to this technology. We typically enter into confidentiality or license agreements with our employees, consultants, customers and vendors in an effort to control access to and distribution of technology, software, documentation and other information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use this technology without authorization. Policing unauthorized use of this technology is difficult. The steps we take may not prevent misappropriation of the technology we rely on. In addition, effective protection may be unavailable or limited in some jurisdictions outside the United States, Canada and the United Kingdom. Litigation may be necessary in the future to enforce or protect our rights or to determine the validity and scope of the rights of others. That litigation could cause us to incur substantial costs and divert resources away from our daily business, which in turn could materially adversely affect our business. Regulation of VoIP services is developing and therefore uncertain, and future legislative, regulatory or judicial actions could adversely affect our business and expose us to liability. Our business has developed in an environment largely free from government regulation. However, the United States and other countries have begun to assert regulatory authority over VoIP and are continuing to evaluate how VoIP will be regulated in the future. Both the application of existing rules to us and our competitors and the effects of future regulatory developments are uncertain. Future legislative, judicial or other regulatory actions could have a negative effect on our business. If we become subject to the rules and regulations applicable to telecommunications providers in individual states, we may incur significant litigation and compliance costs, and we may have to restructure our service offerings, exit certain markets or raise the price of our services, any of which could cause our services to be less attractive to 15

19 Table of Contents customers. In addition, future regulatory developments could increase our cost of doing business and limit our growth. Our international operations are also subject to regulatory risks, including the risk that regulations in some jurisdictions will prohibit us from providing our services costeffectively or at all, which could limit our growth. Currently, there are several countries where regulations prohibit us from offering service. In addition, because customers can use our services almost anywhere that a broadband Internet connection is available, including countries where providing VoIP services is illegal, the governments of those countries may attempt to assert jurisdiction over us, which could expose us to significant liability and regulation. We identified a material weakness in our internal control over financial reporting which was remediated as of December 31, 2007 and may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company s annual or interim financial statements will not be prevented or detected on a timely basis. We reported a material weakness that existed in the design of our internal control procedures relating to recording stock-based compensation expense during 2007, which was remediated as of December 31, If we fail to maintain the adequacy of our internal controls, we may not be able to conclude in the future that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to maintain effective internal controls could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm the market value of our common stock. Any failure to maintain effective internal controls also could impair our ability to manage our business and harm our financial results. Our common stockholders may suffer dilution in the future upon exercise of our Convertible Notes. In connection with the Financing, we issued $18,000 aggregate principal amount of Convertible Notes to Silver Point Finance, LLC, certain of its affiliates, other third parties and affiliates of us. In 2009, an aggregate of $12,305 principal amount of Convertible Notes were converted into 42,431 shares of our common stock. If the remaining conversion rights in the Convertible Notes are exercised, the exercising note holders may obtain a significant equity interest in us and other stockholders may experience significant and immediate dilution. Conversion of the entire remaining $5,695 aggregate principal amount of Convertible Notes at the initial conversion rate would have resulted in an increase of our outstanding common stock from 199,898 shares (as of December 31, 2009) to 219,536 shares, an approximate 9.0% dilution to our common stockholders. Jeffrey A. Citron, our founder, Chairman and a significant stockholder, exerts significant influence over us. As of December 31, 2009, Mr. Citron beneficially owned approximately 28.3% of our outstanding common stock, including outstanding securities convertible into or exercisable for common stock within 60 days of such date. As a result, Mr. Citron is able to exert significant influence over all matters presented to our stockholders for approval, including election and removal of our directors and change of control transactions. In addition, as our Chairman, Mr. Citron has and will continue to have significant influence over our strategy and other matters. Mr. Citron s interests may not always coincide with the interests of other holders of our common stock. We may be unable to fully realize the benefits of our net operating loss ( NOL ) carry forwards if an ownership change occurs. If we were to experience another change in ownership under Section 382 of the Internal Revenue Code ( Section 382 ), the NOL carry forward limitations under Section 382 would impose an annual limit on the amount of the future taxable income that may be offset by our NOL generated prior to the change in ownership. If a change in ownership were to occur, we may be unable to use a significant portion of our NOL to offset future taxable income. In general, a change in ownership occurs when, as of any testing date, there has been a cumulative change in the stock ownership of the corporation held by 5% stockholders of more than 50 percentage points over an applicable three-year period. For these purposes, a 5% stockholder is generally any person or group of persons that at any time during an applicable three-year period has owned 5% or more of our outstanding common stock. In addition, persons who own less than 5% of the outstanding common stock are grouped together as one or more public group 5% stockholders. Under Section 382, stock ownership would be determined under complex attribution rules and generally includes shares held directly, indirectly (though intervening entities) and constructively (by certain related parties and certain unrelated parties acting as a group). The market price of our common stock has been and may continue to be volatile, and purchasers of our common stock could incur substantial losses. Securities markets experience significant price and volume fluctuations. This market volatility, as well as general economic conditions, could cause the market price of our common stock to fluctuate substantially. The trading price of our common stock has been, and is likely to continue to be, volatile. Many factors that are beyond our control may significantly affect the market price of our shares. These factors include: > changes in our earnings or variations in operating results; > any shortfall in revenue or increase in losses from levels expected by securities analysts; > judgments in our litigation; > changes in regulatory policies or tax law; > operating performance of companies comparable to us; and > general economic trends and other external factors. If any of these factors causes the price of our common stock to fall, investors may not be able to sell their common stock at or above their respective purchase prices. 16 VONAGE ANNUAL REPORT 2009

20 Table of Contents Our certificate of incorporation and bylaws, the agreements governing our indebtedness and the terms of certain settlement agreements to which we are a party contain provisions that could delay or discourage a takeover attempt, which could prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares. Certain provisions of our restated certificate of incorporation and our second amended and restated bylaws may make it more difficult for, or have the effect of discouraging, a third party from acquiring control of us or changing our board of directors and management. These provisions: > permit our board of directors to issue additional shares of common stock and preferred stock and to establish the number of shares, series designation, voting powers (if any), preferences, other special rights, qualifications, limitations or restrictions of any series of preferred stock; > limit the ability of stockholders to amend our restated certificate of incorporation and second amended and restated bylaws, including supermajority requirements; > allow only our board of directors, Chairman of the board of directors or Chief Executive Officer to call special meetings of our stockholders; > eliminate the ability of stockholders to act by written consent; > require advance notice for stockholder proposals and director nominations; > limit the removal of directors and the filling of director vacancies; and > establish a classified board of directors with staggered three-year terms. In addition, a change of control would constitute an event of default under our Financing agreements. Upon the occurrence of an event of default, the lenders and the note holders could elect to declare due and payable immediately all amounts due under the Financing agreements, including principal, accrued interest, a make-whole premium and, in the case of the Convertible Notes, liquidated damages, and may take action to foreclose upon the collateral securing the indebtedness. Under our Financing agreements, a change of control would result from the occurrence of, among other things: > the disposition by Jeffrey A. Citron, our Chairman, or certain of his affiliates of shares of common stock in excess of certain specified amounts; > the acquisition by any person or group (other than Mr. Citron and his majority-controlled affiliates or certain investment funds related to New Enterprise Associates) of at least 30% of the voting and/or economic interest of our outstanding common stock on a fully-diluted basis or of the power to elect a majority of our board of directors, if such acquiror also has a greater voting and/or economic interest in our company than Mr. Citron and his majority-owned affiliates; > a change in our Chief Executive Officer, unless an interim successor and permanent successor reasonably acceptable to the administrative agent and note agent is appointed within specified time periods; or > the acquisition by Silver Point Finance, LLC and its affiliates and related funds of at least 50% of the voting and/or economic interest of our outstanding common stock on a fully-diluted basis or those entities obtaining the power to elect a majority of our board of directors. We encourage you to read the agreements in full, including the definition of change of control therein. These Financing agreements have been previously filed with the Securities and Exchange Commission as exhibits to Amendment No. 8 to our Schedule TO, which was filed on October 22, Further, we were named as a defendant in several suits that related to patent infringement and entered into agreements to settle certain of the suits in Certain terms of those agreements, including licenses and covenants not to sue, will be restricted upon a change of control, which may discourage certain potential purchasers from acquiring us. Such provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices. Any delay or prevention of, or significant payments required to be made upon, a change of control transaction or changes in our board of directors or management could deter potential acquirors or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares. 17

21 Table of Contents ITEM 1B. Unresolved Staff Comments Not applicable. ITEM 2. Properties The following is a summary of our offices and locations: Location Holmdel, New Jersey We believe that the facilities that we occupy are adequate for our current needs and do not anticipate leasing any additional space. ITEM 3. Legal Proceedings Square Footage Lease Expiration Date Business Use Corporate Headquarters, Network Operations, Customer Service, Sales and Marketing, and Administration 350, London, United Kingdom Sales and Marketing, Administration 3, Altanta, Georgia Product Development 2, From time to time, we may become party to litigation and subject to claims, normally those incidents to the ordinary course of our business. Litigation State Attorney General Proceedings. In 2008, we learned that an initial group of 28 states attorneys general had begun an investigation into certain of our business practices. We received document requests from 22 of the participating states. The requests sought information that Vonage previously produced to the Wisconsin Attorney General as part of an investigation commenced in November 2007, which consisted of, among other things, sales and retention marketing scripting, advertising disclosures, and information related to our money back guarantee. The requests also sought, among other things, information related to marketing and billing practices, as well as early termination fees. On November 16, 2009, we reached a definitive agreement to settle the investigation. The settlement was filed for Court approval where such approval was required. There was no finding of any violation or wrongdoing by us, and the 32 states participating in the settlement have released us and our affiliates from the matters investigated. In connection with the settlement, we agreed to pay an aggregate of $3.0 million to the participating states, including to cover legal and investigation fees incurred. To improve the customer experience and promote continued customer satisfaction, we also agreed to implement certain enhancements to our business practices, many of which we implemented prior to completion of the settlement. We also agreed to provide refunds for certain affected consumers. We previously made a reserve in the second quarter of 2009 for the amount of the payment to the states and the customer refunds, and in September 2009, placed into escrow the payment to the states. We do not believe that any future amounts recorded in connection with this matter will be material to our financial position, results of operations or cash flows. IPO Litigation. During June and July 2006, Vonage, several of our officers and directors, and the firms who served as the underwriters in our IPO were named as defendants in several purported class action lawsuits arising out of our IPO. On January 9, 2007, the Judicial Panel on Multidistrict Litigation transferred all complaints to the District of New Jersey. On September 7, 2007, the Court appointed Zyssman Group as the lead plaintiff, and the law firm of Zwerling, Schachter and Zwerling, LLP as lead counsel. On November 19, 2007, the plaintiffs filed the Amended Complaint, which generally alleges: (i) defendants made misstatements regarding subscriber line growth and average monthly churn rate; (ii) defendants failed to disclose problems with facsimile transmissions and a pending fax litigation case; (iii) defendants failed to disclose all patent infringement claims and issues; and (iv) that the Directed Share Program suffered from various infirmities. On January 18, 2008, defendants filed their motions to dismiss the Amended Complaint. On April 6, 2009, the Court hearing the matter dismissed three claims with leave to amend two of them, and declined at such time to dismiss two of the other claims. On April 20, 2009, the plaintiffs filed a motion asking the Court to reconsider the partial dismissal of their claims. On June 3, 2009, the Court grantedin-part and denied-in-part plaintiffs motion for reconsideration. On June 16, 2009, Vonage and the plaintiffs reached an agreement in principle to settle the litigation, which includes a release and dismissal of all stockholder claims against Vonage and its individual directors and officers who were named as defendants. On December 4, 2009, we received final Court approval for the settlement. The settlement was funded by our liability insurance under our directors and officers liability insurance policy. 18 VONAGE ANNUAL REPORT 2009

22 Table of Contents 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 described above does not resolve the IPO underwriters claims for indemnification against the Company. 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, marketing and quality issues for both phone and fax service, the most recent of which was filed in California in January 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, 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 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 alleges that this conduct (1) violates the California Unfair Competition Law, (2) violates the California Consumer Legal Remedies Act and (3) has unjustly enriched Vonage. We expect to file a motion to remove the action to Federal court. City of New York vs. Verizon and Vonage. On April 21, 2008, the City of New York and the Sheriff of the City of New York filed a complaint ( NYC Complaint ) in New York State Court against Verizon and Vonage, arising out of collection efforts on the $58,000 judgment entered against Vonage in connection with the prior patent litigation with Verizon. The City alleged that either Verizon or Vonage is liable for $2,900, which represents a poundage fee of 5% of the value of the property sought to be levied upon. On May 13, 2008, Vonage filed a motion to dismiss one count of the NYC Complaint. On May 16, 2008, Verizon filed a motion to dismiss the NYC Complaint in its entirety. The Court denied both motions. On March 19, 2009, Verizon filed a motion for an order granting summary judgment and dismissing all claims against Verizon and on May 1, 2009, Vonage filed a cross-motion for summary judgment seeking dismissal of all claims against Vonage. After Verizon s and Vonage s cross-motions for summary judgment were filed and fully briefed, the City advised that it had reached a settlement with Verizon, and it subsequently dismissed its claims against Verizon. On January 5, 2010, Vonage and the City reached a settlement of the litigation, for which no cost was incurred by us. 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. Vonage believes Centre One is a firm owned by a sole inventor. 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. 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 Contentions in which it seeks to withdraw its allegations of infringement of certain patent 19

23 Table of Contents 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, 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, 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 February 24, 2010, the Court denied the defendants motions to stay the litigation pending the resolution of the inter partes reexamination. 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. 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, 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, 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, Smaller telecommunication providers, like Vonage, have fifteen months to implement the process before the one-day requirement becomes effective on February 2, 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 tele - 20 VONAGE ANNUAL REPORT 2009

24 Table of Contents communications 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 enjoined the Nebraska Public Service Commission from asserting state jurisdiction over Vonage to force Vonage to contribute to the Nebraska Universal Service Fund and found the Nebraska Public Service Commission s assertion of state jurisdiction over Vonage to force Vonage to pay into the Nebraska Universal Service Fund is unlawful as preempted by the FCC. It 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 and we are now collecting and remitting sales taxes in those states. In addition, a few 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 have also contacted authorities in each of the other states to discuss how we can financially contribute to the 911 system. We do not know how all these discussions will be resolved, but there is a possibility that we will be required to pay or collect and remit some or all of these Taxes in the future. Additionally, some of these Taxes could apply to us retroactively. As such, we have a reserve of $4,865 at December 31, 2009 as our best estimate of the potential tax exposure for any retroactive assessment. We believe the maximum estimated exposure for retroactive assessments is $18,786 as of December 31,

25 Table of Contents ITEM 4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of Stockholders was held on December 2, There were present at the Annual Meeting in person or by proxy stockholders holding an aggregate of 167,487,963 shares of common stock. The results of the vote taken at the Annual Meeting with respect to the election of the nominees to be Class III Directors were as follows: Class III Director Nominees For Withheld Jeffrey A. Citron 163,320,845 4,167,118 Morton David 153,816,196 13,671,767 Jeffrey J. Misner 163,430,166 4,057,797 The terms of the office of the following directors who were not up for re-election continued after the Annual Meeting: Peter Barris, Michael A. Krupka, Marc P. Lefar, J. Sanford Miller, Gov. Thomas J. Ridge and John J. Roberts. In addition, a vote of the stockholders was taken at the Annual Meeting with respect to the proposal to ratify the selection by the Audit Committee of the appointment of BDO Seidman, LLP as our independent registered public accounting firm for the fiscal year ending December 31, For the purpose of such vote, 164,863,943 shares voted in favor of such proposal, 2,286,334 shares were voted against such proposal and 337,686 shares abstained from voting. There were no broker non-votes. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT Our executive officers and directors are listed below. Marc P. Lefar, Director and Chief Executive Officer. Marc P. Lefar, age 46, has been our Chief Executive Officer and a director since July Prior to joining Vonage, Mr. Lefar was Founder and Principal of Marketing Insights, a technology and media consultancy that he founded in May Prior to founding that firm, Mr. Lefar served as Chief Marketing Officer of Cingular Wireless from February 2003 to April Mr. Lefar also served as Executive Vice President, Marketing and Value-Added Services of Cable and Wireless Global from 2000 to He also held senior leadership roles at Verizon Wireless and GTE Wireless. Mr. Lefar spent the first nine years of his career at Procter & Gamble. Jamie Haenggi, Chief Marketing Officer. Jamie Haenggi, age 40, has served as Chief Marketing Officer since May 2007 and is responsible for overseeing Marketing, Retail Sales and Corporate Communications. From November 2006 through April 2007, Ms. Haenggi served as Vice President of Customer Life. Prior to joining Vonage, from 1997, Ms. Haenggi served as Vice President of Worldwide Marketing for ADT Security Services and various other sales and marketing operational roles. Ms. Haenggi s experience in the home security and protection industry also includes tenure as the head of marketing and acquisition integration at Holmes Protection and as the Director of National Guardian s International Division. John S. Rego, Executive Vice President, Chief Financial Officer and Treasurer. John S. Rego, age 48, joined Vonage as Chief Financial Officer in July 2002 and manages accounting, finance, planning, taxation and facilities. From 2001 to 2002, Mr. Rego served as Vice President of Finance for business operations at RCN Corporation. From 1998 to 2000, Mr. Rego served in a variety of corporate and operational finance positions at Winstar Communications, including Vice President of Finance for the SME, Internet, Web Hosting and Professional Services divisions. Additionally, Mr. Rego spent over 14 years in practice as a certified public accountant with international CPA firms. On January 14, 2010, we announced that Mr. Rego will be leaving the Company later this year following the filing of this Annual Report on Form 10-K and the engagement of a new Chief Financial Officer. Kurt Rogers, Chief Legal Officer and Secretary. Kurt Rogers, age 38, joined us as Chief Legal Officer and Secretary in July 2009, overseeing the Law Department and legal matters regarding Vonage. Prior to joining us, he was a partner at the law firm of Bingham McCutchen LLP from August 2008 to July 2009 with a focus in litigating patents, trade secrets, copyrights and trademarks. Prior to that he was an attorney at the law firm of Latham & Watkins LLP from April 2000 to August 2008, most recently as a partner. Theresa Hennesy, Senior Vice President of Network Operations. Theresa Hennesy, age 51, joined us as Senior Vice President of Network Operations in February 2009 and leads our Network Operations Team. She is responsible for the continual optimization and ongoing operation of our VoIP network, and oversees personnel across various functional areas including network operations/monitoring, network and field engineering, systems operations and network architecture. Ms. Hennesy has more than 25 years of technical experience, most recently as Senior Vice President of Technical Operations at VeriSign, a provider of Internet infrastructure services, from January 2007 to February Previously, she was Vice President of Primus Telecommunications, a communications services provider, from July 2006 to November 2006 and Senior Vice President, Global Internet Operations of Cable & Wireless, an international communications services provider, from February 1999 to May Nicholas P. Lazzaro, Senior Vice President, Product Development and Information Technology. Nicholas P. Lazzaro, age 40, joined us as Senior Vice President, Product Development and Information Technology in March Mr. Lazzaro is responsible for the Information Technology, Software Development, Device Development and Certification, and Quality Assurance teams. He has an extensive background in technology and telecommunications. He held several leadership roles at Amdocs, a provider of software products and services to the communication, media and entertainment industry, from 2001 to March 2009, most recently serving as Unit President. He previously held roles at SBC Communications, a communications company, Ernst and Young, a professional services organization, and Iridium, a provider of mobile voice and data communications services, and served as Vice President at Fujitsu, a provider of IT-based business solutions. 22 VONAGE ANNUAL REPORT 2009

26 Table of Contents Kimberly O Loughlin, as Senior Vice President of Customer Care. Kimberly O Loughlin, age 47, joined us as Senior Vice President of Customer Care in April Ms. O Loughlin has more than 20 years of experience in customer service, Internet (web) services, operations, information technology, product management, marketing and strategic planning at the senior executive level. Most recently, Ms. O Loughlin was Vice President, Global Customer Care Operations and Systems at AIG, Inc., an insurance and financial services company, from May 2005 to April Previously she held several leadership roles at AT&T Wireless, a communications company, from January 2000 to April 2005, most recently as Vice President Business Operations. Michael Tempora, Senior Vice President of Program Management and Strategic Initiatives. Michael Tempora, age 47, joined us as Senior Vice President of Program Management and Strategic Initiatives in December In this role, he leads the execution of our strategic imperatives aimed at tightening fundamentals across the company and delivering an improved experience for our customers. Mr. Tempora has 24 years of experience in telecommunications and financial services. Most recently, from January 2005 to December 2008, he was an Executive Director of AT&T, a communications company, and led AT&T s efforts to develop integrated wireless and consumer broadband products including video, Internet and home phone. Prior to that, Mr. Tempora was VP Consumer Marketing & Product Management at AT&T Wireless from August 2004 to January 2005 and VP Operations Transformation at AT&T from September 1999 to May Jeffrey A. Citron, Director, Chairman. Jeffrey A. Citron, age 39, has been the Chairman of our board of directors since January Mr. Citron was also our Chief Executive Officer from January 2001 through February He served as our Chief Strategist from February 2006 to July 2008 and assumed the additional role of Interim Chief Executive Officer from April 2007, upon the resignation of Vonage s prior Chief Executive Officer, until July In 1995, Mr. Citron founded The Island ECN, a computerized trading system designed to automate the order execution process. Mr. Citron became the Chairman and CEO of Datek Online Holdings Corp. in February 1998 and departed The Island ECN and Datek Online Holdings Corp. in October Peter Barris, Director. Peter Barris, age 58, joined our board of directors in September Mr. Barris has served as Managing General Partner of New Enterprise Associates, Inc., or NEA, since He has been with NEA since 1992, and he serves as either an executive officer, Manager or General Partner of various entities affiliated with NEA. Mr. Barris serves on the boards of directors of Innerworkings, Inc., Neutral Tandem, Inc., Echo Global Logistics, Inc. and the Mid-Atlantic Venture Association, as well as several private companies in the NEA portfolio. Mr. Barris is a member of the Board of Trustees of Northwestern University and the University of Virginia, College Foundation and the Board of Overseers of Tuck School at Dartmouth College. Morton David, Director. Morton David, age 73, joined our board of directors in August Mr. David served as the Chairman and Chief Executive Officer of Franklin Computer Corporation (later Franklin Electronic Publishers, Inc.) from 1983 to Mr. David previously served on the board of directors of Datek Online Holdings Corp. from 1998 until its acquisition by Ameritrade Holdings in 2002 and on the board of directors of Sharper Image Corporation from 1998 until Michael Krupka, Director. Michael Krupka, age 44, joined our board of directors in July Mr. Krupka has served as Managing Director of Bain Capital Ventures since its founding in Prior to Bain Capital Ventures, Mr. Krupka was a Managing Director and Principal with the Private Equity Group of Bain Capital Partners, LLC from 1994 to 2000, during which time he focused on technology and technology-driven companies, including software, hardware, database and telecommunication services. Earlier at Bain Capital Partners, LLC, from 1991 to 1994, Mr. Krupka was a Principal of Information Partners, a fund focused on early-stage information technology investing. Prior to Bain Capital Partners, LLC, Mr. Krupka was a consultant with Bain & Company. Mr. Krupka serves on the board of directors of a number of privately held companies. Mr. Krupka became our Lead Independent Director in February J. Sanford Miller, Director. J. Sanford (Sandy) Miller, age 60, joined our board of directors in January Mr. Miller is a General Partner in Institutional Venture Partners, or IVP, which he joined in April Prior to joining IVP, Mr. Miller was a Senior Partner at 3i, which he joined in Prior to joining 3i, Mr. Miller co-founded Thomas Weisel Partners in 1998, where he was a Member of the Executive Committee, Chief Administrative and Strategic Officer and Co-Director of Investment Banking. From 1990 to 1998, Mr. Miller was a Senior Partner at Montgomery Securities, where he led the technology and healthcare groups. Mr. Miller serves on the Board of Visitors of the Stanford University School of Law. Jeffrey J. Misner, Director. Jeffrey Misner, age 56, joined our board of directors in March Mr. Misner served as Executive Vice President and Chief Financial Officer of Continental Airlines, Inc. from August 2004 until his retirement in August Mr. Misner joined Continental Airlines, Inc. in 1995 and previously served in various capacities, most recently as Senior Vice President and Chief Financial Officer. Governor Thomas J. Ridge, Director. Governor Thomas J. Ridge, age 64, joined our board of directors in August Governor Ridge has served as President and Chief Executive Officer of Ridge Global, LLC, a global strategic consulting company since July From April 2005 to July 2006, he was President and Chief Executive Officer of Thomas Ridge LLC. From January 2003 to January 2005, Governor Ridge served as the Secretary of the United States Department of Homeland Security. From 2001 through 2002, Governor Ridge served as the Special Assistant to the President for Homeland Security, an Executive Office created by President Bush in October Governor Ridge served as Governor of the Commonwealth of Pennsylvania for two terms from 1995 through 2001 and was a member of the U.S. House of Representatives from 1983 through Governor Ridge currently serves on the boards of directors of The Hershey Company, Exelon Corporation and Brightpoint, Inc. John J. Roberts, Director. John J. Roberts, age 65, joined our board of directors in August Mr. Roberts served as Global Managing Partner for PricewaterhouseCoopers LLP from 1998 until his retirement in June From 1994 to 1998, Mr. Roberts served as Chief Operating Officer of Coopers & Lybrand, which merged with Price Waterhouse in He currently serves on the boards of directors and audit committees of Armstrong World Industries, Inc. and Safeguard Scientifics, Inc. and the board of trustees and audit committee of the Pennsylvania Real Estate Investment Trust. He is a Member of the American Institute of Certified Public Accountants. 23

27 Table of Contents PART II ITEM 5. Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Price Range of Common Stock Our common stock has been listed on the New York Stock Exchange under the ticker symbol VG since May 24, Prior to that time, there was no public market for our common stock. The following table sets forth the high and low sales prices for our common stock as reported on the NYSE for the quarterly periods indicated. Holders At January 31, 2010, we had approximately 193 stockholders of record. This number does not include beneficial owners whose shares are held in street name. Dividends We have never paid cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock for at least the next 12 months. We intend to retain all of our earnings, if any, for general corporate purposes, and, if appropriate, to finance the expansion of our business. Use of Proceeds from Initial Public Offering Price Range of Common Stock High Low 2009 Fourth quarter $ 2.06 $ 1.13 Third quarter $ 2.63 $ 0.31 Second quarter $ 0.82 $ 0.34 First quarter $ 0.70 $ Fourth quarter $ 1.32 $ 0.57 Third quarter $ 1.96 $ 0.90 Second quarter $ 2.05 $ 1.66 First quarter $ 2.43 $ 1.69 On May 23, 2006, the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (File No ) relating to our 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 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, Through the year ended December 31, 2009, we used $483,310 of the net proceeds from the IPO to fund operating activities of $288,476 including $220,025 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 $127,457 for capital expenditures, software development and patent purchases. 24 VONAGE ANNUAL REPORT 2009

28 Table of Contents Stock Performance Graph The graph below compares the cumulative total return of our common stock between May 24, 2006 (the date of our IPO) and December 31, 2009, with the cumulative total return of (1) the S&P 500 Index, (2) the NASDAQ Telecom Index and (3) the NYSE Composite Index. This graph assumes the investment of $100 on May 24, 2006 in our common stock, the S&P 500 Index, the NASDAQ Telecom Index and the NYSE Composite Index, and assumes the reinvestment of dividends, if any. The graph assumes the initial value of our common stock on May 24, 2006 was the closing sales price of $14.85 per share. The graph below and related information shall not be deemed soliciting material or filed with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934 (the Exchange Act ), nor shall such information be deemed incorporated by reference into any filing under the Securities Act of 1933 (the Securities Act ) or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act. COMPARISON OF THE CUMULATIVE TOTAL RETURN ON COMMON STOCK BETWEEN MAY 24, 2006 AND DECEMBER 31, 2009 Among Vonage Holdings Corp., the S&P 500 Index, the NASDAQ Telecom Index and the NYSE Composite Index December 31, Vonage Holdings Corp. $ $ $ 4.44 $ 9.43 S&P 500 Index $ $ $ $ NASDAQ Telecom Index $ $ $ $ NYSE Composite Index $ $ $ $

29 Table of Contents ITEM 6. Selected Financial Data The following table sets forth our selected historical financial information. The statement of operations and cash flow data for the years ended December 31, 2009, 2008, and 2007 and the balance sheet data as of December 31, 2009 and 2008 are derived from our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The statement of operations and cash flow data for the year ended December 31, 2006 and 2005 and the balance sheet data as of December 31, 2007, 2006 and 2005 are derived from our audited consolidated financial statements and related notes not included in this Annual Report on Form 10-K. The results included below and elsewhere are not necessarily indicative of our future performance. You should read this information together with Management s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. For the Years Ended December 31, (in thousands, except per share amounts) Statement of Operations Data: Operating Revenues: Telephony services $ 864,848 $ 865,765 $ 803,522 $ 581,806 $ 258,165 Customer equipment and shipping 24,232 34,355 24,706 25,591 11, , , , , ,196 Operating Expenses: Direct cost of telephony services(1) 213, , , ,958 84,050 Royalty 32,606 51,345 Total direct cost of telephony services 213, , , ,303 84,050 Direct cost of goods sold 71,488 79,382 59,117 62,730 40,441 Selling, general and administrative 265, , , , ,716 Marketing 227, , , , ,404 Depreciation and amortization 53,391 48,612 35,718 23,677 11, , ,559 1,090, , ,733 Income (loss) from operations 57,202 (6,439) (261,780) (340,488) (264,537) Other Income (Expense): Interest income 277 3,236 17,582 21,472 4,347 Interest expense (54,192) (29,878) (22,810) (19,583) (1,093) Change in fair value of derivatives (49,933) Gain (loss) on extinguishment of notes 4,041 (30,570) Other, net 843 (247) (238) (189) (441) (98,964) (57,459) (5,466) 1,700 2,813 Net loss $ (42,598) $ (64,576) $ (267,428) $ (338,573) $ (261,334) Net loss per common share calculation: Net loss $ (42,598) $ (64,576) $ (267,428) $ (338,573) $ (261,334) Imputed dividend on preferred shares (605) Net loss attributable to common shareholders $ (42,598) $ (64,576) $ (267,428) $ (338,573) $ (261,939) Net loss per common share: Basic and diluted $ (0.25) $ (0.41) $ (1.72) $ (3.59) $ (189.67) Weighted-average common shares outstanding: Basic and diluted 170, , ,593 94,207 1, VONAGE ANNUAL REPORT 2009

30 Table of Contents December 31, (dollars in thousands) Statement of Cash Flow Data: Net cash provided by (used in) operating activities $ 38,396 $ 3,555 $ (270,926) $ (188,898) $ (189,765) Net cash provided by (used in) investing activities (50,565) 40, ,457 (210,798) (154,638) Net cash provided by (used in) financing activities (3,253) (68,370) , ,006 Balance Sheet Data (at period end): Cash, cash equivalents and marketable securities $ 32,213 $ 46,134 $ 151,484 $ 499,736 $ 266,379 Property and equipment, net 90,548 98, , , ,184 Restricted cash 43,700 39,585 38,928 8,042 7,453 Total assets 313, , , , ,562 Total debt, net of discount 201, , , , ,958 Capital lease obligations 20,948 22,199 23,235 24,255 22,431 Total liabilities 405, , , , ,620 Total redeemable preferred stock 388,427 Total stockholders equity (deficit) (91,909) (90,742) (75,127) 183,201 (368,485) (1) Excludes depreciation and amortization of $19,178 for 2009, $20,254 for 2008, $18,434 for 2007, $12,715 for 2006 and $6,671 for

31 Table of Contents ITEM 7. Management s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with Selected Financial Data and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors, including the factors we describe under Item 1A Risk Factors, and elsewhere in this Annual Report on Form 10-K. 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 December 31, While customers in the United States represented 94% of our subscriber lines at December 31, 2009, 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. In August 2009 we launched Vonage World, a residential plan that includes unlimited calling to more than 60 countries, including India, Mexico and China for the current flat monthly rate of $ In addition, the Vonage World offer includes unlimited Vonage Visual Voic , which provides readable voic delivered via or short message service (SMS) text message. 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. 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: For the Years Ended December 31, Gross subscriber line additions 748, ,014 1,153,218 Change in net subscriber lines (155,458) 26, ,116 Subscriber lines (at period end) 2,434,896 2,607,156 2,580,227 Average monthly customer churn 3.1 % 3.1 % 2.8 % Average monthly revenue per line $ $ $ Average monthly telephony services revenue per line $ $ $ Average monthly direct cost of telephony services per line $ 7.08 $ 7.27 $ 7.52 Marketing costs per gross subscriber line addition $ $ $ Employees (excluding temporary help) (at period end) 1,225 1,491 1, VONAGE ANNUAL REPORT 2009

32 Table of Contents Broadband adoption. The number of U.S. households with broadband Internet access has grown significantly. We expect this trend 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. Changing competitive landscape. We are facing increasing competition from other companies that offer multiple services such as cable television, video services, voice and broadband Internet service. These competitors are offering VoIP or other voice services as part of a bundle. In addition, certain competitors have developed integrated offerings that we cannot provide and that may be more attractive to customers. For example, as wireless providers offer more minutes at lower prices and companion landline alternative services, their services have become more attractive to households as a replacement for wire line service. We also compete against established alternative voice communication providers and independent VoIP service providers. Some of these service providers may choose to sacrifice telephony revenue in order to gain market share and have offered their services at lower prices or for free. 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 softphones but do not include our virtual phone numbers or toll free numbers, which only allow inbound telephone calls to customers. As part of a database review, we identified 16,802 subscriber lines that did not meet the criteria for inclusion as subscriber lines as of December 31, We recorded an adjustment as of January 1, 2009 for these lines which we considered to be immaterial to the current and prior periods. This adjustment had no impact to our financial statements but will impact per line metrics. Subscriber lines including this adjustment decreased from 2,607,156 as of December 31, 2008 to 2,434,896 as of December 31, In the fourth quarter of 2009, we had a net loss of 10,131 subscriber lines. Excluding the adjustment, we believe that the decrease in our subscriber lines was primarily due to increasing wireless substitution, competition, particularly from cable companies, worsening economic conditions, and reduced marketing spend during the second half of 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 remained consistent at 3.1% for 2009 and 2008, respectively. In the fourth quarter of 2009, our average monthly customer churn was 2.8%. 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 increased 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 $29.49 for 2009 compared to $28.92 for This increase was due primarily to pricing actions that we have taken in the past year. 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 was $28.68 for 2009 compared with $27.82 for 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 decreased to $7.08 for 2009 compared to $7.27 for 2008 due primarily to favorable rates negotiated with our service providers. These improvements were partially offset by costs from higher international call volume associated with Vonage World. Direct cost of telephony services is expected to increase in 2010 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. Our marketing cost per gross subscriber line addition 29

33 Table of Contents increased to $ for 2009 from $ in 2008 due primarily to a reduction in gross subscriber line additions compared to the prior year primarily due to worsening economic conditions, increasing competition 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, and a number of initiatives could have an impact on our business. For example, the FCC has concluded that wire line broadband Internet access, such as DSL and Internet access provided by cable companies, is an information service and is subject to lighter regulation than telecommunications services. This order may give providers of wire line broadband Internet access the right to discriminate against our services, charge their customers an extra fee to use our service or block our service. In August 2008, however, the FCC found that a major cable operator s network management practices, which had the effect of degrading certain applications, were not allowed under the FCC s 2005 network neutrality policy statement. The cable operator is currently appealing the FCC s decision in the United States Court of Appeals for the D.C. Circuit. In September 2009, the Chairman of the FCC announced his intention to adopt the principles in the FCC s 2005 network neutrality policy statement as formal rules. He also proposed adding two new principles to the formal rules, including an explicit non-discrimination principle and a transparency principle, which requires broadband providers to disclose network management practices to consumers, content providers, and application providers. Also the Chairman s proposed rules would apply to both wire line and wireless carrier broadband networks. It was not clear whether the 2005 network neutrality policy statement applied to wireless carrier broadband networks. If the Chairman s proposed rules are adopted, Vonage may have expanded opportunities to provide VoIP service over wireless carrier broadband networks. Given these recent developments, we believe it is unlikely that blocking or discrimination by broadband network operators will occur on a widespread basis, but if it does, it would have a material adverse effect on us. See also the discussion under Regulation in note 11 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 voic to text messages with Vonage Visual Voic . 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 30 VONAGE ANNUAL REPORT 2009

34 Table of Contents activation fee, are deferred and amortized over the estimated average customer relationship period. 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. The average customer relationship period was 60 months in 2007, 48 months in 2008 and 44 months in For 2010, the average customer relationship period will be further reduced to 38 months based upon further analysis of historical trends. The impact of these changes to the average customer relationship period 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 44% and 42% of our total direct cost of telephony services for 2009 and 2008, 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 relationship period. > 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. 31

35 Table of Contents 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. > Gain (loss) on extinguishment of notes. > Change in fair value of derivatives. RESULTS OF OPERATIONS The following table sets forth, as a percentage of consolidated operating revenues, our consolidated statement of operations for the periods indicated: For the Years Ended December 31, Operating Revenues: Telephony services 97 % 96 % 97 % Customer equipment and shipping Operating Expenses: Direct cost of telephony services (excluding depreciation and amortization) Royalty 4 Total direct cost of telephony services Direct cost of goods sold Selling, general and administrative Marketing Depreciation and amortization Income (loss) from operations 6 (31) Other Income (Expense): Interest income 2 Interest expense (6) (3) (3) Change in fair value of derivatives (6) Gain (loss) on extinguishment of notes 1 (4) Other, net (11) (7) (1) Loss before income tax expense (5) (7) (32) Income tax expense Net loss (5)% (7)% (32)% 32 VONAGE ANNUAL REPORT 2009

36 Table of Contents Summary of Results for the Years Ended December 31, 2009, 2008 and 2007 Telephony Services Revenue and Direct Cost of Services For the Years Ended December 31, Dollar Change 2009 vs. Dollar Change 2008 vs. Percent Change 2009 vs. Percent Change 2008 vs. (in thousands, except percentages) Telephony services $ 864,848 $ 865,765 $ 803,522 $ (917) $ 62,243 (0%) 8 % Direct cost of telephony services (excluding depreciation and amortization of $19,178, $20,254 and $18,434, respectively) 213, , ,831 (12,657) 9,379 (6%) 4 % Royalty 32,606 32,606 * 100 % 2009 compared to 2008 Telephony services revenue. The decrease in telephony services revenue of $917, or 0%, was primarily due to a decrease in the number of subscriber lines from 2,607,156 at December 31, 2008 to 2,434,896 at December 31, The decrease in subscriber lines and changes in plan mix translated into a decrease in monthly subscription fees of $14,379 and in activation fees of $1,830, which included an offset of $3,664 for the change in our customer life from 48 months to 44 months in the first quarter of There was also a decrease of $1,046 in overage in domestic plan minutes usage, a decrease in fees that we charged for disconnecting our service of $555 and a decrease of $934 in other revenue. The reduction in revenue from lower volume of international per minute usage following introduction of our Vonage World plan with free unlimited calls to more than 60 countries, as partially offset by an increase in revenues from customers on international plans, was $1,765. There was also an increase in additional features we provided to customers of $571, an increase in regulatory fees that we collected from subscribers of $14,850, which included $3,392 of USF and related fees, and a decrease of $2,300 in bad debt expense and a decrease in credits we issued to subscribers of $1,869. Direct cost of telephony services. The decrease in direct cost of telephony services of $12,657, or 6%, was primarily due to a decrease in our network costs of $13,685, 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. There was also a decrease in termination costs of $8,293, which are costs that we pay other phone companies for terminating phone calls, a decrease of taxes that we pay on our purchase of telecommunications services from our suppliers of $1,369 and a decrease in other cost of $184, which was offset by the increase of USF and related fees imposed by government agencies of $3,392 and in international usage cost of $7,482, in part due to increased international call volume following the introduction of our Vonage World plan compared to 2007 Telephony services revenue. The increase in telephony services revenue of $62,243, or 8%, was primarily due to an increase of $30,632 in monthly subscription fees resulting from an increased number of subscriber lines, which grew from 2,580,227 at December 31, 2007 to 2,607,156 at December 31, Also, the growing number of subscriber lines generated additional revenue from activation fees of $13,516, which included $8,393 for the change in our customer life from 60 months to 48 months in the first quarter of 2008, increased revenue of $19,190 from a higher volume of customers on international plans and an increase in international calling by subscribers and increased revenue of $13,323 in regulatory fees we collected from customers, including $9,662 of USF. Additionally, add-on features to our service plans generated an increase of $1,454 as well as an increase of $3,172 in the fees we charge for disconnecting our service. This was offset by a $6,356 increase in credits we issued, a $12,963 increase in bad debt expense partially attributable to the extension to our customer grace period for non-payment in the second quarter of Direct cost of telephony services. The increase in direct cost of telephony services of $9,379, or 4%, was primarily due to an increase in USF and E911 fees imposed by government agencies of $9,662 and $518, respectively. Our network costs, 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, increased by $2,938. Also, we had an increase in other cost of services of $1,184, mainly for new features. This was offset by a decrease of $4,501 in fees that we pay other phone companies for terminating phone calls and a decrease of $707 in the cost of porting phone numbers for our customers. Royalty. There was a decrease in royalty of $32,606 since no royalty was required subsequent to our October 2007 IP-litigation settlement with Verizon. 33

37 Table of Contents Customer Equipment and Shipping Revenue and Direct Cost of Goods Sold 2009 compared to 2008 Customer equipment and shipping revenue. Our customer equipment and shipping revenue decreased by $10,123, or 29%, 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 the dollar value of customer equipment sales net of rebates of $3,653 and a decrease in customer shipping revenue of $6,470. Direct cost of goods sold. The decrease in direct cost of goods sold of $7,894, or 10%, was primarily due to a decrease in customer equipment costs of $7,382 resulting from fewer period over period customer additions and lower promotional activity and a corresponding decrease in shipping costs of $2,650. There was also a decrease in amortization costs on deferred customer equipment of $1,062 including $2,852 increase due to the change of our customer life from 48 months to 44 months in the first quarter of 2009 and an increase in waived activation fees for new customers of $3, compared to 2007 Customer equipment and shipping revenue. Our customer equipment and shipping revenue increased by $9,649, or 39%, primarily due to an increase in the dollar value of customer equipment sales of $19,791 including sales in the retail channel for replacement devices or upgrades that do not yield a new activation offset by the increase in customer rebates of $8,493 and the decrease in customer shipping revenue of $1,649 due to less period over period customer additions. Direct cost of goods sold. The increase in direct cost of goods sold of $20,265, or 34%, was due to an increase in the cost of customer equipment of $9,072, which included $7,606 of amortization costs on deferred customer equipment due to the change of our customer life from 60 months to 48 months in the first quarter of In addition, there was a decrease in activation fees for new customers of $10,447 due to lower gross line additions which contributed $5,085 and an increase in waived activation fees for new customers of $5, compared to 2008 Selling, general and administrative. The decrease in selling, general and administrative expenses of $33,529, or 11%, this decrease was primarily due to a decrease in professional fees of $5,048, primarily related to consulting, a decrease in salaries, recruiting and outsourced temporary labor of $17,365, and a decrease in credit card fees of $1,483. Additionally, we reduced the number of kiosks locations, which decreased our retail kiosk costs by $5,135. We also had a decrease in facility and other costs of $5,977 and a decrease in share-based cost of $3,764, which was offset by an increase in the cost for settlements and the potential exposure related to litigation and contractual disputes of $2,055, an increase in severance costs of $267 primarily due to the close down of our Canada facility and an increase in tax expense of $2, compared to 2007 For the Years Ended December 31, Dollar Change 2009 vs Dollar Change (in thousands, except percentages) vs vs vs Customer equipment and shipping $ 24,232 $ 34,355 $ 24,706 $ (10,123) $ 9,649 (29%) 39 % Direct cost of goods sold 71,488 79,382 59,117 (7,894) 20,265 (10%) 34 % Customer equipment and shipping gross loss (47,256) (45,027) (34,411) Selling, General and Administrative Percent Percent For the Years Ended December 31, Dollar Change 2009 vs. Dollar Change 2008 vs. Change 2009 vs. Change 2008 vs. (in thousands, except percentages) Selling, general and administrative $ 265,456 $ 298,985 $ 461,768 $ (33,529) $ (162,783) (11%) (35%) Selling, general and administrative. The decrease in selling, general and administrative expenses of $162,783, or 35%, was due to several reasons. A decrease in settlement expenses of $132,232 related to our patent litigation with Sprint, AT&T, Verizon and others for the year ended December 31, 2007 accounted for a the majority of the decrease. Professional fees, primarily related to legal fees for our patent infringement litigations, decreased by $26,932. There were decreases in salaries and employeerelated benefits of $6,078, a decrease of $4,305 in workforce reduction costs and a decrease of our facility maintenance and other administrative expenses of $2,920. This was offset by the increase in share-based expense of $4,696 due to the large number of forfeitures in connection with terminated employees recorded for the year ended December 31, As we continued to add customers, our credit card, debit card and ECP fees have increased by $1,285. Our kiosk sales channels increased our expense by $1,938, and there was an increase in our outsourced labor costs of $2, VONAGE ANNUAL REPORT 2009 Percent Change Percent Change

38 Table of Contents Marketing For the Years Ended December 31, Dollar Change 2009 vs. Dollar Change 2008 vs. Percent Change 2009 vs. Percent Change 2008 vs. (in thousands, except percentages) Marketing $ 227,990 $ 253,370 $ 283,968 $ (25,380) $ (30,598) (10%) (11%) 2009 compared to 2008 Marketing. The decrease in marketing expense of $25,380, or 10%, was primarily related to a decrease in alternative media of $8,055, in online advertising of $19,831, in retail advertising of $7,030 and in direct mail costs of $4,084. These decreases were offset by an increase in television advertising of $13,919. For year ended December 31, 2009, we reduced marketing spending as we completed the transition to our new agencies and continued the development of new advertising and eliminated inefficient nonmedia spending compared to 2007 Marketing. The decrease in marketing expense of $30,598, or 11%, was driven by the plan to balance growth with profitability. This was primarily comprised of a reduction in alternative media of $15,063, in online advertising of $1,636, in television advertising of $9,594, in retail advertising of $5,616 and in other marketing expense of $2,477, which was offset by an increase in direct mail of $3,880. Depreciation and Amortization For the Years Ended December 31, Dollar Change Dollar Change Percent Change Percent Change 2009 vs vs vs vs. (in thousands, except percentages) Depreciation and amortization $ 53,391 $ 48,612 $ 35,718 $ 4,779 $ 12, % 36 % 2009 compared to 2008 Depreciation and amortization. The increase in depreciation and amortization of $4,779, or 10%, was primarily due to an increase in software amortization of $6,725, including lower impairment charges of $835. These increases were offset by a decrease in depreciation of network equipment and computer equipment of $449, including higher impairment charges of $123 and less amortization related to patents of $1, compared to 2007 Depreciation and amortization. The increase in depreciation and amortization of $12,894, or 36%, was primarily due to an increase in depreciation of network equipment, computer equipment and amortization related to patents and software. We also recorded asset impairment of $3,666 in 2008 for assets that no longer had future benefit compared to impairment of $1,374 in Other Income (Expense) For the Years Ended December 31, Dollar Change 2009 vs. Dollar Change 2008 vs. Percent Change 2009 vs. Percent Change 2008 vs. (in thousands, except percentages) Interest income $ 277 $ 3,236 $ 17,582 $ (2,959) $ (14,346) (91%) (82%) Interest expense (54,192) (29,878) (22,810) (24,314) (7,068) (81%) (31%) Change in fair value of derivatives (49,933) (49,933) * * Gain (loss) on extinguishment of notes 4,041 (30,570) 34,611 (30,570) 113 % * Other, net 843 (247) (238) 1,090 (9) 441 % (4%) $ (98,964) $ (57,459) $ (5,466) 2009 compared to 2008 Interest income. The decrease in interest income of $2,959, or 91%, was due to the decrease in cash, cash equivalents and marketable securities and lower interest rates. Interest expense. The increase in interest expense of $24,314, or 81%, was primarily related to an increase in interest expense on the new credit facilities and convertible notes compared to the convertible notes that we refinanced in November 2008 of $25,088, which was offset by a decrease in other interest expense of $774. Change in fair value of derivatives. The increase in the change in fair value of derivatives is primarily due to the recording of the change in the fair value of the conversion feature contained within our convertible notes, which was determined to be an embedded derivative in accordance with new guidance codified in Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) 815, Derivatives and Hedging, of $49,380 for the year ended December 31, We also recorded $553 for the fair value of our common stock warrant. Gain (loss) on extinguishment of notes. The change in gain (loss) of early extinguishment of $34,611, or 113%, was primarily related to the loss of $30,570 in 2008 resulting from the early extinguishment of debt offset by $4,041 gain associated with conversion of our Convertible Notes. Other. We recognized $792 in other income for the year ended December 31, 2009 for the net proceeds we received from a key-man term life insurance policy related to the passing of a former executive compared to 2007 Interest income. The decrease in interest income of $14,346, or 82%, was due to lower interest rates and lower cash balances resulting from payment of IP litigation settlements in the fourth quarter of 2007, and the use of cash on hand to repay a portion of our exiting convertible notes in November 2008.

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40 Table of Contents Interest expense. The increase in interest expense of $7,068, or 31%, was primarily related to incremental interest expense on our November 2008 financing and an increase in interest expense of $662 on our AT&T litigation settlement. Loss on extinguishment of debt. We incurred a loss of $30,570 as a result of the early extinguishment of notes, comprised of $20,452 in third party costs and $9,672 representing the excess of the fair value of the replacement debt over the carrying value of the extinguished debt and $446 of other. Income Tax Expense For the Years Ended December 31, Dollar Change Dollar Change Percent Change Percent Change 2009 vs vs vs vs. (in thousands, except percentages) Income tax expense $ (836) $ (678) $ (182) $ (158) $ (496) (23%) (273%) PROVISION FOR INCOME TAXES The provision for each year represents state and local income taxes currently payable. 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 valuation allowance on net deferred tax assets of $385,941 as of December 31, We participated 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 tax years 2007, 2008 and 2009, we sold approximately, $8,488, $10,051 and $0, respectively, of our New Jersey State net operating loss carry forwards for a recognized benefit of approximately $649 in 2007, $605 in 2008 and $0 in Collectively, all transactions represent approximately 85% of the surrendered tax benefit each year and have been recognized in the year received. 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 In addition, we had net operating loss carry forwards for Canadian tax purposes of $50,128 expiring through We also had net operating loss carry forwards for United Kingdom tax purposes of $38,078 with no expiration date. Net Loss 2009 compared to 2008 Net Loss. Based on the activity described above, our net loss of $42,598 for the year ended December 31, 2009 decreased by $21,978, or 34%, from $64,576 for the year ended December 31, compared to 2007 For the Years Ended December 31, Dollar Change 2009 vs. Dollar Change 2008 vs vs vs. (in thousands, except percentages) Net loss $ (42,598) $ (64,576) $ (267,428) $ 21,978 $ 202, % 76 % Net Loss. Based on the activity described above, our net loss of $64,576 for the year ended December 31, 2008 decreased by $202,852, or 76%, from $267,428 for the year ended December 31, VONAGE ANNUAL REPORT 2009 Percent Change Percent Change

41 Table of Contents QUARTERLY RESULTS OF OPERATIONS The following table sets forth quarterly statement of operations data. We derived this data from our unaudited consolidated financial statements, which we believe have been prepared on substantially the same basis as our audited consolidated financial statements. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period. (dollars in thousands, except operating data) Mar 31, 2008 Jun 30, 2008 Sep 30, 2008 Dec 31, 2008 Mar 31, 2009 Jun 30, 2009 For the Quarter Ended Sep 30, Dec 31, Revenue: Telephony services $ 216,980 $ 218,738 $ 216,092 $ 213,955 $ 215,643 $ 214,709 $ 216,085 $ 218,411 Customer equipment and shipping 7,637 8,786 9,678 8,254 8,362 5,319 5,420 5, , , , , , , , ,542 Operating expenses: Direct cost of telephony services (1) 56,498 56,586 56,502 56,624 51,751 51,480 52,044 58,278 Direct cost of goods sold 22,072 18,533 20,835 17,942 20,512 16,179 17,727 17,070 Selling, general and administrative 79,392 77,931 73,035 68,627 68,051 71,327 63,187 62,891 Marketing 60,899 65,300 64,911 62,260 65,695 52,144 57,393 52,758 Depreciation and amortization 10,209 11,114 13,347 13,942 12,896 13,848 12,881 13, , , , , , , , ,763 Income (loss) from operations (4,453) (1,940) (2,860) 2,814 5,100 15,050 18,273 18,779 Other income (expense): Interest income 1,400 1, Interest expense (5,571) (5,535) (5,504) (13,268) (13,542) (13,679) (13,690) (13,281) Change in fair value of derivatives 12,970 1,150 (62,998) (1,055) Gain (loss) on extinguishment of debt (30,570) 3, Other, net (164) (181) (4,335) (4,462) (4,914) (43,748) 339 (12,464) (72,799) (14,040) Income (loss) before income tax benefit (expense) (8,788) (6,402) (7,774) (40,934) 5,439 2,586 (54,526) 4,739 Income tax benefit (expense) (173) (480) (43) 18 (168) (301) (29) (338) Net income (loss) $ (8,961) $ (6,882) $ (7,817) $ (40,916) $ 5,271 $ 2,285 $ (54,555) $ 4,401 Net income (loss) per common share: Basic $ (0.06) $ (0.04) $ (0.05) $ (0.26) $ 0.03 $ 0.01 $ (0.33) $ 0.02 Diluted $ (0.06) $ (0.04) $ (0.05) $ (0.26) $ (0.03) $ 0.01 $ (0.33) $ 0.02 Weighted-average common shares outstanding: Basic 156, , , , , , , ,503 Diluted 156, , , , , , , ,376 Operating Data: Gross subscriber line additions 281, , , , , , , ,592 Net subscriber line additions 30,133 2,080 9,460 (14,744) (6,493) (88,643) (50,191) (10,131) Subscriber lines at end of period 2,610,360 2,612,440 2,621,900 2,607,156 2,583,861 2,495,218 2,445,027 2,434,896 Average monthly customer churn 3.3 % 3.0 % 3.0 % 2.9 % 3.1 % 3.2 % 3.4 % 2.8 % Average monthly revenue per line $ $ $ $ $ $ $ $ Average monthly telephony services revenue per line $ $ $ $ $ $ $ $ Average monthly direct costs of telephony services per line $ 7.26 $ 7.22 $ 7.20 $ 7.22 $ 6.67 $ 6.76 $ 7.02 $ 7.96 Marketing costs per gross subscriber line additions $ $ $ $ $ $ $ $ Employees at end of period 1,722 1,662 1,573 1,491 1,413 1,260 1,239 1,225 (1) Excludes depreciation and amortization of $4,701, $4,728, $4,908 and $5,917, for the quarters ended March 31, June 30, September 30 and December 31, 2008, respectively, and $4,757, $4,872, $4,371 and $5,178, for the quarters ended March 31, June 30, September 30 and December 31, 2009, respectively. 37

42 Table of Contents Telephony services revenue. Telephony services revenue generally has increased on a quarterly basis with the exception of the third and fourth quarters of 2008 and second quarter of The reduction in telephony services revenue in the third quarter of 2008 was related to an increase in promotional activity and customer credits issued primarily for customer retention. The decrease in revenue in the fourth quarter of 2008 was due to a decline in both the Canadian dollar and British pound. The decrease in revenue in the second quarter of 2009 was due to a decline in number of subscriber lines. During the third quarter of 2009 we introduced the Vonage World plan resulting in increased telephony services revenue for the second half of Direct costs of telephony services. Direct costs of telephony services have remained consistent each quarter but are expected to increase as seen in the fourth quarter of 2009 due to higher international call volume following the introduction of our Vonage World plan. Direct cost of goods sold. The fluctuations in direct cost of goods sold expenses between the quarters was due to the mix in the type of customer equipment sold and the fluctuations in the subscriber line additions. In addition in 2008 and 2009 there were incremental costs from the reduction in the period over which deferred customer equipment costs are amortized. Selling, general and administrative. Selling, general and administrative expenses generally have decreased on a quarterly basis, In 2009, selling, general and administrative cost declined primarily due a decrease in professional fees, salaries, recruiting and outsourced temporary labor. For 2008, selling, general and administrative cost declined primarily due to the reduction in legal and consulting costs. Marketing. Marketing expense declined in 2009, primarily driven by reduced marketing spending as we completed the transition to our new agencies and continued the development of new advertising and eliminated inefficient non-media spending. LIQUIDITY AND CAPITAL RESOURCES Overview The following table sets forth a summary of our cash flows for the periods indicated: For the Years Ended December 31, (dollars in thousands) Net cash provided by (used in) operating activities $ 38,396 $ 3,555 $ (270,926) Net cash provided by (used in) investing activities (50,565) 40, ,457 Net cash provided by (used in) financing activities (3,253) (68,370) 245 For the year ended December 31, 2009, 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, funding operating losses, IP litigation settlements, repaying our prior convertible notes and other general corporate purposes. Although our historical net losses were driven primarily by start-up costs and the cost of developing our technology, more recently our results of operations have been impacted by investments in marketing, settlement of our IP litigation and refinancing costs. In addition to marketing, we plan to continue to invest in developing new products, our network infrastructure and customer care. In 2007, we announced a plan seeking to balance growth with profitability. We intend to continue to pursue growth because we believe it will position us as a strong competitor in the long term. 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, is 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 will have the right to withdraw funds from the Concentration Account in excess of $30,000. As of December 31, 2009, we funded of $3,277 into the Concentration Account with additional funding of $18,718 through February 25, VONAGE ANNUAL REPORT 2009

43 Table of Contents 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 (i) $95,000 until December 31, 2009 and (ii) for each quarter thereafter, 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 December 31, 2009, 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, We also incurred $27,051 of debt related costs in connection with the Financing. 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 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. Certain events could trigger prepayment obligations under the First Lien Senior Facility. If we have more than $75,000 of specified unrestricted cash in any quarter after January 1, 2009, we may be obligated to prepay without premium certain amounts. 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. The loans under the Second Lien Senior Facility will mature in October 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 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 of PIK interest as of December 31, 2009 was $18,576. 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 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, 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 year ended December 31, 2009, we received Notices of Conversion from certain note holders indicating their desire to convert their Convertible Notes. In the aggregate $12,305 principal amount of Convertible Notes were converted into 42,431 shares of our common stock. As of 39

44 Table of Contents December 31, 2009, there were $5,695 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 December 31, 2009 and December 31, 2008 was $1,478. In connection with note conversions during 2009, $2,207 was paid for accrued interest. 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. State and Local Sales Taxes We also have contingent liabilities for state and local sales taxes. As of December 31, 2009, we had a reserve of $4,865. 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 2009, 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 year ended 2009 were $46,628, of which $21,654 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 $38,396 during the year ended December 31, 2009 compared to $3,555 for the prior year period, primarily due to lower marketing expenditures and overall tighter controls on costs partially offset by lower revenues as our overall customer base has decreased over the past year and higher interest expense associated with our November 2008 Financing. 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 used for working capital requirements increased by $22,260 during the year ended December 31, 2009 compared to the prior year period primarily due to prepayments to take advantage of discounts negotiated with vendors given our Concentration Account requirements. Cash provided by operating activities increased to $3,555 during the year ended December 31, 2008 compared to cash used in operating activities of $270,926 for the prior year period, primarily due to the absence of patent litigation settlements including royalties in 2008, lower marketing expenditures and improved direct margin. 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 used for working capital requirements decreased by $25,115 during the year ended December 31, 2008 compared to the prior year period primarily due to timing of payments related to litigation settlements. Investing Activities Cash used in investing activities for 2009 of $50,565 was attributable to capital expenditures of $23,724, $1,250 for the licensing of IBM patents, development of software assets of $21,654 and an increase in restricted cash of $3,937. Cash provided by investing activities for 2008 of $40,486 was attributable to net purchases and sales of marketable securities of $79,942, offset by the purchase of capital expenditures of $38,476, of which $26,530 was for software acquisition and development and an increase in restricted cash of $980 related to reserves required by our credit card processors. Cash provided by investing activities for 2007 of $131,457 was attributable to net purchases and sales of marketable securities of $210,074, offset by the purchase of capital expenditures of $41,732, $5,500 for the acquisition of the Sprint patents as a result of the Sprint litigation settlement and the increase in restricted cash of $31,385 related to reserves required by our credit card processors. Financing Activities Cash used in financing activities for 2009 of $3,253 was attributable to $1,251 in capital lease payments, $1,809 in first lien facility principal payment and $252 in additional debt related costs. Cash used in financing activities for 2008 of $68,370 was primarily attributable to the repurchase of our Previous Convertible Notes of $253,460 in a tender offer in November We also had a new debt financing for $220,300 offset by original issue discount of $7,167, debt related costs of $26,799 and the principal payments on capital lease obligations of $1,036. Cash provided by financing activities for 2007 of $245 was primarily attributable to $1,265 for net proceeds from exercise of stock options, proceeds from subscription receivables and from payments received for the directed share program, which was offset by the principal payments on capital lease obligations of $1, VONAGE ANNUAL REPORT 2009

45 Table of Contents CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS The table below summarizes our contractual obligations at December 31, 2009, and the effect such obligations are expected to have on our liquidity and cash flow in future periods. Payments Due by Period (dollars in thousands) Total Less than 1 year 2-3 years 4-5 years After 5 years (unaudited) Contractual Obligations: First lien senior facility $ 128,165 $ 1,303 $ 17,265 $ 109,597 $ Second lien senior facility 72,000 9,000 63,000 Third lien convertible notes 5,695 5,695 Interest related to first lien senior facility 74,723 20,711 39,642 14,370 Interest related to second lien senior facility. 169,086 23,503 50,637 94,946 Interest related to third lien senior facility 13,433 1,463 3,854 8,116 Capital lease obligations 33,082 4,038 8,318 8,653 12,073 Operating lease obligations 4,535 3, Purchase obligations 56,074 29,014 16,860 7,960 2,240 Other obligations 20,800 7,800 13,000 Total contractual obligations $ 577,593 $ 66,814 $ 120,638 $ 204,071 $ 186,070 Other Commercial Commitments: Standby letters of credit $ 18,000 $ 18,000 $ $ $ Total contractual obligations and other commercial commitments $ 595,593 $ 84,814 $ 120,638 $ 204,071 $ 186,070 Senior debt facilities. On October 19, 2008, we entered into definitive agreements for the Financing consisting of (i) the $130,300 First Lien Senior Facility, (ii) the $72,000 Second Lien Senior Facility and (iii) the sale of $18,000 of Convertible Notes. The funding for this transaction took place on November 3, See Note 7 in the notes to the consolidated financial statements. Interest related to debt. The table above assumes interest is paid in cash for the First Lien Senior Facility and paid by PIK or deferred for the Second Lien Senior Facility and Convertible Notes. Capital lease obligations. At December 31, 2009, we had capital lease obligations of $33,082 related to our corporate headquarters in Holmdel, New Jersey that expire in Operating lease obligations. At December 31, 2009, future commitments for operating leases included $3,167 for co-location facilities in the United States that accommodate a portion of our network equipment through 2012, $1,268 for kiosks leased in various locations throughout the United States through 2010, $36 for office space leased for our London, UK office through 2010 and $64 for office space leased in Atlanta, GA for product development through Purchase obligations. We have engaged several vendors to assist with local number portability, which allows customers to keep their existing phone number when switching to our service. We have committed to pay these vendors a minimum of $4,680 through We have engaged a vendor to assist with inbound sales inquiries. We have committed to pay this vendor $8,500 in We have committed to purchase communication devices from several vendors. We have committed to these vendors $5,134 in We have engaged a credit card processor to process our billings. We have committed to pay this vendor a minimum of $11,100 through We have engaged a vendor to assist with the provision of E-911 services. We have committed to pay this vendor approximately $3,300 in We have engaged a vendor to provide analysis of customer service calls. We have committed to pay this vendor $1,170 through We have engaged a vendor who will (i) license to us billing and ordering software, (ii) provide professional services relating to the implementation, operation, support and maintenance of the licensed system and (iii) transition support services in connection with migration to the licensed systems. We have committed to pay this vendor $22,190 through 2015; however, we may terminate the contract sooner subject to payment of early termination fees. Other obligations. At December 31, 2009, we were obligated to pay AT&T $20,800 through 2012 for a settlement agreement, which required Vonage to pay AT&T $650 each month. 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 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. 41

46 Table of Contents On an ongoing basis, we evaluate our estimates, including the following: > those related to the average period of service to a customer (the customer relationship period ) used to amortize deferred activation fees and deferred customer acquisition costs associated with customer activation; > the useful lives of property and equipment, software and intangible assets; > assumptions used for the purpose of determining share-based compensation and the estimated fair value of our stock warrant using the Black-Scholes option pricing model ( Model ), and on various other assumptions that we believe 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 volatility; and > assumptions used to determine the estimated 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, current share price 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 believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. 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 FASB 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 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 relationship period. 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. The average customer relationship period was 60 months in 2007, 48 months in 2008 and 44 months in For 2010, the average customer relationship period will be further reduced to 38 months based upon further analysis of historical trends. The impact of these changes to the average customer relationship period 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 In addition, we had net operating loss carry forwards for Canadian tax purposes of $50,128 expiring through 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 42 VONAGE ANNUAL REPORT 2009

47 Table of Contents 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. In addition, we may be able to increase the base Section 382 limitation amount during the first five years following the ownership change to the extent it realizes built-in gains during that time period. A built-in gain generally is gain or income attributable to an asset that was held at the date of the ownership change and that had a fair market value in excess of the tax basis at the date of the ownership change. Section 382 provides that any unused Section 382 limitation amount can be carried forward and aggregated with the following year s available net operating losses. 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 As a result, $171,147 of the total U.S. net operating losses will be subject to an annual base limitation of $39,374. As noted above, we believe we may be able to increase the base Section 382 limitation for built-in gains during the first five years following the ownership change. 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 ( ASU ) 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 for separating consideration in multiple-deliverable arrangements. ASU 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, Early adoption is permitted on a prospective or retrospective basis. We are currently evaluating the impact of ASU on our financial statements. In May 2008, the FASB affirmed the consensus of FASB ASC , Debt with Conversion and other Options (Including Partial Cash Settlement), which applies to all convertible debt instruments that have a net settlement feature; which means that such convertible debt instruments, by their terms, may be settled either wholly or partially in cash upon conversion. FASB ASC requires issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion to separately account for the liability and equity components in a manner reflective of the issuer s nonconvertible debt borrowing rate. Previous guidance provided for accounting for this type of convertible debt instrument entirely as debt. FASB ASC was effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The adoption of FASB ASC did not have an impact on our financial statements. In April 2008, the FASB issued FASB ASC , General Intangibles Other than Goodwill. FASB ASC amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB ASC This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations after their acquisitions. FASB ASC was effective for financial statements issued for fiscal years and interim periods beginning after December 15, Since this guidance applied prospectively, on adoption, there was no impact to our consolidated financial statements. In February 2008, the FASB amended FASB ASC 820, which delayed the effective date of FASB ASC 820 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. The full adoption of FASB ASC 820 did not have a material impact on our consolidated financial position, results of operations or cash flows. 43

48 Table of Contents OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements. ITEM 7A. 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, We are exposed to interest rate risk since 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. The interest rate on the Second Lien Senior Facility and Convertible Notes are fixed. As of December 31, 2009, 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 December 31, 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. During 2008, due to the economic downturn in the banking industry and in anticipation of the use of cash on hand to repay a portion of our previous convertible notes in November 2008, management decided to convert all of our marketable securities into cash. ITEM 8. Financial Statements and Supplementary Data The information required by this Item is contained on pages F-1 through F-32 of this Annual Report on Form 10-K and incorporated herein by reference. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 44 VONAGE ANNUAL REPORT 2009

49 Table of Contents ITEM 9A. Controls and Procedures Disclosure Controls Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act ), as amended, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2009, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management s Report on Internal Control Over Financial Reporting. February 26, 2010 To the Stockholders of Vonage Holdings Corp.: Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, 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 and includes those policies and procedures that: > Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; > Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and > Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, management concluded that, as of December 31, 2009, our internal control over financial reporting is effective based on those criteria. Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting. This report appears on page F-3. /s/ MARC LEFAR Marc Lefar Director, Chief Executive Officer /s/ JOHN S. REGO John S. Rego Executive Vice President, Chief Financial Officer and Treasurer Report of the Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting. See Report of Independent Registered Public Accounting Firm on page F-3. Changes in Controls There were no changes to controls during the quarter ended December 31, 2009 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. ITEM 9B. Other Information None. 45

50 Table of Contents PART III ITEM 10. Directors, Executive Officers and Corporate Governance The discussion under the heading Proposal No. 1 Election of Directors, Section 16(a) Beneficial Ownership Reporting Compliance, Director Nomination Process and Corporate Governance Board Committees Audit Committee in our Proxy Statement for the 2010 Annual Meeting of Stockholders and in Executive Officers and Directors of the Registrant in Part I of this Annual Report on the Form 10-K is hereby incorporated by reference. We have adopted a Vonage Code of Conduct applicable to all our officers and employees and a Vonage Finance Code of Ethics applicable to our chief financial officer and other employees in our finance organization. The Vonage Code of Conduct and Vonage Finance Code of Ethics are posted in the Investor Relations section of our website, We will provide you with print copies of our codes free of charge on written request to Vonage Investor Relations, 23 Main Street, Holmdel NJ, We intend to disclose any amendments to, or waivers from, provisions of our codes that apply to our principal executive officer, principal financial officer, principal accounting officer or controller, or any person performing in similar functions, on our website promptly following the date of such amendment or waiver. ITEM 11. Executive Compensation The discussion under the headings Compensation, Director Compensation, Compensation Committee Interlocks and Insider Participation and Compensation Committee Report in our Proxy Statement for the 2010 Annual Meeting of Stockholders in hereby incorporated by reference. The Compensation Committee Report contained in our Proxy Statement shall not be deemed soliciting material or filed with the Securities and Exchange Commission or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The discussion under the headings Stock Ownership Information and Equity Compensation Plan Information in our Proxy Statement for the 2010 Annual Meeting of Stockholders is hereby incorporated by reference. ITEM 13. Certain Relationships and Related Transactions, and Director Independence The discussion under the headings Transactions with Related Persons and Board Determination of Independence in our Proxy Statement for the 2010 Annual Meeting of Stockholders is hereby incorporated by reference. ITEM 14. Principal Accountant Fees and Services The discussion under the heading Proposal No. 2 Ratification of Independent Registered Public Accounting Firm in our Proxy Statement for the 2010 Annual Meeting of Stockholders is hereby incorporated by reference. 46 VONAGE ANNUAL REPORT 2009

51 Table of Contents PART IV ITEM 15. Exhibits, Financial Statement Schedules (a) (1) Financial Statements. The index to our financial statements is found on page F-1 of this Form 10-K. (2) Financial Statement Schedules. Schedule II Valuation and Qualifying Accounts is as follows: (3) Exhibits. Balance at Beginning Additions Charged to Charged to Less Deductions Balance at End of Period of Period Revenue Expense Allowance for Doubtful Accounts: Year ended December 31, 2009 $ 2,045 $ (193) $ $ (420) $ 1,432 Year ended December 31, , (86) 2,045 Year ended December 31, ,448 1,924 Inventory Obsolescence Year ended December 31, 2009 $ 1,405 $ $ 2,514 $ (3,487) $ 432 Year ended December 31, ,080 1,519 (3,194) 1,405 Year ended December 31, ,270 2,799 (989) 3,080 Valuation Allowance for Deferred Tax Year ended December 31, 2009 $ 386,547 $ $ (606) $ $ 385,941 Year ended December 31, ,791 3, ,547 Year ended December 31, , , ,791 Valuation Allowance for Assets Held for Sale Year ended December 31, 2009 $ $ $ $ $ Year ended December 31, , (1,995) Year ended December 31, ,374 1,374 Exhibit Number Description of Exhibit 3.1 Restated Certificate of Incorporation of Vonage Holdings Corp.(6) 3.2 Second Amended and Restated By-laws of Vonage Holdings Corp(13) 4.1 Form of Certificate of Vonage Holdings Corp. Common Stock(4) 4.2 Form of 20.00% Senior Secured Third Lien Notes due 2015 issued by Vonage Holdings Corp. and Vonage America Inc.(15) 4.3 Stock Purchase Warrant To Purchase Common Stock of Vonage Holdings Corp.(3) 4.4 Stock Purchase Warrant To Purchase Shares of Series A-2 Convertible Preferred Stock, par value $.001 per share of Vonage Holdings Corp.(3) Stock Incentive Plan of Vonage Holdings Corp.(1)* 10.2 Form of Incentive Stock Option Agreement under the 2001 Stock Incentive Plan(1)* 10.3 Form of Nonqualified Stock Option Agreement for Employees under the 2001 Stock Incentive Plan(1)* 10.4 Form of Nonqualified Stock Option Agreement for Outside Directors under the 2001 Stock Incentive Plan(1)* 10.5 Amended and Restated Vonage Holding Corp Incentive Plan(20)* 10.6 Form of Restricted Stock Unit Agreement under the Vonage Holdings Corp Incentive Plan(9)* 10.7 Form of Nonqualified Stock Option Agreement under the Vonage Holdings Corp Incentive Plan(9)* 10.8 Form of Restricted Stock Agreement under the Vonage Holdings Corp Incentive Plan(9)* 47

52 Table of Contents Exhibit Number Description of Exhibit 10.9 Form of Restricted Stock Agreement for Non-Executive Directors under the Vonage Holdings Corp Incentive Plan (Per Non-Executive Director Compensation Program(14)* Form of Nonqualified Stock Option Agreement for Non-Executive Directors (Quarterly Grants) under the Vonage Holdings Corp Incentive Plan (Per Non- Executive Director Compensation Program(14)* Form of Nonqualified Stock Option Agreement for Non-Executive Directors (Sign-on Grant) under the Vonage Holdings Corp Incentive Plan (Per Non- Executive Director Compensation Program(14)* Vonage Holdings Corp. 401(k) Retirement Plan(1)* Lease Agreement, dated March 24, 2005, between 23 Main Street Holmdel Associates LLC and Vonage USA Inc.(1) Amended and Restated Employment Agreement dated November 5, 2009 between Vonage Holdings Corp. and Marc P. Lefar(20)* Indemnification Agreement dated as of July 29, 2008 by and between Vonage Holdings Corp. and Marc. P. Lefar(13)* Form of Nonqualified Stock Option Agreement for Marc P. Lefar under the Vonage Holdings Corp Incentive Plan(13)* Amended and Restated Employment Agreement, dated February 8, 2006, between Vonage Holdings Corp. and Jeffrey A. Citron(1)* Separation Agreement and General Release dated as of July 29, 2008 by and between Vonage Holdings Corp. and Jeffrey A. Citron(13)* Amended and Restated Non-Compete Agreement dated as of October 17, 2008 by and between Vonage Holdings Corp. and Jeffrey A. Citron(16) Consulting Agreement dated as of July 29, 2008 by and between Vonage Holdings Corp. and KEC Holdings LLC(13)* Form of Nonqualified Stock Option Agreement for Jeffrey A. Citron under the Vonage Holdings Corp Incentive Plan(13)* Amended and Restated Employment Agreement, dated January 1, 2009, between Vonage Holdings Corp. and John S. Rego(17)* Amended and Restated Employment Agreement Employment Agreement, dated January 1, 2009, between Vonage Holdings Corp. and Louis A. Mamakos (17)* Separation Agreement and General Release dated as of March 27, 2009 by and between Vonage Holdings Corp. and Louis A. Mamakos(18)* Letter Agreement, dated November 8, 2006, between Vonage America Inc. and Jamie E. Haenggi(12)* Amendment to Letter Agreement, dated January 1, 2009, between Vonage America Inc. and Jamie E. Haenggi(17)* Letter Agreement, dated January 28, 2009, between Vonage Holdings Corp. and Theresa Hennesy(19)* Letter Agreement, dated February 9, 2009, between Vonage Holdings Corp. and Nicholas P. Lazzaro(19)* Letter Agreement, dated March 24, 2009, between Vonage Holdings Corp. and Kimberly O Loughlin(19)* Letter Agreement, dated November 19, 2008, between Vonage Holdings Corp. and Michael A. Tempora(19)* Letter Agreement, dated July 15, 2009, between Vonage Holdings Corp. and Kurt Rogers(20)* Non-Executive Director Compensation Program effective January 1, 2010(21)* Form of Indemnification Agreement between Vonage Holdings Corp. and its directors and certain officers(10) Third Amended and Restated Investors Rights Agreement, as amended, dated April 27, 2005, among Vonage Holdings Corp. and the signatories thereto(3) Written Consent of Vonage Holdings Corp. and Certain Stockholders to the amendment to the Third Amended and Restated Investors Rights Agreement dated April 27, 2005, as amended, dated November 13, 2006(8) Registration Rights Agreement, dated December 16, 2005, among Vonage Holdings Corp. and the signatories thereto(1) Agreement for Services, dated February 9, 2005, between Vonage Holdings Corp. and Third Party Verification, Inc.(2) First Amendment to Services Agreement, dated June 21, 2006, between Third Party Verification, Inc. and Vonage Holdings Corp.(7) Second Amendment to Services Agreement, dated August 25, 2006, between Third Party Verification, Inc. and Vonage Network of New Jersey d/b/a Vonage Network Inc. (assignee of Vonage Holding Corp.)(7) Fourth Amendment to Services Agreement, dated May 1, 2009 between Third Party Verification, Inc. and Vonage Network LLC (formerly known as Vonage Network Inc.)(19) License and Managed Services Agreement, dated December 23, 2009 between Vonage Network LLC and Amdocs Software Systems Limited and Amdocs, Inc.(21) Patent Settlement Agreement, dated October 25, 2007, between Vonage Holdings Corp. and Verizon Services Corp.(11) Settlement Agreement, effective October 27, 2007, between Vonage Holdings Corp. and Sprint Communications Company L.P.(11) Settlement and Patent License Agreement, dated December 21, 2007, between Vonage Holdings Corp. and AT&T Corp.(11) Settlement Agreement, effective January 1, 2008 between Vonage Holdings Corp. and Nortel Networks Inc. and Nortel Networks Limited(11) First Lien Credit and Guaranty Agreement, dated as of October 19, 2008 among Vonage Holdings Corp., Vonage America Inc., as borrowers, certain subsidiaries of Vonage Holdings Corp., as guarantors, various lenders, and Silver Point Finance, LLC, as Administrative Agent, Collateral Agent and Lead Arranger(15) First Lien Pledge and Security Agreement, dated as of October 19, 2008 among Vonage Holdings Corp., Vonage America Inc. and certain subsidiaries of Vonage Holdings Corp., as grantors, and Silver Point Finance, LLC, as Collateral Agent(15) Second Lien Credit and Guaranty Agreement, dated as of October 19, 2008 among Vonage Holdings Corp., Vonage America Inc., as borrowers, certain subsidiaries of Vonage Holdings Corp., as guarantors, various lenders, and Silver Point Finance, LLC, as Administrative Agent, Collateral Agent and Lead Arranger(15) Second Lien Pledge and Security Agreement, dated as of October 19, 2008 among Vonage Holdings Corp., Vonage America Inc. and certain subsidiaries of Vonage Holdings Corp., as grantors, and Silver Point Finance, LLC, as Collateral Agent(15) Third Lien Note Purchase Agreement dated as of October 19, 2008 among Vonage Holdings Corp., Vonage America Inc., as co-issuers, certain subsidiaries of Vonage Holdings Corp., as guarantors, various purchasers, and Silver Point Finance, LLC, as Note Agent and Collateral Agent(15) Third Lien Pledge and Security Agreement, dated as of October 19, 2008 among Vonage Holdings Corp., Vonage America Inc. and certain subsidiaries of Vonage Holdings Corp., as grantors, and Silver Point Finance, LLC, as Collateral Agent(15) Registration Rights Agreement, dated as of October 19, 2008, among Vonage Holdings Corp., Vonage America Inc. and purchasers of 20.00% Senior Secured Third Lien Notes due 2015(15) 48 VONAGE ANNUAL REPORT 2009

53 Table of Contents Exhibit Number Description of Exhibit 21.1 List of Subsidiaries of Vonage Holdings Corp.(21) 23.1 Consent of BDO Seidman, LLP, independent registered public accounting firm(21) 31.1 Certification of our Interim 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(21) 31.2 Certification of our 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(21) 32.1 Certification of our Interim 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(21) (1) Incorporated by reference to Amendment No. 1 to Vonage Holdings Corp. s Registration Statement on Form S-1 (File No ) filed on April 7, (2) Incorporated by reference to Amendment No. 3 to Vonage Holdings Corp. s Registration Statement on Form S-1 (File No ) filed on April 26, (3) Incorporated by reference to Amendment No. 4 to Vonage Holdings Corp. s Registration Statement on Form S-1 (File No ) filed on April 28, (4) Incorporated by reference to Amendment No. 5 to Vonage Holdings Corp. s Registration Statement on Form S-1 (File No ) filed on May 8, (5) Incorporated by reference to Amendment No. 6 to Vonage Holdings Corp. s Registration Statement on Form S-1 (File No ) filed on May 22, (6) Incorporated by reference to Vonage Holdings Corp. s Quarterly Report on Form 10-Q (File No ) filed on August 4, (7) Incorporated by reference to Vonage Holdings Corp. s Quarterly Report on Form 10-Q (File No ) filed on November 8, (8) Incorporated by reference to Vonage Holding Corp. s Current Report on Form 8-K (File No ) filed on November 14, (9) Incorporated by reference to Vonage Holding Corp. s Annual Report on Form 10-K (File No ) filed on April 17, (10) Incorporated by reference to Vonage Holding Corp. s Quarterly Report on Form 10-Q (File No ) filed on November 14, (11) Incorporated by reference to Vonage Holding Corp. s Annual Report on Form 10-K (File No ) filed on March 17, (12) Incorporated by reference to Vonage Holding Corp. s Quarterly Report on Form 10-Q (File No ) filed on May 12, (13) Incorporated by reference to Vonage Holding Corp. s Current Report on Form 8-K (File No ) filed on August 4, (14) Incorporated by reference to Vonage Holding Corp. s Quarterly Report on Form 10-Q (File No ) filed on August 11, (15) Incorporated by reference to Vonage Holding Corp. s Amendment No. 8 to Schedule TO (File No ) filed on October 22, (16) Incorporated by reference to Vonage Holding Corp. s Quarterly Report on Form 10-Q (File No ) filed on November 10, (17) Incorporated by reference to Vonage Holding Corp. s Annual Report on Form 10-K (File No ) filed on March 3, (18) Incorporated by reference to Vonage Holding Corp. s Quarterly Report on Form 10-Q (File No ) filed on May 11, (19) Incorporated by reference to Vonage Holding Corp. s Quarterly Report on Form 10-Q (File No ) filed on August 6, (20) Incorporated by reference to Vonage Holding Corp. s Quarterly Report on Form 10-Q (File No ) filed on November 6, (21) Filed herewith. Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to an order for confidential treatment pursuant to the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended. Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Exchange Act of 1934, as amended. * Management contract or compensatory plan or arrangement. (b) Financial Statement Schedules Report of Independent Registered Public Accounting Firm Schedule II Valuation and Qualifying Accounts. 49

54 Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Vonage Holdings Corp. Holmdel, New Jersey The audits referred to in our report dated February 26, 2010 relating to the consolidated financial statements of Vonage Holdings Corp., which is contained in Item 8 of this Form 10-K also included the audit of the financial statement schedule listed in the accompanying index. The financial statement schedule is the responsibility of the Company s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP Woodbridge, New Jersey February 26, VONAGE ANNUAL REPORT 2009

55 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Holmdel, State of New Jersey, on February 26, V ONAGE H OLDINGS C ORP. Dated: February 26, 2010 By: / S / JOHN S. REGO John S. Rego Executive Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the dates indicated. Signature Title Date / S / MARC P. LEFAR Marc P. Lefar / S / JOHN S. REGO John S. Rego Director, Chief Executive Officer (principal executive officer) Executive Vice President, Chief Financial Officer and Treasurer (principal financial officer and principal accounting officer) February 24, 2010 February 26, 2010 / S / JEFFREY A. CITRON Jeffrey A. Citron / S / PETER BARRIS Peter Barris / S / MORTON DAVID Morton David / S / MICHAEL KRUPKA Michael Krupka / S / J. SANFORD MILLER J. Sanford Miller / S / JEFFREY J. MISNER Jeffrey J. Misner / S / GOVERNOR THOMAS J. RIDGE Governor Thomas J. Ridge / S / JOHN J. ROBERTS John J. Roberts Director, Chairman February 24, 2010 Director February 24, 2010 Director February 24, 2010 Director February 24, 2010 Director February 25, 2010 Director February 24, 2010 Director February 25, 2010 Director February 24,

56 Table of Contents INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm BDO Seidman, LLP F-2 Report of Independent Registered Public Accounting Firm BDO Seidman, LLP F-3 Consolidated Balance Sheets as of December 31, 2009 and 2008 F-4 Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007 F-6 Consolidated Statements of Stockholders Equity (Deficit) for the years ended December 31, 2009, 2008 and 2007 F-7 Notes to Consolidated Financial Statements F-8 F- 1

57 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Vonage Holdings Corp. Holmdel, New Jersey We have audited the accompanying consolidated balance sheets of Vonage Holdings Corp. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders equity (deficit) and cash flows for each of the three years in the period ended December 31, These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vonage Holdings Corp. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. As described in Note 7, the Company adopted new guidance codified in FASB ASC 815, Derivatives and Hedging, relating to the determination of whether certain conversion features in the Third Lien convertible notes were considered an embedded derivative, effective January 1, We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vonage Holdings Corp. s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010 expressed an unqualified opinion thereon. /s/ BDO SEIDMAN, LLP Woodbridge, New Jersey February 26, 2010 F- 2 VONAGE ANNUAL REPORT 2009

58 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Vonage Holdings Corp. Holmdel, New Jersey We have audited Vonage Holdings Corp. s (the Company ) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria ). The Company s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A. Management s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company s internal control over financial reporting is a process designed 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. A company s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Vonage Holdings Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vonage Holdings Corp. as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders equity (deficit), and cash flows for each of the three years in the period ended December 31, 2009 and our report dated February 26, 2010 expressed an unqualified opinion thereon. /s/ BDO SEIDMAN, LLP Woodbridge, New Jersey February 26, 2010 F- 3

59 Table of Contents VONAGE HOLDINGS CORP. CONSOLIDATED BALANCE SHEETS December 31, December 31, (In thousands, except par value) Assets Current assets: Cash and cash equivalents $ 32,213 $ 46,134 Accounts receivable, net of allowance of $1,432 and $2,045, respectively 15,053 17,696 Inventory, net of allowance of $432 and $1,405, respectively 7,771 10,360 Deferred customer acquisition costs, current 15,997 24,002 Prepaid expenses and other current assets 40,425 18,325 Total current assets 111, ,517 Property and equipment, net 90,548 98,292 Software, net 35,540 34,368 Deferred customer acquisition costs, non-current 7,075 20,393 Debt related costs, net 7,412 11,541 Restricted cash 43,700 39,585 Intangible assets, net 5,331 5,400 Other assets 12,319 10,809 Total assets $ 313,384 $ 336,905 Liabilities and Stockholders Equity (Deficit) Liabilities Current liabilities: Accounts payable $ 11,512 $ 33,978 Accrued expenses 69,171 73,482 Deferred revenue, current portion 55,929 63,155 Current maturities of capital lease obligations 1,500 1,252 Current portion of long-term debt 1,303 1,303 Total current liabilities 139, ,170 Notes payable, net of discount 200, ,747 Derivative embedded within convertible note, at fair value 25,050 Deferred revenue, net of current portion 8,629 23,058 Capital lease obligations, net of current maturities 19,448 20,947 Other liabilities, net of current portion in accrued expenses 12,283 17,725 Total liabilities 405, ,647 Commitments and Contingencies Stockholders Equity (Deficit) Common stock, par value $0.001 per share; 596,950 shares authorized at December 31, 2009 and December 31, 2008; 201,628 and 158,201 shares issued at December 31, 2009 and December 31, 2008, respectively; 199,898 and 156,648 shares outstanding at December 31, 2009 and December 31, 2008, respectively Additional paid-in capital 1,008, ,768 Stock subscription receivable (5,195) Accumulated deficit (1,088,236) (1,052,861) Treasury stock, at cost, 1,730 shares at December 31, 2009 and 1,553 at December 31, 2008 (12,878) (12,704) Accumulated other comprehensive income (loss) 456 (908) Total stockholders equity (deficit) (91,909) (90,742) Total liabilities and stockholders equity (deficit) $ 313,384 $ 336,905 F- 4 VONAGE ANNUAL REPORT 2009 The accompanying notes are an integral part of these financial statements

60 Table of Contents VONAGE HOLDINGS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, (In thousands, except per share amounts) Operating Revenues: Telephony services $ 864,848 $ 865,765 $ 803,522 Customer equipment and shipping 24,232 34,355 24, , , ,228 Operating Expenses: Direct cost of telephony services (excluding depreciation and amortization of $19,178, $20,254 and $18,434, respectively) 213, , ,831 Royalty 32,606 Total direct cost of telephony services 213, , ,437 Direct cost of goods sold 71,488 79,382 59,117 Selling, general and administrative 265, , ,768 Marketing 227, , ,968 Depreciation and amortization 53,391 48,612 35, , ,559 1,090,008 Income (loss) from operations 57,202 (6,439) (261,780) Other Income (Expense): Interest income 277 3,236 17,582 Interest expense (54,192) (29,878) (22,810) Change in fair value of derivatives (49,933) Gain (loss) on extinguishment of notes 4,041 (30,570) Other, net 843 (247) (238) (98,964) (57,459) (5,466) Loss before income tax expense (41,762) (63,898) (267,246) Income tax expense (836) (678) (182) Net loss $ (42,598) $ (64,576) $ (267,428) Net loss per common share: Basic and diluted $ (0.25) $ (0.41) $ (1.72) Weighted-average common shares outstanding: Basic and diluted 170, , ,593 The accompanying notes are an integral part of these financial statements F- 5

61 Table of Contents VONAGE HOLDINGS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS December 31, (In thousands) Cash flows from operating activities: Net loss $ (42,598) $ (64,576) $ (267,428) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization and impairment charges 52,072 45,796 33,574 Amortization of intangibles 1,319 2,816 2,144 Change in fair value of derivatives 49,933 (Gain) loss on extinguishment of notes (4,041) 30,570 Beneficial conversion on interest in kind on convertible notes Amortization of discount on notes 5, Accrued interest paid in-kind 17,154 2, Allowance for doubtful accounts (193) 207 1,852 Allowance for obsolete inventory 2,514 1,519 2,799 Amortization of debt related costs 2,708 3,237 4,689 Loss on disposal of fixed assets Share-based expense 8,473 12,238 7,542 Changes in operating assets and liabilities: Accounts receivable 2,930 2,028 (5,296) Inventory 203 7,472 2,196 Prepaid expenses and other current assets (22,053) 501 (6,185) Deferred customer acquisition costs 21,523 13,322 (10,796) Due from related parties 2 74 Other assets (1,510) (7,498) (81) Accounts payable (22,595) (22,029) (2,966) Accrued expenses (4,764) (10,507) (77,770) Deferred revenue (22,153) (10,124) 20,509 Other liabilities (5,995) (5,321) 23,046 Net cash provided by (used in) operating activities 38,396 3,555 (270,926) Cash flows from investing activities: Capital expenditures (23,724) (11,386) (20,386) Purchase of intangible assets (1,250) (560) (5,500) Purchase of marketable securities (21,375) (236,875) Maturities and sales of marketable securities 101, ,949 Acquisition and development of software assets (21,654) (26,530) (21,346) Increase in restricted cash (3,937) (980) (31,385) Net cash provided by (used in) investing activities (50,565) 40, ,457 Cash flows from financing activities: Principal payments on capital lease obligations (1,251) (1,036) (1,020) Principal payments on notes (1,809) (326) Proceeds from issuance of notes payable 220,300 Discount on notes payable (7,167) Extinguishment of convertible notes (253,460) Debt related costs (252) (26,799) Proceeds from subscription receivable, net Proceeds from directed share program, net Proceeds from exercise of stock options Net cash provided by (used in) financing activities (3,253) (68,370) 245 Effect of exchange rate changes on cash 1,501 (1,079) 513 Net change in cash and cash equivalents (13,921) (25,408) (138,711) Cash and cash equivalents, beginning of period 46,134 71, ,253 Cash and cash equivalents, end of period $ 32,213 $ 46,134 $ 71,542 Supplemental disclosures of cash flow information: Cash paid during the periods for: Interest $ 28,671 $ 20,519 $ 19,004 Income taxes $ 1,206 $ 1,181 $ 182 Non-cash financing transactions during the periods for: Conversion of convertible notes into common stock: Third lien convertible notes, net of discount and debt related costs $ 9,361 $ $ 152 Embedded derivative liability within third lien convertible notes $ 57,050 $ $ F- 6 VONAGE ANNUAL REPORT 2009 The accompanying notes are an integral part of these financial statements

62 Table of Contents VONAGE HOLDINGS CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) Additional Stock Accumulated Other Common Subscription Accumulated Treasury Comprehensive (In thousands) Stock Paid-in Capital Receivable Deficit Stock Income (Loss) Total Balance at December 31, 2006 $ 156 $ 922,097 $ (5,721) $ (720,857) $ (12,342) $ (132) $ 183,201 Stock option exercises Share-based compensation 7,542 7,542 Share-based award activity (157) (157) Convertible notes converted into common stock Directed share program transactions, net Stock subscription receivable payments (7) Comprehensive income (loss): Change in unrealized loss on available-for-sale investments (13) (13) Foreign currency translation adjustment Net loss (267,428) (267,428) Total comprehensive income (loss) (267,428) 298 (267,130) Balance at December 31, ,600 (5,266) (988,285) (12,499) 166 (75,127) Stock option exercises Share-based expense 12,238 12,238 Share-based award activity (205) (205) Premium attributed to notes payable 37,884 37,884 Directed share program transactions, net Stock subscription receivable payments 9 9 Comprehensive loss: Change in unrealized loss on available-for-sale investments (1) (1) Foreign currency translation adjustment (1,073) (1,073) Net loss (64,576) (64,576) Total comprehensive loss (64,576) (1,074) (65,650) Balance at December 31, ,768 (5,195) (1,052,861) (12,704) (908) (90,742) Opening adjustment due to separate valuation of embedded derivative (37,884) 7,223 (30,661) Stock option exercises Share-based expense 8,473 8,473 Share-based award activity (174) (174) Convertible notes conversion 43 62,327 62,370 Uncollected stock subscription receivable (5,195) 5,195 Comprehensive income (loss): Foreign currency translation adjustment 1,364 1,364 Net loss (42,598) (42,598) Total comprehensive income (loss) (42,598) 1,364 (41,234) Balance at December 31, 2009 $ 202 $ 1,008,547 $ $ (1,088,236) $ (12,878) $ 456 $ (91,909) The accompanying notes are an integral part of these financial statements F- 7

63 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) 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 subscribers in the United States represented 94% of our subscriber lines at December 31, 2009, we also serve subscribers in Canada and the United Kingdom. SIGNIFICANT ACCOUNTING POLICIES Principles 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 relationship period ) 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. Accounting Standards Codification During 2009, the Company adopted the Financial Accounting Standards Board ( FASB ) Accounting Standards Update No , Amendments based on Statement of Financial Accounting Standards No. 168 The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the Codification ). The Codification became the single source of authoritative Generally Accepted Accounting Principles ( GAAP ) in the United States, other than rules and interpretive releases issued by the United States Securities and Exchange Commission ( SEC ). The Codification reorganized GAAP into a topical format that eliminates the previous GAAP hierarchy and instead established two levels of guidance authoritative and nonauthoritative. All non-grandfathered, non-sec accounting literature that was not included in the Codification became nonauthoritative. The adoption of the Codification did not change previous GAAP, but rather simplified user access to all authoritative literature related to a particular accounting topic in one place. Accordingly, the adoption had no impact on the Company s consolidated financial position or results of operations. All prior references to previous GAAP in the Company s consolidated financial statements were updated for the new references under the Codification. 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 FASB Accounting Standards Codification ( ASC ) 605, Revenue Recognition. Telephony Services Revenue 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 ( 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 is recognized as services are provided, that is, as minutes are used, and is billed to a customer s credit or debit card or ECP in arrears. We estimate the amount of revenues earned but not billed from international calls and from customers exceeding allocated call minutes under limited minute plans from the end of each billing cycle to the end of F- 8 VONAGE ANNUAL REPORT 2009

64 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) each reporting period and record these amounts in accounts receivable. These estimates are based primarily upon historical minutes and have been consistent with our actual results. 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 minimum service period based upon the estimated number of customers that will ultimately earn and claim the rebates. 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. 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. The average customer relationship period was 60 months in 2007, 48 months in 2008 and 44 months in For 2010, the average customer relationship period will be further reduced to 38 months based upon further analysis of historical trends. The impact of these changes to the average customer relationship period 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 compliance and related litigation, E-911 compliance and to cover taxes that we are charged by the suppliers of telecommunications services. In addition, beginning on October 1, 2006, we began charging customers Federal Universal Service Fund ( USF ) fees. We recognize revenue on a gross basis for USF, and related fees, which were $57,835 for 2009, $54,444 for 2008, and $44,782 for We record these fees as revenues when billed. 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. Disconnect fee revenues amounted to $21,715 for 2009, $22,271 for 2008, and $19,099 for Customer Equipment and Shipping Revenue Customer equipment and shipping revenues consist of revenues from sales of customer equipment to wholesalers or directly to customers for replacement devices, or for upgrading their device at the time of customer sign-up for which we charge an additional fee. In addition, customer equipment and shipping revenues include the fees that customers are charged for shipping their customer equipment to them. 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. 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. Equipment recovery fee revenues amounted to $17,044 for 2009, $14,788 for 2008, and $4,983 for Direct Cost of Telephony Services Direct cost of telephony services consists primarily of direct costs that we pay to third parties in order to provide telephony services. These costs include access and interconnection charges that we pay to other telephone companies to terminate domestic and international phone calls on the public switched telephone network. In addition, these costs include the cost to lease phone numbers, to co-locate in other telephone companies facilities, to provide enhanced emergency dialing capabilities to transmit 911 calls and to provide local number portability. These costs also include taxes that we pay on telecommunications services from our suppliers or imposed by government agencies such as Federal USF and royalties for use of third parties intellectual property (including patents referenced in the Verizon litigation). For 2009, 2008 and 2007, we paid $57,835, $54,444, and $44,782, respectively in Federal USF costs. These costs do not include indirect costs such as depreciation and amortization, payroll and facilities costs. Our presentation of direct cost of telephony services may not be comparable to other similar companies. Direct Cost of Goods Sold Direct cost of goods sold consists primarily of costs that we incur when a customer signs up for our service. These costs include the cost of customer equipment for customers who subscribe through the direct sales channel in excess of activation fees. In addition, these costs include the amortization of deferred customer equipment, the cost of shipping and handling for customer equipment, the installation manual that accompanies the customer equipment and the cost of certain promotions. Shipping and Handling Revenue relating to shipping and handling is included in customer equipment and shipping revenue and amounted to $4,660 for 2009, $11,130 for 2008 and $12,779 for Costs related to shipping and handling F- 9

65 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) are included in direct cost of goods sold and amounted to $11,565 for 2009, $14,215 for 2008 and $13,469 for Advertising Costs Advertising costs, which are included in marketing expense, are expensed as incurred and amounted to $146,448 for 2009, $170,686 for 2008 and $196,651 for Development Expenses Costs associated with the development of new services and changes to existing services are charged to operations as incurred and are included in selling, general and administrative expense. Cash and Cash Equivalents We maintain cash with several investment grade financial institutions. Highly liquid investments, which are readily convertible into cash, with original maturities of three months or less, are recorded as cash equivalents. Interest income was $277 for 2009, $3,236 for 2008 and $17,582 for Certain Risks and Concentrations Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, marketable securities and accounts receivable. They are subject to fluctuations in both market value and yield based upon changes in market conditions, including interest rates, liquidity, general economic conditions and conditions specific to the issuers. Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States. By collecting subscription fees in advance, we are able to minimize our accounts receivable and bad debt exposure. If a customer s credit card, debit card or ECP is declined, we generally suspend international calling capabilities as well as their ability to incur domestic usage charges in excess of their plan minutes. If the customer s credit card, debit card or ECP cannot be successfully processed during the current and subsequent two month s billing cycle, we will terminate the account. In addition, we automatically charge any per minute fees to our customers credit card, debit card or ECP monthly in arrears. To further mitigate our bad debt exposure, a customer s credit card, debit card or ECP will be charged in advance of their monthly billing if their international calling or overage charges exceed a certain dollar threshold. 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. Property and Equipment Property and equipment includes acquired assets and those accounted for under capital leases and consist principally of network equipment and computer hardware, furniture, software and leasehold improvements. In addition, the lease of our corporate headquarters has been accounted for as a capital lease and is included in property and equipment. Network equipment and computer hardware and furniture are stated at cost with depreciation provided using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements are amortized over their estimated useful life of the related assets or the life of the lease, whichever is shorter. The cost of renewals and substantial improvements is capitalized while the cost of maintenance and repairs is charged to operating expenses as incurred. Our network equipment and computer hardware, which consists of routers, gateways and servers that enable our telephony services, is subject to technological risks and rapid market changes due to new products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives or the carrying value of these assets, or both. 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 FASB ASC , 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 $72,359 at December 31, 2009 and $53,429 at December 31, 2008, substantially all which were external costs. Accumulative amortization was $36,819 and $19,061 at December 31, 2009 and 2008, respectively. Amortization expense was $20,486, including $1,068 for impairment for 2009, $13,761, including $1,904 for impairment for 2008 and $4,132 for Intangible Assets Patents Intangible assets acquired in the settlement of litigation or by direct purchase are accounted for based upon the fair value of assets received. Patent rights acquired in the settlement of litigation or by direct purchase are accounted for based upon the fair value of assets received. Long-Lived Assets We evaluate impairment losses on long-lived assets used in operations when events and changes in circumstances indicate that the assets might be impaired. If our F- 10 VONAGE ANNUAL REPORT 2009

66 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) review indicates that the carrying value of an asset will not be recoverable, based on a comparison of the carrying value of the asset to the undiscounted future cash flows, the impairment will be measured by comparing the carrying value of the asset to its fair value. Fair value will be determined based on quoted market values, discounted cash flows or appraisals. Impairments are recorded in the statement of operations as part of depreciation expense. In 2009, 2008 and 2007, we incurred an impairment loss of $1,886, $1,762 and $1,374, respectively. The impairments were mainly for marketing displays, network equipment, computer hardware and furniture and fixtures. Facility Exit and Restructuring Costs In June 2009, we announced the closing of our office facility in Canada. The facility exit and restructuring costs for the year ended December 31, 2009 were $2,529. These costs included $1,090 for severance and personnel-related costs which were recorded as selling, general and administrative in the statement of operations, $670 for lease termination and facilities-related costs which were recorded as selling, general and administrative in the statement of operations and $769 for asset impairments which were recorded in the statement of operations as part of depreciation expense. As of December 31, 2009, all of these costs were paid. 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 have provided our credit card processors with cash reserves of $22,423 and a cash collateralized letter of credit for $10,500. We have a cash collateralized letter of credit for $7,350 and $7,000 as of December 31, 2009 and December 31, 2008, respectively, related to lease deposits for our offices. The total amount of collateralized letters of credit was $18,000 and $17,562 at December 31, 2009 and December 31, 2008, respectively. Pursuant to the terms of credit facilities (see Note 7. Long-term Debt) commencing October 1, 2009, all specified unrestricted cash above $30,000, subject to certain adjustments, is 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 will have the right to withdraw funds from the Concentration Account in excess of $30,000. As of December 31, 2009, we have funded $3,277 into the Concentration Account. We funded an additional $18,718 through February 25, In the aggregate, cash reserves and collateralized letters of credit of $43,700 and $39,585 were recorded as long-term restricted cash at December 31, 2009 and December 31, 2008, 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 $2,708 and $478 for 2009 and 2008, respectively. Accumulated amortization of debt related costs was $4,859 and $478 at December 31, 2009 and December 31, 2008, respectively, including a $1,673 write off of debt related costs associated with the conversion of convertible notes for the year ended December 31, Costs of $9,935 in connection with our December 2005 and January 2006 issuance of convertible notes was deferred and amortized as interest expense through September 30, 2007 over the five-year term of the notes. Although the notes would have matured on December 1, 2010, they could have been put to us on December 16, In the fourth quarter of 2007, the rate of amortization was accelerated so that only one third of the original deferred financing costs remained to be amortized in Amortization expense related to these costs was included in interest expense in the consolidated statements of operations and was $2,758, $4,689 in 2008 and 2007, respectively. Additionally, the unamortized portion of $414 at the time the convertible notes ( Previous Convertible Notes ) were repaid was included in loss on early extinguishment of notes in our consolidated statement of operations for Derivatives We do not hold or issue derivative instruments for trading purposes; however, certain features within our 20% senior secured third lien notes due 2015 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. Foreign Currency Generally, the functional currency of our non-u.s. subsidiaries is the local currency. The financial statements of these subsidiaries are translated to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs and expenses. Translation gains and losses are deferred and F- 11

67 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) recorded in accumulated other comprehensive loss as a component of stockholders equity. We recorded a net translation gain of $1,364 in 2009 and a net translation loss of $1,073 in 2008, respectively. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. We recognized a net gain of $46 for 2009, a net loss of $315 for 2008 and a net gain of $56 for 2007 resulting from foreign exchange transactions. Income Taxes We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of its assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. We record a valuation allowance to reduce the deferred tax assets to the amount that we estimate is more likely than not to be realized. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution. We have not had any unrecognized tax benefits. We recognize interest and penalties accrued related to unrecognized tax benefits as components of its income tax provision. We have not had any interest and penalties accrued related to unrecognized tax benefits. 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 our 20% senior secured third lien notes due 2015, 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. The following shares were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects: Comprehensive Loss Comprehensive loss consists of net loss and other comprehensive items. Other comprehensive items include foreign currency translation adjustments and unrealized losses on available for sale investments. Assets and liabilities of foreign operations are translated at the period-end exchange rate and revenue and expense amounts are translated at the average rates of exchange prevailing during the period. At December 31, 2009, accumulated other comprehensive income in our consolidated balance sheet was $456 for cumulative translation gain. At December 31, 2008, accumulated other comprehensive loss in our consolidated balance sheet was $908 for cumulative translation loss. Share-Based Compensation For the Years Ended December 31, Common stock warrants ,085 Convertible notes (1) 17,824 Convertible notes (2) 19,638 62,069 Restricted stock units 2,792 3,100 3,104 Employee stock options 28,528 29,227 18,257 51,472 94,910 42,270 (1) refers to our Previous Convertible Notes issued in December 2005 and January (2) The share amount in 2008 is related to our convertible notes issued in November 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. F- 12 VONAGE ANNUAL REPORT 2009

68 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) Recent Accounting Pronouncements In October 2009, the FASB issued Accounting Standards Update No ( ASU ) 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 for separating consideration in multiple-deliverable arrangements. ASU 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, Early adoption is permitted on a prospective or retrospective basis. We are currently evaluating the impact of ASU on our financial statements. In May 2008, the FASB affirmed the consensus of FASB ASC , Debt with Conversion and other Options (Including Partial Cash Settlement), which applies to all convertible debt instruments that have a net settlement feature; which means that such convertible debt instruments, by their terms, may be settled either wholly or partially in cash upon conversion. FASB ASC requires issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion to separately account for the liability and equity components in a manner reflective of the issuer s nonconvertible debt borrowing rate. Previous guidance provided for accounting for this type of convertible debt instrument entirely as debt. FASB ASC was effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The adoption of FASB ASC did not have an impact on our financial statements. In April 2008, the FASB issued FASB ASC , General Intangibles Other than Goodwill. FASB ASC amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB ASC This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations after their acquisitions. FASB ASC was effective for financial statements issued for fiscal years and interim periods beginning after December 15, Since this guidance applied prospectively, on adoption, there was no impact to our consolidated financial statements. In February 2008, the FASB amended FASB ASC 820, which delayed the effective date of FASB ASC 820 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. The full adoption of FASB ASC 820 did not have a material impact on our consolidated financial position, results of operations or cash flows. Reclassifications Certain reclassifications have been made to prior years financial statements in order to conform to the current year s presentation. The reclassifications had no impact on net earnings previously reported. Note 2. Prepaid Expenses and Other Current Assets December 31, Inventory $ 9,457 $ 5 Telecommunications 8,845 2,977 Nontrade receivables 7,117 4,710 Software and hardware maintenance and support 6,958 2,814 Services 2,887 1,149 Insurance 1,885 1,739 Marketing 894 4,367 Other prepaids 2, $ 40,425 $ 18,325 F- 13

69 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) Note 3. Property and Equipment December 31, Building (under capital lease) $ 25,709 $ 25,709 Network equipment and computer hardware 122, ,888 Leasehold improvements 41,608 42,125 Furniture 9,849 10,887 Vehicles Displays , ,187 Less: accumulated depreciation and amortization (108,990) (85,895) Net property and equipment $ 90,548 $ 98,292 Related depreciation and amortization expense was $31,586 for 2009, $32,035 for 2008 and $29,442 for Included in depreciation and amortization expense for 2009, 2008 and 2007 was $2,199, $2,199 and $2,368 related to capital leases, respectively. Note 4. Intangible Assets December 31, License to use portfolio of Voice over Packet patents $ 1,250 $ Patents for compression of packetized digital signal 5,268 5,268 License to use Sprint s portfolio of Voice over Packet patents 5,500 5,500 Trademark ,578 11,328 Less: accumulated amortization (7,247) (5,928) Net intangible assets $ 5,331 $ 5,400 In June 2006, we purchased three patents related to the compression of packetized digital signals commonly used in Voice over Internet Protocol ( VoIP ) technology at a cost of $5,268. In July 2006, we began amortizing the cost of these patents over their estimated useful lives of 2.7 years. Amortization expense was $424 for the year ended December 31, 2009 and $1,938 for the years ended December 31, 2008 and 2007, respectively. These patents were fully amortized as of March 31, In October 2007, in connection with the settlement of our patent litigation with Sprint, we acquired a license to use Sprint s portfolio of Voice over Packet patents. The fair value assigned to these patents was $5,500. We began amortizing the cost of these patents in October 2007 over their patent lives of 6.6 years. Amortization expense was $825 for the years ended December 31, 2009 and 2008, and $206 for the year ended December 31, 2007, respectively. Annual amortization will be approximately $825. In December 2009, we entered into a licensing agreement for a portfolio of Voice over Packet patents. The fair value assigned to these patents was $1,250. We will begin amortizing the cost of these patents in January 2010 over the estimated useful lives of 5 years. Trademark In April 2008, in connection with the settlement of a trademark dispute, we acquired the right to use the trademark in question. The fair value assigned to the trademark was $560. This trademark is being amortized over its remaining life of 8 years. Amortization expense was $70 and $52 for the year ended December 31, 2009 and 2008, respectively. F- 14 VONAGE ANNUAL REPORT 2009

70 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) Note 5. Accrued Expenses December 31, Compensation and related taxes and temporary labor $ 16,747 $ 14,776 Taxes and fees 14,415 14,313 Telecommunications 9,873 10,614 Marketing 9,331 14,482 Litigation 6,689 5,343 Customer credits 3,384 2,172 Accrued interest 3,304 3,350 Professional fees 2,209 3,439 Credit card fees Inventory Other accruals 3,000 3,570 $ 69,171 $ 73,482 Note 6. Income Taxes The following table summarizes deferred taxes resulting from differences between financial accounting basis and tax basis of assets and liabilities. December 31, Current assets and liabilities: Deferred revenue $ 21,450 $ 21,405 Accounts receivable and inventory allowances 688 1,309 Accrued expenses 5,218 4,253 Debt original issue discount (2,098) (2,027) Debt related costs 1,656 1,417 26,914 26,357 Valuation allowance (26,914) (26,357) Net current deferred tax asset $ $ Non-current assets and liabilities: Depreciation and amortization $ 2,089 $ (1,141) Accrued expenses 5,567 7,408 Research and development tax credit Stock option compensation 19,820 17,059 Capital leases (1,275) (772) Deferred revenue 3,173 7,732 Debt original issue discount (6,934) (9,112) Debt related costs 6,014 6,564 Net operating loss carryforward 330, , , ,190 Valuation allowance (359,027) (360,190) Net non-current deferred tax asset $ $ F- 15

71 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) We have net losses for financial reporting purposes. 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 valuation allowance on net deferred tax assets of $385,941 as of December 31, 2009 and $386,547 as of December 31, The components of income (loss) before income tax expense are as follows: The components of the income tax expense are as follows: For the Years Ended December 31, United States $ (41,761) $ (59,475) $ (242,030) Foreign (1) (4,423) (25,216) $ (41,762) $ (63,898) $ (267,246) The reconciliation between the U.S. statutory federal income tax rate and the effective rate is as follows: For the Years Ended December 31, Current: State and local taxes $ (836) $ (678) $ (182) Foreign Federal $ (836) $ (678) $ (182) Deferred: State and local taxes $ $ $ Foreign Federal $ $ $ $ (836) $ (678) $ (182) For the Years Ended December 31, U.S. Federal statutory tax rate (34%) (34%) (34%) Permanent items 35% 0% 0% State and local taxes, net of federal benefit 2% (4%) (5%) Sale of net operating loss carryforwards 0% (1%) (1%) Valuation reserve for income taxes (1%) 40% 40% Effective tax rate 2% 1% 0% 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 In addition, we had net operating loss carry forwards for Canadian tax purposes of $50,128 expiring through We also had net operating loss carry forwards for United Kingdom tax purposes of $38,078 with no expiration date. No provision has been made for income taxes on the undistributed earnings of our foreign subsidiaries of $10,718 at December 31, 2009 as we intend to indefinitely reinvest such earnings. 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. In addition, F- 16 VONAGE ANNUAL REPORT 2009

72 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) we may be able to increase the base Section 382 limitation amount during the first five years following the ownership change to the extent we realize built-in gains during that time period. A built-in gain generally is gain or income attributable to an asset that was held at the date of the ownership change and that had a fair market value in excess of the tax basis at the date of the ownership change. Section 382 provides that any unused Section 382 limitation amount can be carried forward and aggregated with the following year s available net operating losses. 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 As a result, $171,147 of the total U.S. net operating losses will be subject to an annual base limitation of $39,374. As noted above, we believe we may be able to increase the base Section 382 limitation for built-in gains during the first five years following the ownership change. We participated 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 tax years 2009, 2008 and 2007 we sold approximately, $0, $10,051 and $8,488, respectively, of our New Jersey state net operating loss carryforwards for a recognized benefit of $0 in 2009, approximately $605 in 2008, $649 in Collectively, all transactions represent approximately 85% of the surrendered tax benefit each year and have been recognized in the year received. Note 7. Long-Term Debt A schedule of long-term debt at December 31, 2009 and 2008 is as follows: At December 31, 2009, future payments under long-term debt obligations over each of the next five years and thereafter are as follows: December 31, % First Lien Senior Facility due 2013, net of discount $ 107,246 $ 104,459 20% Second Lien Senior Facility due 2015, net of discount 86,614 69,708 20% Third Lien Convertible Notes due 2015, net of discount 6,608 18,580 $ 200,468 $ 192,747 First Lien Senior Facility Second Lien Senior Facility Third Lien Convertible Notes 2010 $ 1,303 $ $ , , ,597 1, ,200 Thereafter 63,000 5,695 Minimum future payments of principal 128,165 72,000 5,695 Plus accreted interest 18,576 1,478 Less unamortized discount 19,616 3, Current portion 1,303 Long-term portion $ 107,246 $ 86,614 $ 6,608 December 2005 and January 2006 Convertible Notes Financing In December 2005 and January 2006, we issued convertible notes with an aggregate principal amount of $249,919 (the Previous Convertible Notes ). We used the proceeds from the offering of the Previous Convertible Notes for working capital and other general corporate purposes (including the funding of our operating losses). F- 17

73 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) Since the holders were able to require us to repurchase all or any portion of the Previous Convertible Notes on December 16, 2008 at a price in cash equal to 100% of the principal amount of the Previous Convertible Notes plus any accrued and unpaid interest and late charges, the Previous Convertible Notes were classified as a current liability on the December 31, 2007 balance sheet. At our option, we were able to pay interest on the Previous Convertible Notes in cash or in-kind. If we paid in cash, interest accrued at a rate of 5% per annum payable quarterly in arrears. If we paid-in-kind, the interest accrued at a rate of 7% per annum payable quarterly in arrears. Interest paid-in-kind will increase the principal amount outstanding and will thereafter accrue interest during each period. The first interest payment made on March 1, 2006 was paid-in-kind in the amount of $3,645. All subsequent interest payments of approximately $3,100 were paid in cash. We evaluated the provisions of the Previous Convertible Notes periodically to determine whether any of the provisions would be considered embedded derivatives that would require bifurcation under FASB ASC 815, Derivatives and Hedging. Because the shares of common stock underlying the Previous Convertible Notes had not been registered for resale at the time of issuance, they were not readily convertible to cash. Thus, the conversion option did not meet the net settlement requirement of FASB ASC 815, and would not be considered a derivative if freestanding. Accordingly, the Previous Convertible Notes did not contain an embedded conversion feature that must be bifurcated. In November 2006, the underlying shares of Common Stock were registered, which satisfied the net settlement required under FASB ASC 815. However, in accordance with FASB ASC 815, which we adopted on October 1, 2006, contingently payable registration payment arrangements are no longer considered part of the related financial instruments and are only recognized when payment is probable and the amount is reasonably estimable. We evaluated the registration payment arrangement in the Previous Convertible Notes in accordance with FASB ASC 470, Debt with Conversion and Other Options ( FASB ASC 470 ) and concluded that the likelihood of having to make a registration payment was not probable. As such, no amounts were recorded in the financial statements with respect to the registration payment arrangement. We identified certain other embedded derivatives and concluded their value was de minimis. Since the Previous Convertible Notes issued in December 2005 and January 2006 did not contain an embedded conversion feature that required bifurcation, we evaluated the conversion feature to determine if it was a beneficial conversion feature under FASB ASC 470. The conversion price equaled the fair value of the underlying Common Stock. As such, there was no beneficial conversion feature for those issuances. For the Previous Convertible Notes issued on March 1, 2006 for the payment of interest in-kind, the fair market value of the underlying Common Stock exceeded the conversion price. Accordingly, in March 2006 we recorded the intrinsic value of the beneficial conversion feature on 256 shares in the amount of $214 as a discount to the convertible notes with an offsetting amount increasing additional paid-in-capital. This beneficial conversion feature was amortized to interest expense over the remaining life of the Previous Convertible Notes on our consolidated statement of operations using the effective interest method. The amortization for the year ended December 31, 2008 and 2007 was $108 and $42, respectively. The unamortized 2006 portion of the Previous Convertible Notes were repaid was included in loss on early extinguishment of debt in our consolidated statement of operations for November 2008 Financing 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, 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. We used the net proceeds of the Financing of $213,133 ($220,300 principal amount less original issue discount of $7,167) plus $40,327 of cash on hand, to repurchase $253,460 of the Previous Convertible Notes in a tender offer that expired on November 3, We also incurred $27,051 of debt related costs in connection with the Financing. For holders of the new debt who were also holders of the Previous Convertible Notes, we recorded a loss on early extinguishment of notes of $30,570 on $174,263 of the repurchase in accordance with FASB ASC 470 Debt Modification and Extinguishment. For this $174,263 of the Financing, the First Lien Senior Facility, Second Lien Senior Facility and Convertible Notes were recorded at fair market value of $183,935 with $85,184 allocated to the First Lien Senior Facility, $54,620 allocated to the Second Lien Senior Facility and $44,131 allocated to the Convertible Notes. The excess of the fair market value of the Financing over the Previous Convertible Notes of $9,672, plus $20,452 in fees paid to the holders of the Previous Convertible Notes, $414 of unamortized debt related costs on the Previous Convertible Notes and $32 of F- 18 VONAGE ANNUAL REPORT 2009

74 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) unamortized beneficial conversion related to the Previous Convertible Notes comprised the $30,570. For the remaining $46,037 of the Financing, since many of the purchasers purchased more than one component of the Financing, we allocated the net proceeds of $44,543 (reflecting a reduction of $1,494 for the portion of $7,167 discount attributed to $46,037) to the First Lien Senior Facility, Second Lien Senior Facility and Convertible Notes based upon their relative fair values with $20,138 allocated to the First Lien Senior Facility, $12,652 allocated to the Second Lien Senior Facility and $11,753 allocated to the Convertible Notes. 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 $5,362 and $766 at December 31, 2009 and December 31, 2008, respectively. The amortization for the year ended December 31, 2009 and 2008 was $4,956 and $766, 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 $766 and $116 at December 31, 2009 and December 31, 2008, respectively. The amortization for the year ended December 31, 2009 and 2008 was $650 and $116, 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 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 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 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. Certain events could trigger prepayment obligations under the First Lien Senior Facility. If we have more than $75,000 of specified unrestricted cash in any quarter after January 1, 2009, we may be obligated to prepay without premium certain amounts. 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 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 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 of PIK interest as of December 31, 2009 and December 31, 2008 was $18,576 and $2,320, 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 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, shares for each $1,000 principal amount of Convertible Notes, or approximately $0.29 F- 19

75 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) 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 year ended December 31, 2009, we received Notices of Conversion from certain note holders indicating their desire to convert their Convertible Notes. In the aggregate $12,305 principal amount of Convertible Notes were converted into 42,431 shares of our common stock. As of December 31, 2009, there were $5,695 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 December 31, 2009 and December 31, 2008 was $1,478 and $580, respectively. In connection with note conversions during the year ended December 31, 2009, $2,207 was paid for accrued interest. 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 new guidance codified in 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 at December 31, 2009: 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 $1,541 as of December 31, 2009, including a $1,271 write-off of discount on notes related to the conversion of Convertible Notes, and $47 as of December 31, Amortization for the year ended December 31, 2009 was $223. December 31, 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. 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, The changes in fair value were recorded as an expense within other income (expense) for the year ended December 31, 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. December 31, For the $5,695 principal amount of Convertible Notes that were not converted as of December 31, 2009, the fair value of the conversion feature of those Convertible Notes at December 31, 2009 was $25,050, which was an increase in value of $14,698 from the fair value of the conversion feature as of December 31, F- 20 VONAGE ANNUAL REPORT 2009

76 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) Security Amounts borrowed under the Financing are secured by substantially all of the assets of 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, is swept into a 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 will have the right to withdraw funds from the Concentration Account in excess of $30,000. As of December 31, 2009, we have funded $3,277 into the Concentration Account. We funded an additional $18,718 through February 25, Other Terms and Conditions of the Financing 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 (i) $95,000 until December 31, 2009 and (ii) for each quarter thereafter, 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 December 31, 2009, 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. Note 8. Fair Value of Financial Instruments Effective January 1, 2008, we adopted FASB ASC 820, Fair Value Measurements and Disclosures ( FASB ASC 820 ). 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 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 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 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 $553 as of December 31, 2009 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 $25,050 as of December 31, 2009 is included as a Level 3 liability. F- 21

77 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) The following tables set forth the inputs as of December 31, 2009 and January 1, 2009 and a summary of changes in the fair value of our Level 3 liabilities for the year ended December 31, 2009: December 31, 2009 January 1, 2009 Maturity date October 31, 2015 October 31, 2015 Risk- free interest rate 2.95% 2.24% Price of common stock $ 1.40 $0.66 Volatility 109.3% 87% For the Year Ended December 31, Liabilities: 2009 Beginning balance (January 1, 2009) $ 32,720 Increase in value for notes converted 34,682 Fair value adjustment for notes converted (57,050) Total unrealized loss in earnings 14,698 Ending balance $ 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 December 31, 2009 and December 31, 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 the First Lien Senior Facility, Second Lien Senior Facility and Convertible Notes at December 31, 2009, each debt instrument would bear an interest rate significantly below the stated coupon rates (See Note 7 Long-Term Debt). Given the reductions in the market rate of interest, we estimate the fair value of our debt at December 31, 2009, using a present value model, was approximately $147,000 for the First Lien Senior Facility ($107,246 carrying amount); approximately $135,000 for the Second Lien Senior Facility ($86,814 carrying amount) and approximately $10,000 for the Convertible Notes ($6,608 carrying amount) exclusive of the conversion feature which, as noted above, is already recorded at fair value. Note 9. Common Stock Directed Share Program In connection with our initial public offering ( IPO ), we requested that our underwriters reserve 4,219 shares for our customers to purchase at the initial public offering price of $17.00 per share through the Vonage Customer Directed Share Program ( DSP ). In connection with our IPO, we also entered into an Underwriting Agreement, dated May 23, 2006, pursuant to which we agreed to indemnify the Underwriters for any losses caused by the failure of any participant in the DSP to pay for and accept delivery of the shares that had been allocated to such participant in connection with our IPO. In the weeks following the IPO, certain participants in the DSP that had been allocated shares failed to pay for and accept delivery of such shares. As a result of this failure and as part of the indemnification obligations, we acquired from the Underwriters or their affiliates 1,056 shares of our common stock which had an aggregate fair market value of $11,723. These shares were recorded as treasury stock on the consolidated balance sheet using the cost method. We do not anticipate making any further purchases of securities pursuant to our indemnification obligations under the Underwriting Agreement. Because we were pursuing the collection of monies owed from the DSP participants who failed to pay for their shares, we recorded a stock subscription receivable of $6,110 representing the difference between the aggregate IPO price value of the unpaid DSP shares and the $11,723 we paid for these shares. In the second half of 2006, we reimbursed $6,110 of the indemnification obligation due to the Underwriters in accordance with the Underwriting Agreement. Through December 31, 2009, we received $915 in payments from certain participants in the DSP that had been allocated shares and failed to pay for such shares leaving $5,195 uncollected. We have directed our outside legal counsel to cease seeking to collect the remaining uncollected balances from DSP participants through the Financial Industry Regulatory Authority dispute resolution process as the litigation surrounding the IPO has been settled. As such, we reversed the remaining $5,195 against additional paid-incapital as of December 31, 2009 for these uncollected balances. F- 22 VONAGE ANNUAL REPORT 2009

78 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) Common Stock Warrant On April 17, 2002, Vonage s principal stockholder and Chairman received a warrant to purchase 514 shares of Common Stock at an exercise price of $0.70 per share that expires on June 20, As a result of the issuance of our Convertible Notes, the exercise price was reduced to $0.58. In connection with $20,000 of notes payable from our principal stockholder and Chairman in 2003, we issued a warrant to purchase Series A-2 preferred stock, which automatically converted into the 2,571 of common stock upon our IPO with an exercise price of $1.40 per share that are included in our consolidated balance sheet under additional paid-in capital. These warrants expired on October 1, Note 10. Employee Benefit Plans Share-Based Compensation Our stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. Currently, we grant options from our 2006 Incentive Plan. Our 2001 Stock Incentive Plan was terminated by our board of directors in As such, share-based awards are no longer granted under the 2001 Stock Incentive Plan. Under the 2006 Incentive Plan, share-based awards can be granted to all employees, including executive officers, outside consultants and non-employee directors. Vesting periods for share-based awards are generally four years for both plans. Awards granted under each plan expire in five or 10 years from the effective date of grant. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model. The assumptions used to value options are as follows: Risk-free interest rate % % 5.04 % Expected stock price volatility % % % Dividend yield 0.00 % 0.00 % 0.00 % Expected life (in years) Beginning January 1, 2006, we estimated the volatility of our stock using historical volatility of comparable public companies in accordance with guidance in FASB ASC 718, Compensation-Stock Compensation. Beginning in the first quarter of 2008, we used the historical volatility of our common stock to measure expected volatility for future option grants. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding, which we derive based on our historical settlement experience Stock Incentive Plan In February 2001, we adopted the 2001 Stock Incentive Plan, which is an amendment and restatement of the 2000 Stock Incentive Plan of MIN-X.COM, INC. The 2001 Stock Incentive Plan provides for the granting of options or restricted stock awards to our officers, directors and employees. The objectives of the 2001 Stock Incentive Plan include attracting and retaining personnel, providing for additional performance incentives, and promoting our success by providing employees the opportunity to acquire stock. During 2005, the number of shares authorized for issuance pursuant to options or restricted stock awards was increased from 7,503 to 28,286. In management s opinion, all stock options were granted with an exercise price at or above the fair market value of our common stock at the date of grant with the exception of a grant in 2005 for 125 shares. Initially, we recorded deferred compensation in 2005 related to this option grant. On January 1, 2006, we reversed the remaining deferred compensation balance in accordance with FASB ASC 718. There weren t any options available for future grant under the 2001 Stock Incentive Plan since our board of directors terminated the plan in Incentive Plan In May 2006 we adopted the 2006 Incentive Plan. The 2006 Incentive Plan permits the grant of stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock, performance units, annual awards and other awards based on, or related to, shares of our common stock. Options awarded under our 2006 Incentive Plan may be nonstatutory stock options or may qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. Our 2006 Incentive Plan contains various limits with respect to the types of awards, as follows: > a maximum of 20,000 shares may be issued under the plan pursuant to incentive stock options; > a maximum of 10,000 shares may be issued pursuant to options and stock appreciation rights granted to any participant in a calendar year; F- 23

79 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) > a maximum of $5,000 may be paid pursuant to annual awards granted to any participant in a calendar year; and > a maximum of $10,000 may be paid (in the case of awards denominated in cash) and a maximum of 10,000 shares may be issued (in the case of awards denominated in shares) pursuant to awards, other than options, stock appreciation rights or annual awards, granted to any participant in a calendar year. The maximum number of shares of our common stock that are authorized for issuance under our 2006 Incentive Plan will be determined under a formula set forth in the plan, and will equal approximately 17.65% of the number of shares that are issued and outstanding from time to time. Shares issued under the plan may be authorized and unissued shares or may be issued shares that we have reacquired. Shares covered by awards that are forfeited, cancelled or otherwise expire without having been exercised or settled, or that are settled by cash or other non-share consideration, will become available for issuance pursuant to a new award. Shares that are tendered or withheld to pay the exercise price of an award or to satisfy tax withholding obligations will not be available for issuance pursuant to new awards. At December 31, 2009, 14,028 shares were available for future grant under the 2006 Stock Incentive Plan. The following table summarizes the activity for all awards under both of our Stock Incentive Plans: Range of Exercise Prices Weighted Average Exercise Price Weighted Average Remaining Contractual Aggregate The weighted average grant date fair value of options granted was $0.62, $0.95 and $1.85 for the years ended December 31, 2009, 2008 and 2007, respectively. Weighted Average Grant Date (Shares and Intrinsic Value in Thousands) Number of Shares Term in Years Intrinsic Value Fair Value Awards outstanding at December 31, ,916 $ $35.00 $ $4.09 Granted 10,999 $ $6.94 $2.53 $2.01 Exercised (1,034) $ $1.76 $0.79 $2,442 $2.48 Canceled (7,520) $ $35.00 $6.15 $4.46 Awards outstanding at December 31, ,361 $ $35.00 $ $10,244 $2.97 Granted 16,875 $ $2.21 $1.45 $1.05 Exercised (832) $ $1.76 $0.06 $1,102 $3.11 Canceled (5,072) $ $35.00 $5.07 $3.22 Awards outstanding at December 31, ,332 $ $35.00 $ $2,050 $1.93 Granted 6,819 $ $1.65 $0.68 $0.60 Exercised (1,004) $ $1.92 $0.06 $885 $2.53 Canceled (6,827) $ $35.00 $6.87 $2.59 Awards outstanding at December 31, ,320 $ $35.00 $ $7,612 $1.48 Shares exercisable at December 31, ,097 $ $35.00 $ $761 $2.02 Unvested shares at December 31, ,446 $ $18.00 $ $1,999 $1.61 Unvested shares at December 31, ,223 $ $18.00 $ $6,677 $1.13 Total share-based compensation expense recognized for the years ended December 31, 2009, 2008 and 2007 was $8,473, $12,238 and $7,542, respectively, which were recorded to selling, general and administrative expense in the consolidated statement of operations. As of December 31, 2009, total unamortized share-based compensation was $7,824, which is expected to be amortized over the remaining vesting period of each grant, up to the next 48 months. Compensation costs for all sharebased awards are recognized using the ratable single-option approach on an accrual basis and are amortized using an accelerated amortization schedule. F- 24 VONAGE ANNUAL REPORT 2009

80 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) Restricted stock and restricted stock unit activity under our 2006 Incentive Plan was as follows: (Shares in Thousands) Number of Shares Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Awards outstanding at December 31, ,912 $ 6.49 Granted 3,130 $ 2.40 Exercised (364) $ 6.42 $ 847 Canceled (1,574) $ 4.68 Awards outstanding at December 31, ,104 $ 3.33 $ 7,139 Granted 1,747 $ 1.91 Exercised (786) $ 3.28 $ 1,059 Canceled (960) $ 2.92 Awards outstanding at December 31, ,105 $ 2.67 $ 2,050 Granted 1,188 $ 0.51 Exercised (971) $ 1.58 $ 880 Canceled (536) $ 2.25 Awards outstanding at December 31, ,786 $ 1.72 $ 2,688 The weighted average grant date fair value of restricted stock and restricted stock units granted was $0.51, $1.91 and $2.40 during the year ended December 31, 2009, 2008 and 2007, respectively. Retirement Plan In March 2001, we established a 401(k) Retirement Plan (the Retirement Plan ) available to employees who meet the plan s eligibility requirements. Participants may elect to contribute a percentage of their compensation to the Retirement Plan up to a statutory limit. We may make a contribution to the Retirement Plan in the form of a matching contribution. The employer matching contribution is 50% of each employee s contributions not to exceed $6 in 2007, 2008 and Our expense related to the Retirement Plan was $620 $1,307 and $1,695 in 2009, 2008 and 2007, respectively. Note 11. Commitments and Contingencies Capital Leases Assets financed under capital lease agreements are included in property and equipment in the consolidated balance sheet and related depreciation and amortization expense is included in the consolidated statements of operations. On March 24, 2005, we entered into a lease for our headquarters in Holmdel, New Jersey. We took possession of a portion of the office space at the inception of the lease, another portion on August 1, 2005 and took over the remainder of the office space in early The overall lease term is twelve (12) years and five (5) months. In connection with the lease, we issued a letter of credit which requires $7,350 of cash as collateral, which is classified as restricted cash. The gross amount of the building recorded under capital leases totaled $25,709 as of December 31, 2009 and accumulated depreciation was approximately $8,853 as of December 31, Operating Leases We have entered into various non-cancelable operating lease agreements for certain of our existing office and telecommunications co-location space in the U.S. and for international subsidiaries with original lease periods expiring between 2010 and We are committed to pay a portion of the buildings operating expenses as determined under the agreements. F- 25

81 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) At December 31, 2009, future payments under capital leases and minimum payments under non-cancelable operating leases are as follows over each of the next five years and thereafter: December 31, 2009 Operating Capital Leases Leases 2010 $ 4,038 $ 3, , , , ,369 Thereafter 12,073 Total minimum payments required $ 33,082 $ 4,535 Less amounts representing interest (12,134) Minimum future payments of principal 20,948 Current portion 1,500 Long-term portion $ 19,448 Rent expense was $5,449 for 2009, $7,507 for 2008 and $5,795 for Stand-by Letters of Credit We have stand-by letters of credit totaling $18,000 and $17,562, as of December 31, 2009 and 2008, respectively. End-User Commitments We are obligated to provide telephone services to our registered end-users. The costs related to the potential utilization of minutes sold are expensed as incurred. Our obligation to provide this service is dependent on the proper functioning of systems controlled by third-party service providers. We do not have a contractual service relationship with some of these providers. Vendor Commitments We have engaged several vendors to assist with local number portability, which allows customers to keep their existing phone number when switching to our service. We have committed to pay these vendors a minimum of $3,480 in 2010 and $1,200 in We have engaged a vendor to assist with inbound sales inquiries. We have committed to pay this vendor $8,500 in We have committed to purchase communication devices from several vendors. We have committed to pay these vendors $5,134 in We have engaged a credit card processor to process our billings. We have committed to pay this vendor a minimum of $3,700 each year through We have engaged a vendor to assist with the provision of E-911 services. We have committed to pay this vendor approximately $3,300 in We have engaged a vendor to provide analysis of customer service calls. We have committed to pay this vendor $570 in 2010 and $600 in We have engaged a vendor who will (i) license to us billing and ordering software, (ii) provide professional services relating to the implementation, operation, support and maintenance of the licensed system and (iii) transition support services in connection with migration to the licensed systems. We have committed to pay this vendor $4,330 in 2010, $3,740 in 2011, $3,920 in 2012, $3,980 in 2013 and 2014 and $2,240 in We may terminate the contract sooner subject to payment of early termination fees. Litigation State Attorney General Proceedings. In 2008, we learned that an initial group of 28 states attorneys general had begun an investigation into certain of our business practices. We received document requests from 22 of the participating states. The requests sought information that Vonage previously produced to the Wisconsin Attorney General as part of an investigation commenced in November 2007, which consisted of, among other things, sales and retention marketing scripting, advertising disclosures, and information related to our money back guarantee. The requests also sought, among other things, information related to marketing and billing practices, as well as early termination fees. On November 16, 2009, we reached a definitive agreement to settle the investigation. The settlement was filed for Court approval where such approval was required. There was no finding of any violation or wrongdoing by us, and the 32 states participating F- 26 VONAGE ANNUAL REPORT 2009

82 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) in the settlement have released us and our affiliates from the matters investigated. In connection with the settlement, we agreed to pay an aggregate of $3.0 million to the participating states, including to cover legal and investigation fees incurred. To improve the customer experience and promote continued customer satisfaction, we also agreed to implement certain enhancements to our business practices, many of which we implemented prior to completion of the settlement. We also agreed to provide refunds for certain affected consumers. We previously made a reserve in the second quarter of 2009 for the amount of the payment to the states and the customer refunds, and in September 2009, placed into escrow the payment to the states. We do not believe that any future amounts recorded in connection with this matter will be material to our financial position, results of operations or cash flows. IPO Litigation. During June and July 2006, Vonage, several of our officers and directors, and the firms who served as the underwriters in our IPO were named as defendants in several purported class action lawsuits arising out of our IPO. On January 9, 2007, the Judicial Panel on Multidistrict Litigation transferred all complaints to the District of New Jersey. On September 7, 2007, the Court appointed Zyssman Group as the lead plaintiff, and the law firm of Zwerling, Schachter and Zwerling, LLP as lead counsel. On November 19, 2007, the plaintiffs filed the Amended Complaint, which generally alleges: (i) defendants made misstatements regarding subscriber line growth and average monthly churn rate; (ii) defendants failed to disclose problems with facsimile transmissions and a pending fax litigation case; (iii) defendants failed to disclose all patent infringement claims and issues; and (iv) that the Directed Share Program suffered from various infirmities. On January 18, 2008, defendants filed their motions to dismiss the Amended Complaint. On April 6, 2009, the Court hearing the matter dismissed three claims with leave to amend two of them, and declined at such time to dismiss two of the other claims. On April 20, 2009, the plaintiffs filed a motion asking the Court to reconsider the partial dismissal of their claims. On June 3, 2009, the Court grantedin-part and denied-in-part plaintiffs motion for reconsideration. On June 16, 2009, Vonage and the plaintiffs reached an agreement in principle to settle the litigation, which includes a release and dismissal of all stockholder claims against Vonage and its individual directors and officers who were named as defendants. On December 4, 2009, we received final Court approval for the settlement. The settlement was funded by our liability insurance under our directors and officers liability insurance policy. 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 described above does not resolve the IPO underwriters claims for indemnification against the Company. 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, marketing and quality issues for both phone and fax service, the most recent of which was filed in California in January 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, 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 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 alleges that this conduct (1) violates the California Unfair Competition Law, (2) violates the California Consumer Legal Remedies Act and (3) has unjustly enriched Vonage. We expect to file a motion to remove the action to Federal court. F- 27

83 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) City of New York vs. Verizon and Vonage. On April 21, 2008, the City of New York and the Sheriff of the City of New York filed a complaint ( NYC Complaint ) in New York State Court against Verizon and Vonage, arising out of collection efforts on the $58,000 judgment entered against Vonage in connection with the prior patent litigation with Verizon. The City alleged that either Verizon or Vonage is liable for $2,900, which represents a poundage fee of 5% of the value of the property sought to be levied upon. On May 13, 2008, Vonage filed a motion to dismiss one count of the NYC Complaint. On May 16, 2008, Verizon filed a motion to dismiss the NYC Complaint in its entirety. The Court denied both motions. On March 19, 2009, Verizon filed a motion for an order granting summary judgment and dismissing all claims against Verizon and on May 1, 2009, Vonage filed a cross-motion for summary judgment seeking dismissal of all claims against Vonage. After Verizon s and Vonage s cross-motions for summary judgment were filed and fully briefed, the City advised that it had reached a settlement with Verizon, and it subsequently dismissed its claims against Verizon. On January 5, 2010, Vonage and the City reached a settlement of the litigation, for which no cost was incurred by us. 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. Vonage believes Centre One is a firm owned by a sole inventor. 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. 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 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, 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, 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 February 24, 2010, the Court denied the defendants motions to stay the litigation pending the resolution of the inter partes reexamination. 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- partypatents and other intellectual propertyrights, 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. 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 tele - F- 28 VONAGE ANNUAL REPORT 2009

84 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) communications 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 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, 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, 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, Smaller telecommunication providers, like Vonage, have fifteen months to implement the process before the one-day requirement becomes effective on February 2, 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, or MPUC, 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. Law suits 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 has also 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 enjoined the Nebraska Public Service Commission from asserting state jurisdiction over Vonage to force Vonage to contribute to the Nebraska Universal Service Fund and found the Nebraska Public Service Commission s assertion of state jurisdiction over Vonage to force Vonage to pay into the Nebraska Universal Service Fund is unlawful as preempted by the FCC. It could also include a finding that the FCC s 2004 declaratory ruling did not preempt states from assessing services provided by nomadic VoIP F- 29

85 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) 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 and we are now collecting and remitting sales taxes in those states. In addition, a few 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 have also contacted authorities in each of the other states to discuss how we can financially contribute to the 911 system. We do not know how all these discussions will be resolved, but there is a possibility that we will be required to pay or collect and remit some or all of these Taxes in the future. Additionally, some of these Taxes could apply to us retroactively. As such, we have a reserve of $4,865 at December 31, 2009 as our best estimate of the potential tax exposure for any retroactive assessment. We believe the maximum estimated exposure for retroactive assessments is $18,786 as of December 31, Employment Agreements Chief Executive Officer The Company is a party to an employment agreement with Marc P. Lefar providing for his employment as Chief Executive Officer for an initial three-year term expiring July 29, The term will automatically renew for additional one-year periods, unless either party gives notice at least 90 days prior to the end of the then-current term. In the event of a change in control, the term will also be automatically extended until the first anniversary of the change of control if the term would otherwise be terminated within such one-year period, subject to automatic annual renewals as described above. Under his employment agreement, Mr. Lefar is entitled to receive an annual base salary of not less than $850 subject to review for increase not less than annually by the Company s compensation committee. Mr. Lefar also is eligible to receive an annual discretionary performance-based bonus in accordance with the Company s annual bonus program for senior executives. Mr. Lefar s employment agreement contains a target annual bonus equal to 75% of Mr. Lefar s annual base wages for 2009 and 100% in 2010 and thereafter. Beginning in 2010, the target is subject to review for increase not less than annually by our compensation committee. Mr. Lefar is entitled to payment for or reimbursement of his commercial air and car transport between his primary residence in Atlanta, Georgia and our principal offices. Each year during the term of the employment agreement, Mr. Lefar is also entitled to (i) payment of or reimbursement for amounts up to a maximum of $600 plus the cost of commercial air travel (i.e., the cost of a first-class, fully refundable, direct flight booked one week prior to travel), to be used by Mr. Lefar for private air travel, (ii) payment of or reimbursement for the cost of housing (i.e., furnished housing, including utilities) and (iii) gross-up for tax purposes of any income arising from such expense payments or reimbursements that are treated as nondeductible taxable income. During the term of his employment agreement, if the Company terminates Mr. Lefar s employment without cause or he resigns with good reason or if Mr. Lefar receives notice of non-renewal of his employment agreement with the Company and, in each case, Mr. Lefar provides us with a general release of claims, he will be entitled to a prorated annual bonus for the year of termination, an amount equal to two times his base salary (one year in the event of non-renewal of Mr. Lefar s employment agreement), payment of medical, dental and vision continuation coverage premiums for Mr. Lefar and his dependents under COBRA in excess of the amount he would have paid if he were an active employee for the COBRA continuation coverage period until he receives such coverage from another employer and up to $50 of outplacement services. If Mr. Lefar s employment is terminated by reason of death or disability, he will be entitled to a prorated annual bonus for the year of termination and an amount equal to his base salary for one year (reduced by the projected net amount of any disability benefits received by Mr. Lefar under the Company s group disability policy). The employment agreement provides for vesting of certain stock options issued to Mr. Lefar under specified circumstances such as a change of control or termination of the employment agreement and for the extension of the exercisability of options under certain of those circumstances. The employment agreement provides that Mr. Lefar will receive an additional payment to reimburse him for any excise taxes imposed pursuant to Section 4999 of the Internal Revenue Code, together with reimbursement for any additional taxes incurred by reason of such payments. Separation Agreement with Chairman and Chief Strategist On July 29, 2008, we entered into a Confidential Separation Agreement and General Release (the Separation Agreement ) with Jeffrey Citron, our Chairman, who step - F- 30 VONAGE ANNUAL REPORT 2009

86 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) ped down as Chief Strategist and Interim Chief Executive Officer effective July 29, Mr. Citron will continue as non-executive Chairman of the Board and will have such duties, responsibilities and authority as determined from time to time by our Board of Directors. As Chairman of the Board, Mr. Citron is entitled to (i) an annual retainer of $125 in cash (in lieu of Board and committee meeting fees), (ii) annual option grants of immediately exercisable, non-qualified stock options in an amount equal to one and one-half times the amount awarded to a non-employee director and (iii) annual restricted stock grants of shares of Vonage common stock in an amount equal to one and one-half times the amount awarded to a non-employee director. Pursuant to the terms of the Separation Agreement, we agreed, in consideration for a general release and certain other obligations, to make a one time payment to Mr. Citron, which constituted Mr. Citron s pro-rata bonus for Mr. Citron was also granted nonqualified options to acquire 750 shares of our Common Stock. Under FASB ASC 718, we recorded approximately $682 for this grant in We also entered into a Consulting Agreement with a limited liability company of which Mr. Citron is the president and managing member (the Consultant ). As partial consideration for the consulting services, Mr. Citron was also granted nonqualified options to acquire 1,000 shares of our Common Stock. We recorded $910 of expense related to this grant in the year ended December 31, 2008 in the consolidated statement of operations. During the term of the Consulting Agreement, Mr. Citron was entitled to participate in all employee healthcare plans, programs and arrangements of ours, in accordance with their respective terms, as may be amended from time to time, and on a basis no less favorable than that made available to senior executives of us. The term of the Consulting Agreement expired July 29, 2009 and was not renewed. We paid to the Consultant an aggregate consulting fee of $250. All of Mr. Citron s unvested options and other share-based awards granted prior to the Separation Agreement will continue to vest in accordance with their respective terms as long as Mr. Citron continues to serve as a member of our Board of Directors. Upon Mr. Citron s cessation of service as a member of the Board of Directors, all unvested options and other share-based awards that have not otherwise expired by their terms will become fully vested and exercisable, as applicable, without regard to the satisfaction of any performance criteria. Under FASB ASC 718, Mr. Citron s existing unvested options received accelerated vesting treatment since there was no longer a future service period. Chief Financial Officer As announced on January 14, 2009, John S. Rego, the Company s Executive Vice President, Chief Financial Officer and Treasurer, will be leaving the Company later this year. Mr. Rego s departure from the Company will occur not later than May 31, Mr. Rego and the Company are party to an employment agreement that provides, in general, that upon a termination of Mr. Rego s employment by the Company without cause or by Mr. Rego for good reason, he is entitled to his accrued compensation until the date of termination, one year s salary and a pro rata portion of his bonus for the year of termination. The employment agreement has been modified in certain respects by an Amendment to Employment Agreement dated as of February 23, 2010 and a Separation Agreement and General Release dated as of February 23, 2010 (the Separation Agreement ). For his services during the remainder of 2010 Mr. Rego will receive his salary and the benefits on the same terms as have been provided by his employment agreement. As severance benefits, Mr. Rego will receive $300,000 (one year s salary), payable in most circumstances six months after termination of employment, plus a pro rata portion of his bonus eligibility for 2010 (based on the portion of the year elapsed up to date of termination of his employment) to the extent the Company achieves the performance goals applicable pursuant to the terms of the Company s annual bonus program, which amount (if any) shall be paid on March 15, In addition, Mr. Rego will receive his earned but unpaid 2009 target annual bonus, in the amount of $324,000, which shall be paid on March 15, 2010, and accrued compensation such as vacation pay. Mr. Rego shall also receive (i) his out-of-pocket costs for continuation of medical, dental and vision insurance coverage premiums for himself and his dependents under the Company s existing insurance programs for up to 18 months, subject to termination in the event he receives comparable coverage under a subsequent employer s programs, (ii) reimbursement of up to $50,000 of outplacement fees incurred over the 12 months following termination of his employment, and (iii) up to $15,000 in reimbursement of legal fees incurred in connection with the negotiation of the Separation Agreement. The unvested stock options and unvested restricted share awards held by Mr. Rego will continue to vest in accordance with their terms through the date of termination of his employment; any then unvested stock options and restricted share awards shall be forfeited in accordance with their terms. The Separation Agreement further provides that, in modification of their terms of grant but as permitted in the Company s discretion by the pertinent equity plan, Mr. Rego s vested stock options will remain exercisable for a period of one year following the termination of his employment (but not beyond ten years after their issuance). F- 31

87 Table of Contents VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share amounts) Note 12. Geographic Information Our chief operating decision-makers review financial information presented on a consolidated basis, accompanied by disaggregated information about revenues and marketing expenses by geographic region for purposes of allocating resources and evaluating financial performance. Accordingly, we consider ourselves to be in a single reporting segment and operating unit structure. Information about our operations by geographic location is as follows: For the Years Ended December 31, Revenue: United States $ 846,981 $ 855,169 $ 786,901 Canada 31,829 34,785 32,663 United Kingdom 10,270 10,166 8,664 $ 889,080 $ 900,120 $ 828,228 Dec 31, 2009 Dec 31, 2008 Long-lived assets: United States $ 131,291 $ 136,670 Canada 100 1,307 United Kingdom $ 131,420 $ 138,060 Note 13. Quarterly Financial Information (Unaudited) The following table sets forth the reviewed consolidated quarterly financial information for 2009 and 2008: For the Quarter Ended March 31, June 30, September 30, December 31, Total Year Ended 2009 Revenue $ 224,005 $ 220,028 $ 221,505 $ 223,542 $ 889,080 Net income (loss) 5,271 2,285 (54,555) 4,401 (42,598) Net income (loss) per common share: Basic $ 0.03 $ 0.01 $ (0.33) $ 0.02 Diluted $ (0.03) $ 0.01 $ (0.33) $ 0.02 Year Ended 2008 Revenue $ 224,617 $ 227,524 $ 225,770 $ 222,209 $ 900,120 Net loss (8,961) (6,882) (7,817) (40,916) (64,576) Net loss per common share: Basic and diluted $ (0.06) $ (0.04) $ (0.05) $ (0.26) (1) In the fourth quarter of 2008, we recorded $30,570 for a loss on extinguishment of debt (see Note 7). (2) In the third quarter of 2009, we recorded a charge of $62,998 for the change in the fair value of derivatives. F- 32 VONAGE ANNUAL REPORT 2009

88 EXHIBIT Cash Compensation Annual Retainer Fees NON-EXECUTIVE DIRECTOR COMPENSATION PROGRAM Chairman of the Board retainer (in lieu of Board & Committee meeting fees) $ 125,000 Base annual retainer for all other Non-Executive Directors (pro-rated for actual service during the 12-month period covered by the retainer) $ 50,000 Additional retainers (pro-rated for actual service during the 12-month period covered by the retainer): Lead Director and Audit Committee Chair $ 25,000 Other Audit Committee members $ 5,000 Compensation Committee and Nominating and Governance Committee Chairs $ 10,000 Other Compensation Committee and Nominating Committee members $ -0- Board and Committee Meeting Fees Fees per in person Board meeting (in person or telephonic participation) $ 3,000 Fees per in person Committee meeting (in person or telephonic participation): Audit Committee Chairperson $ 3,000 Other member $ 2,000 Compensation Committee Chairperson $ 2,500 Other member $ 2,000 Nominating and Governance Committee Chairperson $ 2,500 Other member $ 2,000 Fees Per Telephonic Meeting Audit Committee meetings to review SEC filings $ 2,000 All other telephonic Board and Committee meetings $ 1,000 Equity Compensation Upon Election to Board 150,000 non-qualified stock options Four-year vesting (quarterly after first year) Annual Awards Granted on calendar year schedule 60,000 non-qualified stock options for the Chairman of the Board; 40,000 non-qualified stock options for all other Non-Executive Directors (each granted quarterly on the first day of each quarter) Immediate vesting $40,000 fixed dollar value of restricted shares for Non-Executive Directors other than the Chairman of the Board; 1½ times the number of shares granted to other Non-Executive Directors for the Chairman of the Board (each granted quarterly on the first day of each quarter) Immediate vesting 2 year vested option exercise period after termination of service on Board Non-Executive Director must serve on the Board for the entire previous quarter in order to be eligible for any quarterly installment of non-qualified stock options or restricted shares in connection with the Annual Awards of equity.

89 The Date of Award in the Non-Qualified Stock Option Agreement or the Restricted Stock Agreement for the non-qualified stock options or the restricted stock, as the case may be, awarded to Non-Executive Directors shall be January 1, April 1, July 1, and October 1 of each year. Exercise price of any non-qualified stock options granted to Non-Executive Directors on each Date of Award (the Exercise Price ) shall be the closing selling price of a share of the Company s common stock on the Date of Award as reported on the New York Stock Exchange or such other securities exchange or quotation system as may be designated by the Compensation Committee. The stock price used to calculate the number of restricted shares to be granted to Non-Executive Directors on each Date of Award (the Restricted Stock Price ) shall be the closing selling price of a share of the Company s common stock on the Date of Award as reported on the New York Stock Exchange or such other securities exchange or quotation system as may be designated by the Compensation Committee. To the extent that fractional shares result from using the Restricted Stock Price to calculate the number of restricted shares to be granted to Non-Executive Directors, such fractional shares shall be disregarded and the Non-Executive Directors shall be awarded the next lowest whole number of restricted shares. If the Date of Award is not a trading day for the New York Stock Exchange or such other securities exchange or quotation system as may be designated by the Compensation Committee, the Exercise Price and the Restricted Stock Price shall be the closing selling price of a share of the Company s common stock on the trading day immediately preceding the Date of Award. The non-qualified stock option grant upon election to the Board and the Annual Awards (both as described in the table above) shall be appropriately adjusted as determined by the Board for any future stock dividends, combinations, splits, recapitalizations and the like with respect to the Company s common stock. In the event that a Change of Control (as defined in the 2001 Stock Incentive Plan or the 2006 Incentive Plan, as the case may be) becomes effective while a Non-Executive Director continues to serve on the Board of the Company, all options granted under the Non-Executive Director Compensation Program, as amended from time to time, and not previously vested, shall vest and become exercisable as of the effective date of the Change of Control. Each option granted under this program shall have a term of ten (10) years from the Date of Award. Compensation for a Non-Executive Director s service on any special committees or sub-committees of the Board shall be as determined by the Board. Effective January 1,

90 Exhibit Pages where confidential treatment has been requested are stamped, Confidential treatment has been requested. The redacted material has been separately filed with the Commission. All redacted material has been marked by the symbol (***). LICENSE AND MANAGED SERVICES AGREEMENT BETWEEN VONAGE NETWORK LLC AND AMDOCS SOFTWARE SYSTEMS LIMITED AND AMDOCS, INC. December 23, 2009

91 TABLE OF CONTENTS 1. DEFINITIONS G ENERAL D EFINITIONS 2 2. SCOPE OF SERVICES G ENERAL AND E XCLUSIVITY S COPE AND C HANGES E XCLUDED S ERVICES N EW T ECHNOLOGY T HIRD P ARTY S ERVICES DEVELOPMENT, IMPLEMENTATION AND MIGRATION SERVICES I MPLEMENTATION OF A MDOCS S YSTEMS P HASES A CCEPTANCE T ESTING OF A MDOCS S YSTEMS E FFECT OF D ELAYS S ERVICE C REDITS LICENSE TO AMDOCS SYSTEMS; AMDOCS THIRD PARTY SOFTWARE L ICENSE G RANT A CQUISITIONS L ICENSE R ESTRICTIONS P RODUCT R OADMAP ; R ELEASES A MDOCS T HIRD P ARTY S OFTWARE D OCUMENTATION C ORE S OURCE M ATERIALS AND S OURCE M ATERIALS E SCROW OUTSOURCING SERVICES O UTSOURCING S ERVICES G ENERALLY D ISASTER R ECOVERY AND D ISASTER R ECOVERY P LAN P ROCEDURES M ANUAL AND D ISABLING D EVICES SERVICE LEVELS AND BENCHMARKING P ERFORMANCE A CCORDING TO S ERVICES L EVELS (SLA) S ERVICE L EVEL C REDITS E NVELOPE P ARAMETERS R EVIEW OF S ERVICE L EVELS B ENCHMARKING CHANGE MANAGEMENT PROCEDURES G ENERAL C HANGES C HANGE R EQUESTS O RDERS S UBSTITUTIONS PROFESSIONAL DEVELOPMENT SERVICES A DDITIONAL S ERVICES RESPONSIBILITIES AND RESOURCES 36 i

92 9.1. A MDOCS R OLES AND R ESPONSIBILITIES I NCIDENTAL A CTIVITIES C OMPANY S R OLES AND R ESPONSIBILITIES C OMPLIANCE WITH P LANS A CCESS TO P ERSONNEL C OOPERATION SERVICES LOCATIONS L OCATIONS U SE OF C OMPANY S ITES P HYSICAL S ECURITY A PPLICABLE R EGULATIONS G LOBAL S ERVICES M ODEL PERSONNEL N UMBER OF A MDOCS P ERSONNEL K EY P ERSONNEL C ONTINUITY AND R EPLACEMENT OF A MDOCS P ERSONNEL S UBSTANCE A BUSE R ESPONSIBILITY FOR P ERSONNEL RELATIONSHIP MANAGEMENT S TEERING C OMMITTEE P ROJECT M ANAGEMENT O FFICE P ROJECT M ANAGERS M ILESTONE M EETINGS WARRANTIES AND REPRESENTATIONS M UTUAL W ARRANTIES OF A UTHORIZATION, E NFORCEABILITY AND A BILITY TO P ERFORM A DDITIONAL A MDOCS W ARRANTIES D ISCLAIMER INDEMNIFICATION AND LIMITATION OF LIABILITY I NDEMNIFICATION BY A MDOCS I NDEMNIFICATION BY C OMPANY P ROCEDURE N O A DDITIONAL L IABILITY L IMITATION OF L IABILITY PAYMENT P AYMENTS BY C OMPANY TO A MDOCS I NVOICING P AYMENT I N A RREARS R ESOLUTION OF P AYMENT D ISPUTES R IGHTS OF S ET - OFF P RICE A DJUSTMENT T AXES TERM AND TERMINATION T ERM OF A GREEMENT T ERMINATION FOR I NSOLVENCY 55 ii

93 16.3. T ERMINATION FOR F ORCE M AJEURE T ERMINATION FOR C AUSE T ERMINATION FOR C ONVENIENCE T ERMINATION FOR C HANGE OF C ONTROL OF A MDOCS E FFECT OF T ERMINATION A DDITIONAL T ERMINATION P ROCEDURES T ERMINATION A SSISTANCE GENERAL TERMS AND CONDITIONS C OMPLIANCE WITH L AWS I NTELLECTUAL P ROPERTY R IGHTS C ONFIDENTIALITY D ATA P RIVACY AND S ECURITY N ON -S OLICITATION OF E MPLOYEES N O W AIVER F ORCE M AJEURE A UDITS AND R ECORDS S EVERABILITY E NTIRE A GREEMENT AND C HANGES G OVERNING L AW AND D ISPUTE R ESOLUTION I NDEPENDENT C ONTRACTORS A SSIGNMENT AND S UBCONTRACTS A MDOCS AND C OMPANY I NSURANCE S URVIVAL OF O BLIGATIONS H EADINGS NOT C ONTROLLING N OTICES S UCCESSORS AND A SSIGNEES P UBLICITY E XPORT T HIRD P ARTY B ENEFICIARIES C OVENANT OF G OOD F AITH A CKNOWLEDGMENT O RDER OF P REFERENCE E XECUTION OF A GREEMENT 79 iii

94 EXHIBITS AND SCHEDULES Exhibit 1 Exhibit 2 Schedule 1 Schedule 2 Schedule 3 Schedule 4 Schedule 5 Schedule 6 Schedule 7 Schedule 8 Schedule 9 Schedule 10 Schedule 11 Schedule 12 Schedule 13 Schedule 14 Schedule 14A Schedule 14B Schedule 15 Schedule 16 Schedule 17 Schedule 18 Schedule 19 Schedule 20 Schedule 21 Schedule 22 Schedule 23 Schedule 23A Schedule 23B Schedule 24 Schedule 25 Schedule 26 Schedule 27 Order Form Form Non-disclosure Agreement Amdocs Software Legacy Systems and Company Systems Company Sites and Amdocs Sites File Format for Data Extraction Amdocs Third Party Software Milestone Payments and Fees Envelope and Storage Parameters Implementation and Migration Services Outsourcing Services Roles and Responsibilities SLA: Creditable Performance Specifications Disaster Recovery Services and Plan Milestone Schedule and Project Plan Requirements Basic Requirements Final Requirements Steering Committee and Key Personnel Change Management Procedures and Request Form Data Privacy and Security Termination Assistance Services Control Objectives Amdocs Competitors Specifications Enrollment Form and Escrow Agreement Insurance Requirements Amdocs Insurance Requirements Company Insurance Requirements Company Travel Policy Procedures Manual Amdocs Preferred Support Maintenance Services Description PMO Service Description

95 LICENSE AND MANAGED SERVICES AGREEMENT THIS LICENSE AND MANAGED SERVICES AGREEMENT ( Agreement as further defined below) is made as of the 23rd day of December, 2009 (the Effective Date ) by and among Vonage Network LLC, a limited liability company incorporated under the laws of Delaware, having its principal offices at 23 Main St., Holmdel, NJ, ( Company ), Amdocs Software Systems Limited, a company incorporated under the laws of Ireland, having its principal offices at 1 First Floor, Block S, East Point Business Park Dublin 3, Ireland ( ASSL ), and Amdocs, Inc., a company incorporated under the laws of the State of Delaware, having its principal offices at 1390 Timberlake Manor Parkway, Chesterfield, Missouri, ( INC ). WHEREAS Company is a provider of various types of communications services, and Amdocs develops, distributes, implements, supports, operates and maintains software systems and solutions and provides related managed services; and WHEREAS Company desires to procure from ASSL, and ASSL desires to provide to Company: (i) services for the implementation of Amdocs proprietary software products (the Amdocs Systems as further defined below), which will replace Company s current systems (the Legacy Systems as further defined below) as well as design, coding, customization and integration services for the development of agreed upon modifications to the Amdocs Systems necessary to meet the Specifications; (ii) support services for the migration of Company s existing subscriber base from the Legacy Systems to the Amdocs Systems; and (iii) a license to access and use the Amdocs Software and Customizations subject to the terms and conditions set forth herein, and WHEREAS Company desires to procure from INC., and INC. desires to provide to Company: (i) ongoing services for the operation, support and maintenance of the Amdocs Systems; and (ii) such reasonable and necessary services to transition the Amdocs Systems and services back to Company or its designee in the event of a termination or expiration of this Agreement (the Termination Assistance as further defined below), as well as other services as shall be agreed upon (all such services collectively the Outsourcing Services as further defined below); and WHEREAS this Agreement sets forth the terms and conditions under which Company will procure such services from Amdocs, and Amdocs will provide such services to Company. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and of other good and valid consideration, the receipt and sufficiency of which is hereby acknowledged, Company and Amdocs hereby agree as follows: 1. DEFINITIONS 1.1. General For purposes of this Agreement, all terms defined herein shall have the meanings so defined unless specified otherwise. A term defined in the singular shall include the plural and vice versa when the context so indicates, and words connoting gender shall include all genders. References to Sections, Exhibits and Schedules are to Sections, Exhibits and Schedules of and to this Agreement, except in any Order when references to Sections are to sections of the relevant Order, unless specified otherwise.

96 1.2. Definitions AAA has the meaning set forth in Section Acceptance or Accepted means as to any Deliverable provided by Amdocs under this Agreement, that such Deliverable substantially conforms with the relevant Specifications applicable to such Deliverable and, with respect to the Amdocs Systems, has otherwise met the criteria set forth in Section 3.3 below and, with respect to the Specifications, substantially conform with the Requirements Additional Services means the services, and, if applicable, hardware, Amdocs proprietary software and Amdocs Third Party software that are outside the Scope but which may be provided hereunder pursuant to an Order Additional Service Fees means the amounts set forth in Schedule 6 or in an applicable Order that are payable by Company on a fixed fee or time and materials basis, as agreed in writing by the parties, for Additional Services and/or Customizations, if any, provided by Amdocs hereunder pursuant to an Order Affiliate means, as to any Party, any other entity that, directly or indirectly, controls, is controlled by, or is under common control with, such Party, whether through ownership of voting securities or otherwise, where control means more than fifty percent (50%) of the voting interests or ownership of more than fifty percent (50%) of the beneficial interests in income or capital, provided that, once such control ceases to exist, the affected entity will no longer qualify as an Affiliate for purposes of the Agreement Agreement means this Agreement between Company and Amdocs, including all Exhibits and Schedules attached hereto and Orders, as any of the foregoing may be amended from time to time Alternate System has the meaning set forth in Section Amdocs means, collectively, INC. and ASSL Amdocs Competitors has the meaning set forth in Section Amdocs Confidential Information means any confidential or proprietary information, whether disclosed orally, visually or in writing, by way of any media, of Amdocs, an Amdocs Affiliate or any Third Party which has disclosed such information to Amdocs on a confidential basis, including, but not limited to, Amdocs, its Affiliates or such Third Party s business or financial affairs, trade secrets, technology, research and development, proprietary routines, computer programs, documentation, systems, methodology, know-how, techniques, specifications, plans and other proprietary information, pricing, product plans, marketing plans, including, but not limited to, material associated with and forming part of the Amdocs Systems, the Source Materials and the terms of this Agreement Amdocs Equipment means the hardware and other materials (excluding the Amdocs Third Party Software) owned by Amdocs or leased from Third Parties by Amdocs, and used by Amdocs Personnel in the performance of the Services and in connection with the Amdocs System. 2

97 Amdocs Excused Delay means any delay in or failure to perform by Amdocs or any Amdocs Personnel that results from or is caused by either (a) a Force Majeure Event; or (b) the failure of [***], to perform a task or obligation it was designated to perform under or in connection with this Agreement, provided that performance of such [***] task or obligation is required in order for Amdocs to perform the delayed or failed Services hereunder Amdocs-Generated Claims has the meaning set forth in Section Amdocs Indemnitees has the meaning set forth in Section Amdocs Legal Requirements means the Laws applicable to Amdocs business and its performance of the Services under this Agreement Amdocs Site(s) means the Site(s) owned or controlled by Amdocs or its Affiliates or any Primary Subcontractor as of the Effective Date described in Schedule Amdocs Software or Software means certain generic, proprietary core software products included within the Amdocs family of products and owned exclusively by Amdocs and its Affiliates, all as specified in Schedule 1, which Schedule will be finalized by the Parties during the Scoping Phase and subject to Company s Acceptance, including (a) the CRM Application or any portion thereof, as may be licensed by Amdocs to Company pursuant to Section 4.1.2, (b) any Maintenance Releases provided during the Term, and (c) New Releases of the Amdocs Software provided pursuant to an Order, and in accordance with provisions of this Agreement Amdocs Systems means all Amdocs Software, Amdocs Third Party Software, Amdocs Equipment, Core Source Materials, Source Materials, Updates and Configurations developed or provided by Amdocs in accordance with this Agreement Amdocs Third Party Software means the software licensed or leased by Amdocs from Third Parties and used by Amdocs Personnel in the performance of the Services including, without limitation, the software set forth in Schedule 5 (as such Schedule may be modified or updated from time to time by mutual written agreement of the Parties). Amdocs Third Party Software does not include any Third Party software that Company requires Amdocs to use on its behalf in place of any Third Party software Amdocs is using or proposes to use, including by way of example (and, if applicable) the [***] software referred to in Section 4.5 hereof, unless Amdocs at the Steering Committee level otherwise agrees in writing and Amdocs becomes the licensee of such software Amdocs Tools and Methodologies means the internal Amdocs proprietary diagnostic tools, test equipment and methodologies created as part of the Work Product and used by Amdocs in performing the Services Arbitrators has the meaning set forth in Section ASSL has the meaning set forth in the Preamble or its permitted successors and assigns Audits has the meaning set forth in Section * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 3

98 Authorized Subcontractors means, collectively, Primary Subcontractors and Secondary Subcontractors Basic Requirements means the basic requirements for the Amdocs Systems set forth in Schedule 14A Benchmarker has the meaning set forth in Section Benchmarking Process has the meaning set forth in Section Breaching Party has the meaning set forth in Section Bug List means as to the Amdocs Systems, a complete listing of all material deficiencies, bugs or errors occurring in the Amdocs Systems, or any portion thereof, as measured against the Specifications and reported by Amdocs Personnel or Company Personnel, and for each such deficiency, bug or error, a description of the problem, an indication of the priority assigned to the problem by Amdocs, the current status of the problem, an approach to fixing the problem, and a timeline within which the problem is expected to be corrected Business Day means any day other than a Saturday, Sunday or statutory federal or state holiday or other holiday observed by Company or Amdocs, or any day on which Company s Facilities are closed for business Change means any change to the Services or the Amdocs Systems Change of Control means a change in ownership or control of a Person which results in a new entity (other than a pre-existing Affiliate of such Person) either (a) owning beneficially or of record, more than fifty percent (50%) of the voting securities of such Person; or (b) having the ability to elect a majority of the directors of such Person Change Management Procedures means the procedures for implementing any Changes, and for the ordering and provision of any Additional Services, as specified in Section Change Request means a request by either Party for any Change Change Request Form means a form substantially similar to the form attached hereto as Schedule Code has the meaning set forth in Section COLA has the meaning set forth in Schedule Company has the meaning set forth in the Preamble or its permitted successors and assigns Company Confidential Information means any confidential or proprietary information, whether disclosed orally, visually or in writing, by way of any media, of Company, a Company Affiliate or any Third Party which has disclosed such information to Company on a confidential basis, including, but not limited to, Company s, Company Affiliates, or such Third Party s business or financial affairs, trade secrets, technology, research and development, proprietary routines, computer 4

99 programs, documentation, systems, methodology, know-how, techniques, specifications, plans and other proprietary information, pricing, product plans, marketing plans, and the terms of this Agreement. Company Confidential Information shall include, but not be limited to, Company Data and other proprietary technology of Company Company Data means all data related to Company s or the Company Affiliates customers, including, but not limited to, Subscribers, and other records, data, files, input materials, reports, forms relating to the business, operations, facilities, products, rates, competitors, consumer markets, assets, expenditures, mergers, acquisitions, divestitures, billings, collections, revenues and finances and other such items of Company or the Company Affiliates, but solely to the extent such data is generated in connection with or received or created by Amdocs Personnel in the performance of the Services or the operation of the Amdocs Systems, including, but not limited to, Company Personal Data and all copies, digests and summaries of Company Data Company Equipment means the hardware and other materials (excluding the Company Owned Software and the Company Third Party Software) owned by Company or its current Affiliates or leased from Third Parties by Company or its Affiliates, and used or which may be used by Amdocs Personnel in the performance of the Services. For the avoidance of doubt, this term also includes hardware components and other materials of the Legacy Systems and/or Company Systems owned or leased by Company or its Affiliates Company Excused Delay means any delay in or failure to perform by Company or any Company Personnel that results from or is caused by either (a) a Force Majeure Event, or (b) the failure of [***], to perform a task or obligation it was designated to perform under or in connection with this Agreement Company-Generated Claims has the meaning set forth in Section Company Indemnitees has the meaning set forth in Section Company Legal Requirements means the Laws applicable to Company s business and its performance of the obligations under this Agreement Company Owned Software means software owned by Company or its Affiliates and used or which may be used by Amdocs in performance of the Services. For the avoidance of doubt, this term also includes software components of the Legacy Systems and/or Company Systems owned by Company or its Affiliates Company Personal Data means that portion of Company Data that is subject to any Data Privacy Laws and includes CPNI Company Site means the Sites owned or controlled by Company or its Affiliates as of the Effective Date described in Schedule 3, which may be updated from time to time by Company in writing and provided to Amdocs Company Systems means the Company s systems, which will be developed by Company or are currently existing and which (a) will connect to or interface with the * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 5

100 Amdocs Systems, or (b) are otherwise used by Company or Amdocs in connection with Company s use of the Amdocs Systems or the provision of the Services, including all applicable Company Equipment, Company Owned Software and Company Third Party Software, as specified in Schedule Company Third Party Software means the software or Intellectual Property Rights licensed or leased by Company or its Affiliates from Third Parties and used by Amdocs Personnel in the performance of the Services. For the avoidance of doubt, this definition also includes Third Party software components of the Legacy Systems and/or Company Systems licensed or leased by Company or its Affiliates Confidential Information means either Company Confidential Information or Amdocs Confidential Information, where applicable Configurations means any modifications of the Amdocs Systems that, when made to the Amdocs Systems, use the then-current functionalities of the Amdocs Systems for a particular purpose and/or change the utility, efficiency, functional capability or application of the Amdocs Systems, or any portion thereof, and do not require a modification to or the development of any code Control Objectives has the meaning set forth in Section Core Source Materials means, in respect of the Amdocs Software, or any portion thereof, the then-current source code, technical documentation, user documentation and instructions, work instructions, error list (including each reported error and then current status) and all other software or statements required to build, compile, assemble, translate, bind and load source codes into executable releases Corrective Plan has the meaning set forth in Section CPNI has the meaning set forth in 47 U.S.C. 222(h)(1), as amended from time to time CRM Application means collectively, the CRM Front-End and the CRM Back-End CRM Back-End means those selected components of Amdocs generic, proprietary customer relationship management software product and such related applications as set forth on Schedule 1, which shall be incorporated by Amdocs as part of the Amdocs Systems for use by Customer CRM Front-End means those user-interface related components of Amdocs generic, proprietary customer relationship management software product other than the CRM Back-End which may be licensed from Amdocs by Customer as set forth in Section below Customization means any improvement, deviation, extension or other change to the Amdocs Software, or any portion thereof, made by Amdocs at the request of Company that requires development work and a modification to or the development of any source code of the Amdocs Software, including, but not limited to, the integration of the CRM Front-End and any updates thereto Defect or Nonconformity means a deficiency (or deficiencies) in a Deliverable or the Services, or any portion thereof, as measured against the relevant Specifications. 6

101 Defense has the meaning set forth in Section Deliverables means any tangible item delivered or produced by Amdocs or required to be delivered or produced by Amdocs under this Agreement, including, but not limited to, Work Product containing and embodying the results of the Services, and the Amdocs Systems, or any portion thereof, that is identified in the Project Plan Disabling Device means any virus, worm, trojan horse, built-in or use-driven mechanism, injurious or damaging algorithm, selfdestruct mechanisms, time bomb or other software or hardware or any other inhibitor that are intended to degrade, impair performance, result in inaccurate data, deny accessibility, disable or adversely affect the use of the Amdocs Systems, or any portion thereof, or materially harm, through the Amdocs Systems, any of Company s or its Affiliates data, network or other software, including, but not limited to, Company Data Disaster means an event that causes an unplanned material interruption of any business process or information processing at or affecting an Amdocs Site which is beyond Amdocs reasonable control that, in turn, results in an impairment of the ability of Amdocs to perform the Services, Company s use of the Amdocs Systems, or any damage to Company Data. Examples of a Disaster include, but are not limited to: (a) loss of the building to fire; (b) loss of power due to hurricane damage; (c) inability to access an Amdocs Site due to a chemical spill; (d) health or work stoppage issues; (e) adverse weather conditions or political events; and (f) a pandemic or epidemic (including, but not limited to, Avian flu or swine flu), quarantine or government health alert that prohibits or restricts travel by any member of Amdocs Personnel or prevents any member of Amdocs Personnel from reporting to a work location Disaster Recovery Plan or DRP has the meaning set forth in Section Effective Date has the meaning set forth in the Preamble Envelope Parameters means a set of parameters having certain values and/or ranges in relation to which the Service Levels, the Basic Requirements, the Final Requirements and other provisions of this Agreement apply, as specified in Schedule 7, Schedule 14A and Schedule 14B Excused Delay means, collectively or individually, an Amdocs Excused Delay and a Company Excused Delay, as the context so requires Fees means all amounts set forth in Schedule 6 and payable by Company hereunder Final Acceptance has the meaning set forth in Section Final Migration Date has the meaning set forth in Schedule Final Requirements means the detailed business, processing and servicing requirements for the Amdocs Systems as refined and expanded during the Scoping Phase and the Specifications Phase which are Accepted by Company and set forth in Schedule 14B and which shall be incorporated into the Specifications through the use of a traceability matrix Force Majeure Event has the meaning set forth in Section

102 Force Majeure Period has the meaning set forth in Section I-9 Process means Amdocs and its Personnel s employment eligibility and record keeping requirements under the Immigration Reform and Control Act of 1986, the Immigration Reform Act of 1990 and the Illegal Immigration Reform and Immigrant Responsibility Act of 1996, as the same shall be amended from time to time Implementation and Migration Services means the services to be provided by ASSL as set forth in Section Implementation and Migration Services Fees means the fixed amounts set forth in Schedule 6 that are payable by Company on the dates specified in Schedule 6 for the Implementation and Migration Services provided by ASSL hereunder, including, but not limited to, the applicable Milestone Payments INC. has the meaning set forth in the Preamble or its permitted successors and assigns Initial Term has the meaning set forth in Section Intellectual Property Rights means the worldwide intangible rights or interests evidenced by or embodied in (a) any, design, concept, method, process, technique, apparatus, invention, discovery, or improvement, including any patents, patent applications, trade secrets, and know-how; (b) any trademarks, trade names, trade dress and associated goodwill; (c) any work of authorship, including any copyrights, industrial designs, registration or moral rights recognized by law; and/or (d) any other intellectual property rights, proprietary technology or material in which similar rights exist and are registered or enforceable Iron Mountain has the meaning set forth in Section Key Personnel means Personnel identified in Schedule 15 under the heading Key Personnel Late Payment Interest means interest accruing at the daily equivalent of a monthly rate equal to [***] per calendar month or at the maximum rate allowed by law, if less Laws mean all laws, statutes, regulations, rules, executive orders, supervisory requirements, directives, circulars, opinions, interpretive letters and other official releases of or by any government, or any authority, department or agency thereof, including, but not limited to, the Foreign Corrupt Practices Act and laws relating to data privacy or data protection ( Data Privacy Laws ) Legacy Systems means Company s current systems, as of the Effective Date, that will be replaced in whole or in part by the Amdocs Systems, including all applicable Company Equipment, Company Owned Software and Company Third Party Software, as specified in Schedule License has the meaning set forth in Section 4.1. * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 8

103 License Fees means the fixed amounts set forth in Schedule 6 that are payable by Company on the dates specified in Schedule 6 for the License granted to Company by Amdocs hereunder Maintenance means the standard software maintenance services provided by Amdocs in respect of the core Amdocs Software or otherwise as part of the Outsourcing Services (e.g. in respect of Customizations) for the Fixed Monthly Fee as set forth in Schedule 6 and which Company may elect to purchase from Amdocs in the event Amdocs no longer operates the Amdocs Systems on behalf of Company Maintenance Release means any release of the Amdocs Software, or any portion thereof, that is provided by Amdocs as part of the Maintenance and which is not a New Release Milestone means the phases or development goals for the Deliverables set forth in the Project Plan as such phases or development goals may be amended, modified or supplemented pursuant to this Agreement Milestone Date means a delivery date or deadline established with respect to a Milestone in the Milestone Schedule Milestone Payment means an amount, if any, to be paid to Amdocs by Company upon achievement of a Milestone, in accordance with Schedule Milestone Schedule means the schedule set forth in Schedule New Company Affiliate has the meaning set forth in Section New Company Affiliate License Agreement has the meaning set forth in Section New Release means a modified or enhanced version of the Amdocs Software (excluding Customizations), or any portion thereof, which will be made available by Amdocs to Company under an Order and which is generally identified by the first number that appears to the left of the first decimal point in a version number Non-Compliant Party has the meaning set forth in Section Nonconformity or Defect means a deficiency (or deficiencies) in a Deliverable or the Services, or any portion thereof, as measured against the relevant Specifications Open Source Software means all Amdocs Third Party Software, if any, licensed to Amdocs by Third Parties under licenses substantially similar to those approved by the Open Source Initiative and listed at including, without limitation, the GNU General Public License, the GNU Lesser Public License, the Artistic License, the Berkeley Science Division (BSD) License, and the Apache License Order means a document issued under Section 7.4 of this Agreement, executed in writing by both Parties for the purposes of ordering any Additional Services and/or amending this Agreement pursuant to an acceptable Change Request Outsourcing Services means the Services provided by INC. as set forth in Section

104 Outsourcing Service Fees means the amounts set forth in Schedule 6 that are payable by Company on a monthly basis following the Turn-On Date for the Outsourcing Services provided by Amdocs hereunder, including any Maintenance Releases and Configurations P1 Nonconformity has the meaning set forth in Schedule P2 Nonconformity has the meaning set forth in Schedule P3 Nonconformity has the meaning set forth in Schedule Party means Company or Amdocs; Parties means both of them Payee has the meaning set forth in Section Payer has the meaning set forth in Section Person means any natural person, corporation, limited liability company, limited liability partnership, general partnership, limited partnership, trust, association, governmental organization or agency, or other legal person or legally constituted entity of any kind Personnel means the full-time and part-time employees, contract employees, individual consultants, volunteers, members, directors, officers, partners, independent contractors, subcontractors and/or agents acting for or on behalf of each Party or its Affiliates permitted under this Agreement. Company Personnel refers to the Personnel of Company, and Amdocs Personnel refers to the Personnel of Amdocs, including, but not limited to, Authorized Subcontractors PMO has the meaning set forth in Section Pre-Production Testing has the meaning set forth in Section Primary Subcontractor means a specialist subcontractor who is retained by Amdocs to perform Services that are material to this Agreement Priority Level means the level assigned to a Nonconformity specifying the order in which Resolution of such Nonconformities is to occur. Priority Levels are designated (highest to lowest) P1 Nonconformity, P2 Nonconformity and P3 Nonconformity Procedures Manual has the meaning set forth in Section Product Documentation means the then-current explanatory and informational materials concerning the Amdocs Software provided hereunder that Amdocs has released for distribution, as may be modified by Amdocs from time to time, which may include without limitation, technical documentation, manuals, descriptions, user guides, specifications and/or installation instructions, diagrams, printouts, listings, flowcharts and training materials, but excluding Source Materials Project Management Fee means the fixed amount set forth in Schedule 6 that is payable by Company on the date specified in Schedule 6 in respect of successful integration of the Legacy Systems into the Amdocs Systems by Amdocs hereunder Project Manager has the meaning set forth in Section

105 Project Plan means the detailed implementation schedule and project plan set forth in Schedule Records has the meaning set forth in Section Recruiting Party has the meaning set forth in Section Release means, collectively or individually, New Releases and Maintenance Releases, as applicable Release Condition has the meaning set forth in Section 4.7(a) Renewal Term has the meaning set forth in Section Required Consents means the consents (if any) required to be obtained by either party as is necessary for Amdocs performance of the Services and the provision of and Company s use of the Amdocs Systems, including, but not limited to, the operation, maintenance, management and/or access to any Amdocs Equipment, Amdocs Third Party Software, Amdocs Sites, Legacy Systems, Company Data, Company Sites or Company Systems, all other consents required from Third Parties in connection with Amdocs provision of the Services and the Amdocs Systems, including, but not limited to, the transition of the Amdocs Systems back to Company or its designee in the event the Agreement expires or terminates Requirements means either the Basic Requirements or the Final Requirements as the context so requires Resolution means the correction or elimination of a Nonconformity in accordance with the applicable Priority Level Roles and Responsibilities Document means the document attached hereto as Schedule 10, which identifies specific tasks to be performed by each Party that may be required for performance of the Services SAS 70 means the American Institute of Certified Public Accountants statement on auditing standards number SAS 70 Type II Audit means an audit conducted pursuant to SAS 70 that results in a report that both describes an organization s description of controls at a specific point in time and includes detailed testing of those controls over a minimum six (6) month period, or any replacement or successor audit standard or process Scope means the scope of the Amdocs Systems and all Services to be performed hereunder within the Envelope Parameters, including, but not limited to, the Services set forth in Sections 3.1 and 5.1 and related Schedules attached hereto, the provision of Termination Assistance, any obligations of Amdocs with respect to any audit requirements pursuant to Section 17.8 of this Agreement and any Additional Services provided pursuant to an Order executed by the Parties hereunder Scoping Phase means the phase more fully described in Section Secondary Subcontractor means a specialist subcontractor who is retained by Amdocs to perform services that are not material to this Agreement. 11

106 Security Guidelines has the meaning set forth in Section Security Incident has the meaning set forth in Section Service Credits has the meaning set forth in Section SLA means the Service Level Agreement set forth in Schedule Service Level Credits has the meaning set forth in Section Service Levels means the performance standards for the provision of the Services and the Amdocs Systems set forth in Schedule Services means the Implementation and Migration Services, the Outsourcing Services, the Termination Assistance and any other services to be provided hereunder and any Changes thereto that will be performed by Amdocs in accordance with this Agreement Site means facilities, office space, data centers, development centers, or other premises that are or may be used by Amdocs and/or Company to perform any Services under this Agreement or in connection with the Amdocs Systems Source Materials means, in respect of the Amdocs Systems (excluding Amdocs Third Party Software and Amdocs Equipment), or any portion thereof, the then-current source code, technical documentation, user documentation and instructions, work instructions, error list (including each reported error and then current status) and all other software or statements required to build, compile, assemble, translate, bind and load source codes into executable releases, provided that, with respect to the Amdocs Software, only executable code will be included in the Source Materials and not Core Source Materials SOX Deficiencies has the meaning set forth in Section SOX Laws means the Sarbanes-Oxley Act of 2002, as it may be amended, supplemented or revised from time to time, applicable rules and regulations issued by the U.S. Securities and Exchange Commission, and applicable rules and regulations of the Public Company Accounting Oversight Board including, without limitation, provisions relating to internal controls over financial reporting, as any of the foregoing may have been and/or may be amended, supplemented or revised from time to time Specifications means the detailed business, functional and technical specifications for the Amdocs System, including, without limitation, detailed system architecture, protocols, security, hardware, hardware configuration, and infrastructure, as in the same shall be appended as Schedule 21 to this Agreement following the incorporation therein of the Final Requirements pursuant to an agreed upon traceability matrix Specifications Phase means the phase more fully described in Section Steering Committee has the meaning set forth in Section Subscriber means a customer of Company s services and products whose account is maintained on the Amdocs Systems Term has the meaning set forth in Section

107 Terminating Party has the meaning set forth in Section Termination Assistance has the meaning set forth in Section Termination Assistance Period has the meaning set forth in Section Termination Assistance Plan means a plan signed by the duly authorized representatives of the Parties pursuant to which Amdocs shall perform certain Services in connection with the expiration or termination of this Agreement Termination Date means the date on which the Term of the Agreement expires without renewal or, if earlier, the date for termination set forth in a Termination Notice, as further described in Section 16 (Term and Termination) Termination Notice means the written notice that must be given before termination in accordance with the termination process described in Section 16 (Term and Termination) Test Plan means, with respect to a Deliverable, a plan detailing the criteria, methodologies and responsibilities for testing such Deliverable s compliance with the applicable Specifications Third Party means a Person other than Company, Amdocs, or their respective Affiliates Turn-On Date means the date on which either (a) the initial migration (of up to [***] Subscribers) to the Amdocs Systems is completed, or (b) the first new Subscriber is activated on the Amdocs Systems, whichever is earlier UAT Plan has the meaning set forth in Section Update means each update or change to the Amdocs Systems provided by Amdocs under this Agreement including, but not limited to, all Maintenance Releases, New Releases and Customizations Work Product means all written or computer coded materials manifested in documentation, systems design, disks, tapes, drawings, reports, specifications, notebooks, recommendations, data (other than Company Data), procedures and memoranda and any other data, specifications, work papers, ideas, inventions, processes or other items of any nature whatsoever produced, created, developed, presented, provided and/or distributed by Amdocs in connection with the Outsourcing Services, together with all Intellectual Property Rights, whether developed individually by Amdocs or jointly with Company and whether or not patentable or copyrightable or protectable by any other intellectual property interests and whether or not reduced to writing or other physical form Workaround means a temporary solution to a Nonconformity which results in the return of the Amdocs Systems to functional or operational status or which otherwise enables achievement of the Service Levels. 2. SCOPE OF SERVICES 2.1. General and Exclusivity * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 13

108 Amdocs shall provide the Amdocs Systems to and perform the Services for Company, in a timely manner (including, without limitation, meeting each Milestone Date established herein) in accordance with this Agreement, as further specified in Sections 3.1 and 5.1 and the applicable Schedules. Amdocs shall also provide any Additional Services specified in Orders entered into pursuant to the provisions of Section Subject to Section 2.1.3, and except as otherwise expressly stated in this Agreement, nothing herein shall prevent Company from obtaining any type of Services, or any other services, from any other provider during the Term; provided that Company shall remain responsible for all of the obligations and commitments specifically applicable to it hereunder Company agrees that, commencing on the Final Migration Date and continuing through the end of the Term (but, for the avoidance of doubt, not during Termination Assistance), the Amdocs Systems shall be the exclusive system Company and its Affiliates use to supply the functionality of the Final Requirements for their customers; provided that, Company shall not be obligated to utilize the Amdocs Systems on an exclusive basis if: (a) Company elects to provide such functionality for customers acquired from Third Parties if such customers are on a different billing and/or operational support system (the Alternate System ) unless and until Company elects to migrate such customers to another system or ceases using such Alternate System; or (b) Company s proposed use of the Amdocs Systems would require additional functionality and capabilities of the Amdocs Systems which do not form part of the Amdocs System as of the Final Migration Date, the provision of or development of which would create additional cost to Company (except for the Fixed Monthly Fees or other usage based fees) Scope and Changes The Parties understand and agree that the Final Requirements have not been established as of the Effective Date, and that subject to Section 7, the Basic Requirements may be modified by written agreement of the Parties in an iterative manner within the Scope without the need for an Order (as described in Section 7). Any expansion of the Scope as a result of modifications to the Basic Requirements and the resulting cost shall be addressed through the Change Management Procedures During the Scoping Phase and the Specifications Phase, the Parties will work together to identify the Final Requirements. Subject to Section 3.2.2, Amdocs will deliver the Final Requirements in accordance with the Project Plan. Amdocs shall develop and present to Company the Final Requirements in accordance with the Milestone Dates and Company will commence the Acceptance process with respect to the Final Requirements. The Final Requirements shall be annexed hereto as Schedule 14B Excluded Services The Scope is set out in Sections 3.1 and 5.1 below. Without expanding the Scope, and for greater clarity, the Services do not include the following (unless ordered as Additional Services): (a) Communications Lines; 14

109 (b) (c) (d) Print and Mail; Management of the Vonage network; and CRM Front-End. In the event that Company requests and Amdocs agrees to provide such excluded services at any time during the Term, the Parties will enter into an Order New Technology In providing the Services, Amdocs will, [***], use reasonable commercial efforts to: (a) be proactive in identifying opportunities to implement new technologies that will improve and support the Services; (b) work together with Company to identify opportunities to implement new technology which may be advantageous with respect to the Services; (c) maintain a level of currency, knowledge and technology that allows Company to take advantage of technological advances with respect to the Services; and (d) meet with Company periodically upon Company s reasonable request to inform Company of any new technology or technology trends that Amdocs is developing or is otherwise aware of that could reasonably be expected to have an impact on the Services Third Party Services In the event Company contracts with a Third Party to perform any service outside the Scope of, or in addition to, the Services, including services to augment or supplement the Services or that are dependent on the Services, Amdocs shall cooperate with Company and any such Third Party to the extent reasonably required by Company and able to be supported by the then-existing Amdocs Personnel without degradation in the Service Levels including by providing: (a) to the extent available, written requirements, standards, and policies for any systems so that the developments of such Third Party may be operated or supported by Amdocs; and (b) assistance and support services to such Third Party. Company shall consult with Amdocs concerning the integration of any work provided by such Third Party with the Amdocs Systems. Where Company requires Amdocs to work with such a Third Party, Amdocs shall not be responsible for disruption to, or negative impact on, the provision of the Services by Amdocs to the extent resulting from the performance of the Third Party or defects in the work provided by such Third Party. Further, any Third Party that has a need to know or may have access to Amdocs Confidential Information shall first sign the non-disclosure agreement in the form attached as Exhibit 2. To the extent Amdocs cannot reasonably provide the Third Party cooperation and support requested by Company using existing Amdocs Personnel without degradation in the Service Levels, Amdocs shall promptly inform Company and the parties shall mutually agree upon the additional cost of such support through the Change Management Procedures. 3. DEVELOPMENT, IMPLEMENTATION AND MIGRATION SERVICES 3.1. Implementation of Amdocs Systems In consideration of the Implementation and Migration Services Fees paid by Company to implement the Amdocs Systems, ASSL will provide Company with Services for the implementation of and migration to the Amdocs Systems, as specified in Schedule 8 * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 15

110 (the Implementation and Migration Services ) and in accordance with the Milestone Schedule and Project Plan. Amdocs shall perform the Services and deliver each portion of the Amdocs Systems on or before the respective Milestone Dates set forth in the Milestone Schedule Prior to the Final Migration Date, appropriate representatives of the Parties shall meet at least weekly to discuss the status of the Implementation and Migration Services and performance against the Project Plan Phases Scoping and Delivery of Project Plan (a) During the Scoping Phase of the Project, Amdocs will work with Company to identify additional requirements, document the detailed Deliverables, and to develop the Project Plan for the performance of the Implementation and Migration Services, including documentation of all Milestone Dates and Deliverables. (b) At the conclusion of the Scoping Phase, Amdocs shall submit the detailed Deliverables, as more fully set out in Schedule 8, including the Project Plan, for Company s Acceptance. Company will commence the Acceptance process pursuant to Section 3.3 of this Agreement with respect to the Project Plan. Once Accepted, the Project Plan shall be attached to this Agreement as Schedule 13. The Project Plan may be updated in writing by agreement of the Parties from time to time without reference to the Change Management Procedures; provided that, any change to the Project Plan resulting in a change to the Turn-On Date or the Final Migration Date shall require the signature of a member of the Steering Committee for each Party. (c) Specifications (a) (b) The Project Plan includes Milestones, and an Order may include Milestones relating to Additional Services. A Milestone will be achieved successfully only when the activities, events, Services and/or Deliverables that comprise such Milestone have occurred and/or have been completed and Accepted in accordance with the terms of the Agreement or the applicable Order. Amdocs will work with Company to identify the Final Requirements for the Amdocs Systems and will develop and deliver the Specifications in accordance with Schedule 8, which more fully describes the Implementation and Migration Services to be performed in connection with the Specifications, and the Amdocs Systems to be delivered to Company. The Specifications developed by Amdocs shall include a complete detailed analysis of the Final Requirements. The Parties will work together to identify and agree upon the Specifications. Subject to Section 3.4, Amdocs will deliver the Specifications in accordance with the Milestone Schedule. If the Specifications are Accepted by Company they shall be attached hereto as Schedule

111 (c) (d) The Parties acknowledge that, as of the Effective Date, the Specifications for the Amdocs Systems have not been developed. Changes and refinements of Specifications shall not require Orders, except to the extent they are beyond the Scope, which the Parties will address such a Change in accordance with Section 7. Subject to Section 3.4, Amdocs shall develop and present to Company the Specifications (along with any related Amdocs Systems) in accordance with the Milestone Dates and Company will commence the Acceptance process with respect to the Specifications Develop and Implement Upon Acceptance of the Specifications by Company, Amdocs shall commence development and implementation of the Amdocs Systems. Upon delivery of each Deliverable, Company shall undertake the evaluation and testing of each Deliverable identified in the Project Plan as subject to Acceptance testing set forth in Section 3.3 of this Agreement Acceptance Testing of Amdocs Systems As part of Company s roles and responsibilities, Company will be responsible for Acceptance testing and Acceptance of the Deliverables. Amdocs will provide support for such Acceptance testing, all as described in the Roles and Responsibilities document and in the Milestone Schedule. Within the time frame specified in the Project Plan, the Parties shall be responsible for developing a Test Plan for testing each Deliverable identified in the Project Plan, including, but not limited to, any documentary Deliverable. As between Amdocs and Company, Company shall be responsible for developing a detailed User Acceptance test plan (the UAT Plan ) for testing the Amdocs Systems together with the related test plan models, test scripts, test scenarios and test databases, a subset of which will be used by Company in conducting user acceptance testing. In addition, Amdocs will incorporate into its testing procedures a subset of the user acceptance test cases provided by Company that reflect Company s Requirements Timing. The Acceptance process with respect to the Amdocs Systems and each Deliverable identified in the Project Plan shall be performed within the times prescribed therefor in the Test Plan or otherwise agreed in writing by the Parties; provided, that: (a) dates for performance by a Party as set forth in the Milestone Schedule shall be adjusted for Excused Delays; (b) in the case of any portion of the Amdocs Systems for which no time period is prescribed in the Milestone Schedule in respect of the steps described below, evaluation and testing of any Amdocs Systems or Deliverable (whether initially delivered or fixed and re-delivered) shall be [***], provided that Company will use commercially reasonable efforts to evaluate and test the Amdocs Systems and/or any Deliverable as promptly as possible following delivery/performance or re-delivery/re-performance; and (c) the fix/re-delivery/re-performance period shall be * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 17

112 [***], in each case from the date of receipt of notice of Nonconformities, provided that Amdocs will use commercially reasonable efforts to fix/re-deliver/re-perform the Amdocs Systems and/or any Deliverable as promptly as possible following receipt of Company s notice of Nonconformities. If at the end of any evaluation and testing period or re-evaluation and re-testing period, Company shall not have issued either an Acceptance or a notice of Nonconformities, the Amdocs Systems or Deliverable, as applicable, will be deemed not Accepted. In such event, Amdocs may provide written notice to Company that an Acceptance or a notice of Nonconformities for the applicable Deliverable is overdue and, if within [***], Company shall still not have issued either an Acceptance or a notice of Nonconformities, the Amdocs Systems or Deliverable, as applicable, will be deemed Accepted solely for the purposes of the relevant part of the Amdocs System or Deliverable subject to the particular Acceptance testing and scheduling the Turn-On Date and shall in no way be deemed Final Acceptance Where a Deliverable consists of documentation, Amdocs shall deliver to Company such Deliverable in accordance with the Milestone Schedule. Company shall evaluate and review such documentary Deliverable pursuant to the Test Plan established for such Deliverable and Section above and indicate in writing to Amdocs either (a) its Acceptance of the documentary Deliverable; or (b) its rejection of the documentary Deliverable, setting out in reasonable detail the basis for such rejection. If Company rejects the Deliverable, Amdocs will revise the Deliverable within the timeframes specified in the Test Plan for that Deliverable and/or in Section above so that it will comply with the relevant Specifications, and re-deliver the revised Deliverable to Company within any period required by the applicable Test Plan and/or in Section Company shall evaluate and review the revised Deliverable anew, with all subsequent iterations being performed in accordance with this Section and subject to Section With respect to the Amdocs Systems: (a) Amdocs shall deliver (or, as applicable, provide access to) the Amdocs Systems to Company for pre-live testing of the Amdocs Systems ( Pre-Production Testing ), which evaluation and testing may include use of the Amdocs Systems by a reasonable number of Subscribers in a non-production environment; and (b) Company shall evaluate and test the Amdocs Systems as against the Specifications and the UAT Plan and indicate in writing to Amdocs either (i) its Acceptance of the Amdocs Systems; or (ii) the Nonconformities of the Amdocs Systems in reasonable detail, to the extent that such Nonconformities are discovered upon evaluation and testing. Upon receipt of written notice from Company of Nonconformities, Amdocs shall, if applicable and unless otherwise agreed to in writing by Company s Project Manager, promptly Resolve (A) all P1 Nonconformities, (B) all P2 Nonconformities, provided that with respect to any Deliverables for which Company identifies a P2 Nonconformity, Company will permit Amdocs to implement a Workaround, and (C) at least [***] of all P3 Nonconformities within the later of (1) [***] days of receipt of Company s written notice of Final * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 18

113 Acceptance, and (2) the next Maintenance Release. When all P1 Nonconformities and P2 Nonconformities that have been identified during Pre-Production Testing have been Resolved by Amdocs in accordance with the requirements set forth above (or the Parties have agreed in writing that any of such failures will be Resolved at a later date), Company shall provide Amdocs with written notice of its Acceptance of its Pre-Production Testing of the Amdocs Systems Unless the Parties otherwise agree in writing and subject to any Excused Delays, in the event that: (a) the Turn-On Date does not occur prior to or on the date agreed by the Parties and specified in the Project Plan due to Amdocs failure to meet any of its obligations under this Agreement; and (b) the Turn On Date does not subsequently take place within sixty (60) days thereafter, Company may, subject to the provisions of Sections 16.4, terminate this Agreement for cause, provided that there will be no additional cure period as described in Section Acceptance Meaning. Until Final Acceptance, any interim Acceptances of any portion of the Amdocs Systems, or any portion or component thereof, including, but not limited to, documentary Deliverables, shall not operate as a waiver or otherwise bar Company from rejecting any portion of the Amdocs Systems that was previously accepted if, upon evaluating any subsequent portions of the Amdocs Systems, Nonconformities in the previously accepted portions of the Amdocs Systems arise or become apparent and prevent the Amdocs Systems as a whole from materially conforming to the relevant Specifications and achieving Final Acceptance. For the avoidance of doubt, Company understands and agrees that evaluation and testing of Amdocs Systems and Services by Company is to be conducted within the framework of the applicable Specifications and not used as an opportunity for redefining the Scope of the engagement, except as the Parties may mutually agree pursuant to an Order Final Acceptance. Commencing on the Turn-On Date and for [***] thereafter ( Final Acceptance Testing Period ), Company shall evaluate and test the Amdocs Systems and verify that all Specifications are met when operating the Amdocs Systems under production conditions and indicate in writing to Amdocs either: (a) its Final Acceptance of the Amdocs Systems; or (b) the Nonconformities of the Amdocs Systems in reasonable detail. Upon receipt of written notice from Company of Nonconformities, Amdocs shall, if applicable and unless otherwise agreed to in writing by Company s Project Manager, promptly Resolve (i) all P1 Nonconformities, (ii) all P2 Nonconformities provided that with respect to any Deliverables for which Company identifies a P2 Nonconformity, Company may permit Amdocs to implement a Workaround as determined by Company in its sole discretion, and (iii) at least [***] of all P3 Nonconformities within the later of (A) [***] days of receipt of Company s written notice of Final Acceptance, and (B) the next Maintenance Release. Amdocs shall Resolve all P1 Nonconformities and P2 Nonconformities that have been identified by Company in accordance with the requirements set forth above within the Final Acceptance Testing Period in order for Company to provide Amdocs with written notice of its Final Acceptance of the Amdocs Systems. In the event that the Amdocs System operates under production conditions continuously during the Final Acceptance Testing Period without any P1 Nonconformities or P2 Nonconformities and Company fails to provide written notice * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 19

114 to Amdocs that it has or has not identified any P1 or P2 Nonconformities by the completion of the Final Acceptance Testing Period, then Final Acceptance of the Amdocs Systems shall be deemed to have occurred Effect of Failing to Achieve Final Acceptance. (a) (b) Unless the Parties otherwise agree in writing and subject to any Excused Delays, in the event that Amdocs fails to achieve Final Acceptance with respect to the Amdocs Systems within the Final Acceptance Testing Period and Amdocs fails to cure such failure within [***] thereafter, Company may, in its reasonable discretion and subject to the provisions of Sections 16.4, terminate this Agreement for cause; provided that, there will be no additional cure period as described in Section For the avoidance of doubt, subject to sub-section (a), the failure of Amdocs to timely achieve Final Acceptance is a material breach of the Agreement. The remedies set forth in this Section are in addition to, and not in lieu of, all of Company s other remedies at law and in equity Unless the Parties otherwise agree in writing and subject to any Excused Delays, in the event that: (a) the Final Migration Date does not occur prior to or on the date agreed by the Parties and specified in the Project Plan due to Amdocs failure to meet any of its obligations under this Agreement, and (b) the Final Migration Date does not subsequently take place within sixty (60) days thereafter, Company may, subject to the provisions of Sections 16.4, terminate this Agreement for cause, provided that there will be no additional cure period as described in Section For the avoidance of doubt, Amdocs shall not be held responsible under this Section for any decision or default on the part of Company or its Affiliates that leads to the deferment or delay of the migration of all or any of the relevant Subscribers Notwithstanding anything contained herein to the contrary, Company shall have the right in its sole discretion to suspend its portions of Acceptance testing at any time if, in Company s reasonable judgment, the number or magnitude of issues resulting from Amdocs performance, or lack thereof, of its obligations hereunder, identified during the testing process warrants suspension, and the time periods for conducting such testing shall be extended on a day to day basis to account for the period of suspension. If such suspension continues for thirty (30) consecutive days, the Parties will agree upon and document the impact of such delay in accordance with the Change Management Procedures Each Update that is developed following Final Acceptance will be subject to the testing procedures and requirements set forth in a mutually agreed upon Test Plan for such Update No Other Acceptance. Acceptance as described in this Section 3.3 shall be the sole method of acceptance of the Amdocs Systems and Services, and is intended to exclude all other methods of acceptance unless the Parties otherwise agree in writing. Subject to Company s rights to evaluate and test the Amdocs Systems in production on and after the Turn-On Date and throughout the Final Acceptance Testing Period, including the addition of new Subscribers to the Amdocs Systems, Company understands and * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 20

115 agrees that it will not use of any component of the Amdocs Systems or any other Deliverable for business, profit, revenue or any other commercial purpose unless and until such component is Accepted by Company or until Final Acceptance is achieved Effect of Delays If Amdocs or any Primary Subcontractor fails, or is likely to fail, to timely, diligently and properly perform its obligations under this Agreement, including, but not limited to, meeting a Milestone (other than to the extent caused by or as the result of an Amdocs Excused Delay), Amdocs shall, at its own expense, cure such failure as promptly as reasonably possible, including, but not limited to, at Company s request, providing that number and type of additional Amdocs Personnel as are reasonably necessary to timely achieve the Milestone. Any failure by Amdocs to fulfill any of its responsibilities (to the extent not caused by or as the result of an Amdocs Excused Delay) shall result in an automatic day-for-day extension of any Company s specific obligation or scheduled deadline that is dependent upon the specific, unfulfilled Amdocs responsibility, except as may be otherwise agreed by the Parties. Company s rights and Amdocs obligations pursuant to this Section 3.4 are in addition to Company s other rights and remedies and Amdocs other obligations under this Agreement In the event Amdocs requires performance of a Company task and Company is unable to perform or complete such task designated as Company s responsibility pursuant to a schedule (or otherwise under this Agreement) due to a Company Excused Delay, or because such task requires an increased level of effort by Company not previously anticipated or discussed in connection with this Agreement, then Company shall so notify Amdocs and the Parties shall use good faith efforts to reschedule such Company task. In addition, Amdocs shall use commercially reasonable efforts to reallocate in good faith its resources to minimize the impact of such Company task [***] by Company. As part of the PMO, Amdocs shall keep Company timely apprised in writing of any delays by Company that Amdocs believes to be impeding Amdocs performance of its obligations, including the date on which Amdocs believes such delay by Company began and the reasonably anticipated impacts of such delay. In the event of delays in the performance of Company s obligations hereunder, or the inability to perform such obligations that are required to be performed in order for Amdocs to perform its obligations, to the extent not caused by or the result of a Company Excused Delay or a rescheduled Company task as described above, Amdocs will have an automatic extension of time to perform its effected obligations that are dependent on the specific, unfulfilled Company task for a period at least equal to the same length as the period of Company s delay, except as otherwise agreed by the Parties. In the event Amdocs is required to expend an increased level of effort as a result of such Company delay, Amdocs shall have the right to raise a Change Request to cover such additional effort which Company shall approve in its reasonable discretion; provided that, only Company delays [***] solely with respect to any Milestone set forth on the Milestone Schedule may result in Company [***] and only if such delay has resulted in [***] to Amdocs in order for Amdocs to meet the applicable Milestone. In respect of any Company delay * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 21

116 in performing any activity under this Agreement which is not included in the Milestone Schedule, in the event Amdocs cannot reasonably reallocate its resources or minimize the impact of such Company task without additional cost, the Parties shall address such additional costs through the Change Management Process and the foregoing restriction shall not apply Service Credits In the event that Amdocs fails to achieve Final Acceptance of the Amdocs Systems within the Final Acceptance Testing Period, then Amdocs shall pay a service credit to Company in an amount equal to $[***] per [***] until and including the date that (a) Company terminates this Agreement pursuant to Section 3.3.8(a), or (b) Final Acceptance is achieved ( Service Credits ) up to a maximum Service Credit amount of [***]. Assessment and collection of Service Credits is without prejudice to Company s right to terminate this Agreement pursuant to Section or Section 16 and all other rights and remedies available to Company; provided, however, that such Service Credits shall be Company s sole and exclusive remedy with respect to any failure of Amdocs to achieve Final Acceptance, unless Company has exercised its right to terminate this Agreement in which case such Service Credits shall not be Company s sole and exclusive remedy with respect to any failure of Amdocs to achieve Final Acceptance. 4. LICENSE TO AMDOCS SYSTEMS; AMDOCS THIRD PARTY SOFTWARE 4.1. License Grant Amdocs Software. Subject to the terms and conditions of this Agreement and payment of the License Fees, ASSL hereby grants to Company a perpetual (except as may be otherwise expressly stated in this Agreement, including without limitation pursuant to Section ), non-exclusive, non-transferable (except as otherwise pursuant to Section 17.13), irrevocable right and license for the benefit of Company and any Company Affiliate to access and use the Amdocs Software, Customizations and Product Documentation worldwide from a data center located in the United States and/or Canada ( License ) solely for Company s and/or Company Affiliates business purposes in object code only (except as set forth in Sections 4.7(c), (f) and 16.9) for the maximum number of Subscribers for whom Company has paid the applicable License Fees. In the event Company appoints and uses a Third Party service provider pursuant to Sections 4.7(c) or 16.9, such appointment and use shall be subject to the limitations and requirements of Sections 4.7(c), 16.9 and CRM Application. Subject to the terms and conditions of this Agreement and payment of the License Fees, ASSL hereby grants to Company a limited, non-exclusive, non-transferable (except as otherwise pursuant to Sections 4.7 and 17.13) right and license for the benefit of Company and any Company Affiliate to access and use the CRM Back-End during the Term solely for the number of Subscribers for which Company pays such Outsourcing Fees and solely for Company s and/or Company Affiliates business purposes in object code only (except as set forth in Sections 4.7(c), (f) and 16.9). In the event the Parties agree during the Term to integrate the CRM Front-End into the Amdocs Systems pursuant to an Order, as of the date of such agreed-upon * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 22

117 Order, Company is granted a License to the CRM Application under the terms and conditions of Section 4.1.1, subject to the payment of the applicable license fees and the terms and conditions of the applicable Order Third Party Software. An initial list of Amdocs Third Party Software is set forth on Schedule 5 attached hereto. A copy of such list shall be maintained in the Procedures Manual and shall be updated in the event of a Change to the Amdocs Third Party Software. As part of Termination Assistance, Amdocs shall use commercially reasonable efforts to assist Company in obtaining a license for such Amdocs Third Party Software, as applicable, upon termination or expiration of this Agreement Legacy Systems and Company Systems. Subject to the terms and conditions of this Agreement, Company hereby grants to Amdocs a limited, non-exclusive, non-transferable (except as otherwise pursuant to Section 17.13) right and license to access and use the (a) Legacy Systems prior to the Final Migration Date, and (b) Company Systems during the Term, solely for the purpose of providing the Amdocs Systems and Services pursuant to the terms and conditions of this Agreement Acquisitions If an entity becomes a Company Affiliate or part of Company or an existing Company Affiliate ( New Company Affiliate ) and licenses a system that is the same as, or substantially similar to, the Amdocs Systems pursuant to a pre-existing license agreement between Amdocs and New Company Affiliate (the New Company Affiliate License Agreement ), Amdocs agrees to consent to either (a) an assignment of the New Company Affiliate License Agreement from New Company Affiliate to Company; or (b) New Company Affiliate s transfer of the licenses acquired under the New Company Affiliate License Agreement to Company; or (c) Company s conversion of any of New Company Affiliate s licenses to licenses granted under this Agreement. [***] For purposes of this Agreement, any and all references to a Company Affiliate shall be deemed to include any New Company Affiliate If an entity becomes a New Company Affiliate and does not currently license a system that is the same as, or substantially similar to, the Amdocs Systems, Amdocs agrees to migrate, at Company s request, any and all Subscribers and Personnel of such New Company Affiliate to the Amdocs Systems. The Parties shall mutually agree upon terms regarding the timing and cost of such integration, provided that Amdocs [***] by Company hereunder License Restrictions * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 23

118 Company shall comply with all applicable Laws in using the Amdocs Systems and Product Documentation as authorized herein and, except as set forth in this Agreement, Company may not, directly or indirectly, alone or with any Affiliate or any Third Party, with or without consideration: (a) (b) Distribute, transfer, resell, rent, lease, sublicense or loan the Amdocs Systems, the software components used in performing the Services or the Product Documentation to any Third Party or make such software components or the Product Documentation available to others (including, but not limited to, Mobile Network Virtual Operators (MVNOs)) in a service bureau or in any outsourcing arrangement or for any similar commercial time-sharing, data processing or other Third Party use; and/or Disassemble, reverse engineer, decompile, or modify the Amdocs Systems or the software components used in performing the Services or in any other manner decode such software or create derivative works or make any enhancements, adaptations or translations of such software, except as otherwise expressly permitted hereunder in Section 4.7 and the Escrow Agreement For the avoidance of doubt and without prejudice to the foregoing, Company shall not be restricted from using the Amdocs Systems for [***] Amdocs shall comply with all applicable Laws in using the Legacy Systems and Company Systems as authorized herein and except, as set forth in this Agreement, Amdocs may not, directly or indirectly, alone or with any Affiliate or any Third Party, with or without consideration: (a) (b) Distribute, transfer, resell, rent, lease, sublicense or loan the Legacy Systems or Company Systems to any Third Party or make the Legacy Systems or Company Systems available to others in a service bureau or in any outsourcing arrangement or for any similar commercial time-sharing, data processing or other Third Party use (provided that it is acknowledged and agreed that Amdocs may use Third Party facilities and services in connection with a Disaster); and/or Disassemble, reverse engineer, decompile, or modify the Legacy Systems or Company Systems or in any other manner decode the Legacy Systems or Company Systems or create derivative works or make any enhancements, adaptations or translations of the Legacy Systems or Company Systems, except as otherwise expressly permitted in this Agreement or agreed in writing by the Parties for the purposes of Amdocs performing the Services Product Roadmap; Releases * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 24

119 Amdocs shall periodically, and ordinarily on an annual basis, provide Company with its product roadmap that identifies a list of functional capabilities that Amdocs anticipates adding to the Amdocs Systems in upcoming Releases, and the specific time frame within which Amdocs anticipates each such functional capability will be delivered. Amdocs shall allow Company to participate in the user groups which assist Amdocs in establishing its product roadmap Amdocs shall make available to Company all Releases that are made generally available to Amdocs customers that Company approves in writing to be implemented in the Amdocs Systems. No amount in addition to the Outsourcing Services Fees shall be charged in respect of Maintenance Releases. With respect to any New Releases, the terms regarding the timing and cost of such implementation shall be mutually agreed upon by the Parties and shall be subject to the execution of an Order. All Releases of the Amdocs Systems, or any portion thereof, to which Company may become entitled shall be treated as part of the Amdocs Systems hereunder Amdocs shall provide to Company written notice of each (a) Maintenance Release promptly following its release to enable Company to determine the desirability of the Maintenance Release; and (b) New Release within two (2) years following its release to enable Company to determine the desirability of the New Release. Amdocs shall provide with such notice (i) reasonable documentation, descriptions and specifications for the applicable Release to enable Company to assess the differences in functionality and features that will result therefrom; and (ii) a written description of any and all incompatibilities and other problems that might occur as a result of a Release as determined based upon Amdocs reasonable inquiry in light of the Amdocs Systems. All Releases shall (A) be compatible with the previous version and its associated data and with any software interfacing with the applicable potions of the Amdocs Systems prior to the applicable Release, and (B) not eliminate any of the material functions, features or performance of the previous version. Company may, in its sole discretion, elect to delay the implementation of any Releases. Amdocs shall abide by such determination Amdocs will ensure the migration path for all Releases incorporates a process that will allow Company to regress from the new Releases if problems develop that are attributable to said new Releases. The process methodology shall be documented and tested by Amdocs prior to the delivery of the applicable Release. Company acknowledges that certain changes may not be reversible and as a result, Amdocs agrees that it shall provide to Company, in connection with the notice provided pursuant to Section 4.4.3, notice if a particular change, if implemented, is not reversible Amdocs Third Party Software Company acknowledges that the Amdocs Systems may require the use of Amdocs Third Party Software. Amdocs is responsible for procuring, [***], the Amdocs Third Party Software specified in Schedule 5 necessary for the operation of the Amdocs Systems in accordance with this Agreement and, as of the Effective Date, no Third Party software other than such Amdocs Third Party Software is necessary for Amdocs to operate the Amdocs Systems in accordance with this * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 25

120 Agreement, except in the event Company requires that Amdocs use the [***] software in place of the Vertex software originally proposed for use in connection with the Amdocs Systems by Amdocs, in which case, the [***] software will be the only exception to this provision. In the event that, during the Term in connection with any Orders resulting from Amdocs request to make an addition or replacement of Amdocs Third Party Software to the Amdocs Systems being provided hereunder, Company needs to obtain a license or sub-license to such Amdocs Third Party Software, Amdocs will obtain, on behalf of Company, a license to, or will provide Company with a sub-license to, such Amdocs Third Party Software. Amdocs remains responsible for any failure of the Amdocs Systems to operate in accordance with this Agreement. In the event that Company has a current license for any Amdocs Third Party Software provided in connection with the Amdocs Systems, the terms under which such Amdocs Third Party Software is licensed hereunder for purposes of the Amdocs Systems shall be better than or equal to the terms of Company s current license with such Third Party. In the event Amdocs, using commercially reasonable efforts, is unable to obtain such better than or equal terms from the Third Party and Company wishes to use such Third Party Software pursuant to the terms of its own license agreement, Company shall use commercially reasonable efforts to obtain for Amdocs all Required Consents to permit Amdocs to enjoy the benefits of Company s license with such Third Party for the sole purposes of providing the Amdocs Systems and the Services to Company hereunder Documentation Amdocs shall supply Product Documentation in connection with the Amdocs Software licensed hereunder and shall permit Company to copy such Product Documentation as reasonably necessary for its use of the Amdocs Systems. Amdocs shall provide Product Documentation for each portion of the Amdocs Systems at the time of delivery and such Product Documentation shall include adequate user documentation. All Product Documentation shall be delivered to Company electronically, in such media and in such format as generally provided by Amdocs to its customers Core Source Materials and Source Materials Escrow Immediately following the Turn-On Date and Amdocs receipt from Company of the signed Enrollment Form as attached as part of Schedule 22 naming Company as a beneficiary of the escrow account, and receipt of the payments described below, Amdocs will deposit a copy of the Source Materials with Iron Mountain Intellectual Property Management, Inc. ( Iron Mountain ), pursuant to the Escrow Agreement executed between Amdocs and Iron Mountain attached as part of Schedule 22. In case of any conflict between the provisions of this Agreement and the provisions of such Escrow Agreement, the provisions of the Escrow Agreement will prevail except with respect to the Release Conditions for the Source Materials set forth below. Amdocs shall [***] associated with being a beneficiary of such account. A copy of the then-current Source Materials will be deposited in connection with each New Release of the Amdocs System, but no less frequently than once per calendar year: * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 26

121 (a) (b) (c) Release Condition. As used in this Agreement in connection with the Source Materials, Release Condition means the following: (i) (ii) (iii) Amdocs ceases to be continuously engaged in its normal business operations for a period of thirty (30) days and no successor acceptable to Company is appointed; Amdocs decision to permanently discontinue the provision of Maintenance to Company during any applicable maintenance period, provided that Company is entitled to receive and has paid for such Maintenance; or Amdocs becomes insolvent, ceases doing business as a going concern, makes an assignment for the benefit of its creditors, admits in writing its inability to pay its debts as and when they fall due or in the event that there are any proceedings instituted by or against it in bankruptcy or under the insolvency laws or for receivership or dissolution which are not frivolous or vexatious proceedings or not dismissed within sixty (60) days from commencement of such proceedings and, Amdocs does not, during the pendency of such proceeding, continue to provide Outsourcing Services under this Agreement; in each instance under circumstances where Company has elected as part of Termination Assistance to implement the Amdocs System in a non-amdocs data center for continued use by Company and Company, at the time of occurrence of the Release Condition, is operating or planning to operate the Amdocs Systems itself or through a Third Party (to the extent permitted hereunder) on behalf of Company to support its Subscribers. Filing for Release. If Company believes in good faith that a Release Condition has occurred, Company may provide to Iron Mountain, with a copy to Amdocs, a written notice of the occurrence of the Release Condition and a request for the release of the Source Materials. In the event Amdocs disputes that a Release Condition has occurred, Amdocs will so notify Iron Mountain and Company and such dispute shall be resolved in accordance with Section 17.11, provided that escalation shall commence at level II and escalation to the Steering Committee shall not be necessary. Iron Mountain will continue to store the Source Materials without release pending (a) joint instructions from Amdocs and Company; (b) dispute resolution pursuant to Section of the Agreement; or (c) order from a court of competent jurisdiction pursuant to Section of the Agreement. License Subject to Release Conditions. Pursuant to this Section 4.7, Amdocs hereby presently grants to Company, for the benefit of Company and any Company Affiliate, a perpetual, non-exclusive, non-transferable, fully paid-up, irrevocable, worldwide right and license from a data center located in the United States and/or Canada to (i) receive, use, modify and create derivative works of the Source Materials solely for Company s internal business 27

122 (d) purposes and solely to the extent required for the purposes of use, support, maintenance, configuration, and/or implementation of the Amdocs Systems; and (ii) receive, use, modify and create derivative works of the Core Source Materials solely for Company s internal business purposes solely to the extent required for the purposes of use, support, maintenance, configuration, and/or implementation of the Amdocs Software as a component of the Amdocs Systems. The foregoing right includes the right to appoint a Third Party service provider who is not an Amdocs Competitor (except in the event Amdocs ceases to do business) to assist Company in so doing and to use and access the Source Materials (and the Core Source Materials if the release conditions referred to in Section 4.7(e) apply) solely for the applicable purposes set forth in (i) and (ii) above, provided that, (A) Company gives written notice to Amdocs in advance about such service provider, (B) such service provider executes a written agreement with (1) Amdocs containing terms substantially similar to those set forth in Exhibit 2 and protecting Amdocs rights to the Source Materials and, if applicable, the Core Source Materials, prior to being given any access to the Amdocs Systems; and (2) Company, containing terms limiting such service provider s use of the Source Materials and, if applicable, the Core Source Materials, to the restrictions set forth above in Section 4.3 and this Section 4.7(c) and terms naming Amdocs as a third party beneficiary of such agreement solely for the purposes of enforcing such restrictions and Amdocs rights to the Source Materials and, if applicable, the Core Source Materials (the Sub-License ), a copy of which Sub-License shall be reasonably approved by Amdocs prior to execution; provided that Company may redact any information from such Sub-License that does not relate to (x) the Source Materials and, if applicable, the Core Source Materials, (y) the restrictions set forth above in Section 4.3 and this Section 4.7(c), or (z) Amdocs rights as a third party beneficiary under the Sub-License; (C) Company shall remain fully liable for all acts and omissions of such service provider; (D) Company shall not be restricted from engaging an Amdocs Competitor to run the portions of the Amdocs Systems to which Company has the rights so long as such Amdocs Competitor is not provided or given access to Source Materials or Core Source Materials and subject to all other limitations of this Section 4.7(c); and (E) such Third Party service provider [***], is approved in writing by Amdocs (which approval may be reasonably withheld or conditioned in Amdocs sole discretion). If Company obtains the Source Materials, Amdocs will use all reasonable efforts at Company s cost ([***]) to provide to Company a practical and participatory on-site training program at Company s facilities sufficient to reasonably train other personnel of Company (i.e., train them to be trainers) * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 28

123 (e) (f) with respect to use, maintenance and operation of the Amdocs Systems, subject to all applicable provisions of this Agreement. In addition to the escrow account with respect to the Source Materials as described above, Company shall have a right to become a beneficiary under the applicable Escrow Agreement with regard to the Core Source Materials for each Amdocs Software product perpetually licensed to Customer under this Agreement. Release of the Core Source Materials shall be subject to the terms and conditions of Exhibit C of the Escrow Agreement. Prior to the Turn-On Date, Amdocs shall provide Company with the applicable beneficiary forms. Amdocs obligations with regard to the Core Source Materials shall be governed by the standard terms and conditions of the Escrow Agreement. In case of any conflict between the provisions of this Agreement and the provisions of such Escrow Agreement, the provisions of the Escrow Agreement will prevail. Notwithstanding the foregoing, Amdocs represents to Company that, the Source Materials that may be released pursuant to this Section 4.7, would be sufficient for the Amdocs Personnel to continue to perform the Outsourcing Services without requiring access to the Core Source Materials in accordance with the Service Levels prescribed in this Agreement (excluding maintenance and enhancement of the Amdocs Software incorporated in the Amdocs System). The Source Materials, excluding the Core Source Materials, are the only source materials that are used in and/or necessary to perform the Outsourcing Services (excluding maintenance and enhancement of the Amdocs Software) provided to Company hereunder. The Source Materials and Core Source Materials are Amdocs Confidential Information and Company shall not disclose the Source Materials or Core Source Materials to any Third Party except as expressly permitted above; and Company shall take all reasonable precautions against unauthorized access to the Source Materials and Core Source Materials while such materials are in its possession. For the avoidance of doubt, Company shall retain liability for all breaches of this Agreement, including unauthorized use or disclosure of Source Materials and, if applicable, Core Source Materials, by any persons or entities to whom such Materials are disclosed by Company. 5. OUTSOURCING SERVICES 5.1. Outsourcing Services Generally INC. will perform hosting, maintenance and other services with respect to the Amdocs Systems, as further defined in Schedule 9 (the Outsourcing Services ), commencing on the applicable timelines as specified in Schedule Disaster Recovery and Disaster Recovery Plan As part of the Outsourcing Services, INC is responsible for developing, implementing and maintaining a plan for the Services in the event of a Disaster (the Disaster Recovery Plan or DRP ). As of the Effective Date, a summary of such Services is 29

124 set forth in Schedule 12. The Parties agree that within sixty (60) days of the Effective Date, Amdocs and Company will develop a DRP As part of the DRP, INC. is responsible for the following activities: (a) (b) (c) Maintaining sufficient infrastructure for the production environment(s) of the Amdocs Systems in order to enable Company to maintain business operations at the level of operations specified in the Disaster Recovery Plan, and within the time frames specified in the Disaster Recovery Plan, using support from Amdocs alternate operations center; Maintaining methods and procedures required for DRP testing, at least quarterly, as well as detailed instructions for implementing the DRP in the event of Disasters. INC. shall conduct such DRP testing at all Amdocs Sites. If requested, INC. shall allow Company to observe its DRP tests; Implementing disaster recovery plans and procedures at a secondary Amdocs Site in a timely manner and in accordance with the DRP; (d) Restoring any and all Services to a level that is in compliance with the Silver DR service plan standards as set forth in Schedule 12 ; (e) (f) Providing for recovery after both short and long term Disasters in facilities, communications and data processing equipment. Short term Disasters must be protected through workarounds, redundant resources and network diversity; and Addressing contingency plans for total destruction of Amdocs business operations for a period of thirty (30) days or longer. Amdocs recovery objectives (time to full restoration and amount of lost data tolerated) must meet or exceed the applicable performance levels applicable to the Silver DR service plan standards as set forth in Schedule At all times during the Term, Amdocs must, and shall use reasonable commercial efforts to cause and be responsible for its Primary Subcontractors (if any) to, maintain the DRP and invoke it when necessary Amdocs shall update and provide to Company for its review and Acceptance, at least annually, copies of its DRP and all business continuity exercise final reports Amdocs shall provide a reasonable level of cooperation to Company in the development, implementation, execution, and reasonable testing of Company s own DRP with respect to the Services and the Amdocs Systems. If Amdocs provides electronic interchange of data with Company, Amdocs shall participate, if requested, in any Company data center exercise to validate recovery connectivity. Amdocs shall continue to provide the Services and/or Amdocs Systems to Company in the event Company activates its own DRP or moves to an interim site to conduct its business, including during tests of Company s contingency operations plans Procedures Manual and Disabling Devices In accordance with the further terms of this Section 5.3, Amdocs shall develop as a Deliverable and thereafter regularly update a detailed, procedures manual that 30

125 minimally includes the contents specified in Schedule 25 (the Procedures Manual ). Amdocs shall deliver the first draft of the Procedures Manual to Company for its review and comments thirty (30) days prior to the start of testing by Company pursuant to the UAT Plan and shall, with respect to such draft, incorporate Company s comments and suggestions thereto. Periodically, but at least on an annual basis, Amdocs shall: (a) update the Procedures Manual to reflect changes in the operations and procedures described therein, which updates shall be easily identifiable by Company; (b) provide to Company the updated draft of the Procedures Manual for Company s review and comments; and (c) incorporate Company s comments and suggestions thereto At all times during the Term, Amdocs Personnel shall use reasonable efforts at least consistent with industry standards to ensure that the Amdocs Systems does not contain any Disabling Device that would cause it to be rendered inoperable or otherwise incapable of being used or destroy any of the Company Data or other software; provided, that, Amdocs shall bear no responsibility for such Disabling Device if either of the following conditions are met: (a) the applicable software (containing the Disabling Device) was not developed or delivered by Amdocs and/or an Authorized Subcontractor; or (b) if the applicable software (containing the Disabling Device) was delivered or developed by Amdocs and/or an Authorized Subcontractor, Amdocs shall have tested such software immediately prior to the introduction of such software into the Amdocs Systems using the latest commercially available virus-checking software of a quality equal to or better than highest industry standards. Except as expressly permitted in this Agreement (including, without limitation, under Section ), Amdocs will not de-install, disable or repossess any portion of the Amdocs Systems by means of any Disabling Device or self-help (electronic or otherwise) even if Company fails to perform any of its obligations under this Agreement Amdocs shall maintain and update a Bug List for the Amdocs Systems throughout the Term and will provide Company access to the Bug List at any time upon Company s request. 6. SERVICE LEVELS AND BENCHMARKING 6.1. Performance According to Services Levels (SLA) Amdocs will perform the Services for Company and provide the Amdocs Systems in accordance with the Service Levels specified in Schedule Amdocs shall measure and provide monthly reports to Company its performance results against the Service Levels in the manner specified in Schedule Company may, upon reasonable notice to Amdocs in writing, request changes, through a Change Request, to the Service Levels provided that such changes fall within the Scope and, if not, shall be subject to an Order executed pursuant to Section 7.4 of this Agreement Service Level Credits 31

126 Failure to meet Service Levels or exceed Service Levels may be subject to Amdocs provision of performance credits ( Service Level Credits ) to Company or the application of earn backs (as the term is used in Schedule 11) (as the case may be) The amounts and provision of such Service Level Credits are subject to the terms and conditions of Schedule Envelope Parameters The Service Levels are subject to the Envelope Parameters specified in Schedule Company may, upon reasonable notice to Amdocs in writing, request changes, through a Change Request, to the Envelope Parameters Any changes in the Envelope Parameters, and any effects of such changes on the Service Levels and any other provisions of this Agreement, are subject to the terms and conditions of Schedule Review of Service Levels The Parties will meet to review the Service Levels yearly. As a result of those meetings and as necessary from time to time during the Term, the Steering Committee may, by mutual agreement, add to, delete or adjust the Service Levels. The Parties intent of such yearly review is to agree upon year over year performance improvements in the Service Levels Benchmarking Not earlier than [***], Company shall have the right, but not the obligation, to conduct a measurement and comparison benchmarking process to compare [***] to ensure that Company is receiving [***], given the nature, volume and type of Services provided by Amdocs hereunder (taking into account the volume of Services, the skill sets and geographical location of the Personnel and other such factors necessary to ensure a like-for-like comparison to the benchmark comparator group) (the Benchmarking Process ). Upon Amdocs receipt of notice of Company s intent to exercise its benchmarking right, the Parties shall agree on a pool of suitably qualified, experienced and independent benchmarkers generally in the business of conducting such measurements and comparisons. The pool of benchmarkers shall not include any Person that is an Amdocs Competitor. It is the Parties intention that they shall jointly select the benchmarker to carry out the Benchmarking Process. However, in the event that the Parties are unable to agree as to the identification of such benchmarker, after escalation of this matter to Company s Senior Vice President (IT) and Amdocs Vice President, then Company may utilize any Third Party benchmarker from the pool to perform the Benchmarking Process (the Benchmarker ). The Benchmarker will review its benchmarking methodology with Company and Amdocs and the Parties shall agree to the criteria used for selection of the benchmark comparator group prior to commencement of the Benchmarking Process. Amdocs shall have reasonable * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 32

127 opportunities to make submissions to the Benchmarker as to the performance of the Services and the related pricing. Company shall pay the fees and expenses charged by the Benchmarker (which fees will not be contingency-based). Amdocs cooperation with the Benchmarker shall be conditioned on the Benchmarker s compliance with Amdocs commercially reasonable confidentiality requirements; provided, that, Amdocs shall not be obligated to disclose Confidential Information related to any of Amdocs or its Affiliates other clients to the Benchmarker. The Benchmarking Process shall be conducted so as not to unreasonably disrupt Amdocs operations under this Agreement (including so as not to lead to any material impact on the Service Levels) In conducting the Benchmarking Process, the Benchmarker will obtain and examine information relating to [***], provided on an outsourced basis by a similarly situated information technology service provider. The Benchmarker will collect information concerning the outsourcing of services which are of a similar nature (including service level commitments), type and aggregate volume to the Services then being provided by Amdocs hereunder from similarly situated information technology service providers for the provision of services similar to the Services in order to establish meaningful comparables. Further, the Benchmarker will consider the following factors solely to the extent that the Parties agree that such factors are relevant: [***] The Benchmarker shall provide to Amdocs and Company a copy of the Benchmarker s report and shall meet with Company and Amdocs to review results prior to the report being considered final. Such review will include disclosure of information related to the makeup of the comparator group with sufficient granularity to ensure that the comparators chosen meet the requirements specified for inclusion in the comparator group. Following such meeting, Amdocs shall have up to [***] (or such longer period as may be agreed to by the Parties taking into account the nature of the findings) to review and respond to such report. If Amdocs reasonably believes that the Benchmarker s report contains material errors or inaccuracies of fact or calculation, Amdocs shall notify Company and the Benchmarker by: (a) specifying the errors or inaccuracies; (b) providing any report, data or other evidence that demonstrates, supports or justifies Amdocs belief; and (c) proposing amendments to the Benchmarker s report necessary to correct the errors or inaccuracies. Company and the Benchmarker shall review any such notice given by Amdocs and respond in writing. If the Parties do not agree on the appropriate course of action relating to error correction or if the Parties are unable to agree upon the validity of such findings, the matter shall be resolved pursuant to Section of this Agreement. If the Parties agree, as a result of such internal dispute resolution process, to make changes to the findings of the report then the report will be amended to reflect any changes agreed to * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 33

128 by the Parties. In the event that the final results of the Benchmarking Process indicate that [***], Amdocs shall present to Company its plans for improvements as are reasonably necessary to [***]. Upon agreement by the Parties on the plans for improvement, Amdocs will implement such plans during the subsequent [***] period (or such other period as may be agreed by the Parties, taking into account the nature of any changes), including without limitation, such changes as may be required to the SLA and the Fee Schedule. 7. CHANGE MANAGEMENT PROCEDURES 7.1. General The Change Management Procedures specified in this Section 7 shall apply to any: (a) (b) 7.2. Changes Change Requests; and requests by Company for Additional Services Any Changes shall be agreed by the Parties, specified in writing and handled by the Parties in accordance with the procedures for Change Requests specified in Section Amdocs will not make any Changes that will have an adverse impact on Amdocs compliance with the then-current Services Levels without Company s prior written consent Amdocs will not make any Changes that will increase the Fees for the Services without Company s prior written consent Amdocs will not make Changes that require Amdocs to provide Additional Services without Company s prior written consent Change Requests Change Requests will be processed in accordance with the following agreed to procedure. Amdocs activities relating to Change Requests (including the implementation of such changes) will be provided as Additional Services. Either Party may elect to submit Change Requests to the other Party. Change Requests shall be submitted in writing using a Change Request Form to the other Party and shall contain a sufficient level of detail to permit the other Party to properly evaluate the Change Request. Change Requests may only be submitted by a Party s Project Manager. The Party receiving the Change Request shall promptly thereafter evaluate the ramifications of the Change Request to determine whether the Change Request is, in its reasonable judgment, technically and commercially feasible, and if so, what impact approving the Change Request will have on the Milestone Schedule, the Project Plan, the Services * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 34

129 and Amdocs Systems. Within five (5) Business Days after receipt of the Change Request, the receiving Party shall respond to the requesting Party in writing with either: (a) an acceptance of the Change Request; (b) a proposal of modifications to the Change Request; or (c) the reasons why such a Change Request cannot be accepted. The requesting Party shall have five (5) Business Days upon receipt of such response to evaluate such modifications. In the event that the Change Request as evaluated and/or modified by the Parties is acceptable to both Parties, the Parties shall amend this Agreement by an Order and this Agreement shall continue, as amended by such Order once executed by both Parties. Neither Party will be entitled to or obligated by a Change Request until it has been presented and approved by both Parties in accordance with the above-mentioned procedures. Work performed by either Party to prepare, analyze or respond to a Change Request shall not be chargeable to the other Party hereunder, provided that the number of Change Requests initiated by Company is reasonable. Where (i) Company has requested a Change to the Agreement and mutual agreement cannot be reached between the Parties with respect to the change within thirty (30) days of Amdocs receipt of the Change Request Form, or (ii) Amdocs has requested a Change to the Agreement and mutual consent cannot be reached between the Parties within thirty (30) days of Company s receipt of the Change Request Form, Amdocs must continue to provide the Services and deliver the Amdocs Systems in accordance with the Requirements as stated in the Agreement, even if Amdocs has submitted such matter for dispute resolution in accordance with Section Orders Additional Services may be procured by Company from Amdocs only on the basis of Orders, in accordance with this Section 7.4. Orders shall be substantially in the form attached as Exhibit Each Order shall be deemed to incorporate: (a) the terms and conditions of this Agreement, to the extent applicable; (b) the specifications document applicable to such Order, if any; and (c) any relevant subordinate documents attached to such Order. In case of any conflict between the provisions of this Agreement and the provisions of an Order, the provisions of the Order will prevail as to the subject matter of such Order. An Order may not be modified except as agreed in writing by Company and Amdocs Each Order shall include the provisions required by the applicable Sections of this Agreement and Schedules. Any other provisions agreed by the Parties and specified in an Order shall apply solely to such Order. An Order shall also serve, if applicable, and as provided in such Order, as an amendment to the Agreement An Order will be binding on the Parties only when executed in writing by the Parties Substitutions During the Term, Amdocs is not authorized to substitute any item for any portion of the Amdocs Systems identified in this Agreement without engaging in the Change Management Procedures set forth in Section 7 of this Agreement. Any additions, deletions, or substitutions of any portion of the Amdocs Systems, shall be made in accordance with Sections 7.3 and 7.4 of this Agreement. 35

130 8. PROFESSIONAL DEVELOPMENT SERVICES 8.1. Additional Services The Parties may agree from time to time, by an Order, to add Additional Services to this Agreement Additional Services may include, but are not limited to, Customizations Additional Service Fees will be based upon the agreed upon pricing model for professional services set forth herein, which is based upon the Amdocs estimating model. 9. RESPONSIBILITIES AND RESOURCES 9.1. Amdocs Roles and Responsibilities Amdocs will perform all of the tasks designated as Amdocs tasks in the Roles and Responsibilities Document. Amdocs acknowledges and agrees that its timely and proper performance of such tasks is required for Company s performance of the tasks designated as Company s tasks in the Roles and Responsibilities Document that are dependent upon Amdocs preceding tasks Incidental Activities If any incidental activities which are not specifically designated as Amdocs tasks in the Roles and Responsibilities Document, or in any other descriptions of the Services in the Schedules, are an inherent part of the Services and are reasonably required for proper performance or provision of the Services in accordance with this Agreement, they shall be deemed to be included within the Scope, subject to the responsibilities of Company as specified in this Agreement Company s Roles and Responsibilities Company will perform all of the tasks designated as Company s tasks in the Roles and Responsibilities Document. Company acknowledges and agrees that its timely and proper performance of such tasks may be required for Amdocs performance of the tasks designated as Amdocs tasks in the Roles and Responsibilities Document that are dependent upon Company s preceding tasks. Accordingly, Amdocs shall use reasonable efforts to keep Company timely apprised in writing of any delays by Company that Amdocs believes to be impeding Amdocs performance of its obligations Compliance with Plans Company will comply with the schedules and perform the activities designated as Company s assigned tasks in the Project Plan, DRP, and any other plans and schedules agreed by the Parties; provided, however, that Company s failure to do so shall not constitute a breach of the Agreement by Company. Rather, Company acknowledges that its timely and proper performance of such tasks is required for Amdocs performance of its tasks that are dependent upon Company s preceding tasks and any failure to perform such tasks may delay performance of the Services and give rise to an Amdocs Excused Delay. The impact of such delay, including any compensation to 36

131 Amdocs for any increased costs engendered by such delay, shall be addressed as provided in those terms set forth in Section respecting delays caused by Company Access to Personnel Company shall provide Amdocs with access to the Company Personnel as reasonably required for Amdocs to perform the Services Cooperation Company acknowledges that Amdocs performance hereunder requires information and cooperation from Company, and performance of its responsibilities under this Agreement. Accordingly, Company shall use commercially reasonable efforts to provide Amdocs with complete, timely and accurate information regarding Company s requirements and all other data and information applicable to and reasonably necessary for performance by Amdocs upon Amdocs reasonable request. 10. SERVICES LOCATIONS Locations Subject to Section , Services will be provided by Amdocs at the Amdocs Sites; provided that, Amdocs shall maintain its standard procedures in place as of the Effective Date, which have been conveyed to Company in detail, with respect to the assignment of Personnel and such Personnel s access to Company Data. Amdocs shall obtain Company s prior written approval in the event Amdocs desires to designate a new Amdocs Site from which Services will be provided hereunder. As part of the Services, Amdocs shall maintain and enforce physical security standards and procedures at each of the Amdocs Sites which are in accordance with then current industry standards in the United States and comply with such Company security procedures as may be provided to Amdocs electronically in a mutually agreed upon format and as are reviewed and approved by Amdocs, which approval shall not be unreasonably withheld, conditioned or delayed. Amdocs will make such Company security procedures available to its Personnel and require its Personnel to agree via electronic means to comply with such Company security procedures as received and approved by Amdocs (provided that with respect to Authorized Subcontractors, it shall use reasonable commercial efforts to do so) Notwithstanding the foregoing, Amdocs will perform portions of the Services and any Additional Services at the Company Sites to the extent required in order to provide the Services in accordance with the Specifications and all other Amdocs obligations under this Agreement. Company shall be permitted to relocate, add or remove any Company Sites with respect to the list provided in Schedule 3 attached hereto at any time in its sole discretion upon written notice to Amdocs. Any Changes to the Services and associated costs (if any) related to such relocation shall be addressed pursuant to Section 7 of this Agreement Notwithstanding the territories from which the Services will be provided by Amdocs hereunder, all Company Data, shall be maintained, held and stored in the United States. No such data shall be, at any time, located in a territory other than the United States 37

132 other than such data being accessed by any Personnel of Amdocs, its Affiliates or an Authorized Subcontractor in a territory in which Services are being provided. Promptly following the Effective Date, Amdocs shall notify Company of the Site(s) at which such data will be located, which Site(s) Company shall approve in writing. In the event Amdocs desires to change the location of such data at any time to a Site that is previously approved by Company in writing, Amdocs will provide Company at least five (5) days prior written notice of such change. In the event Amdocs desires to change the location of such data at any time to a Site other than any Site previously approved by Company in writing, Amdocs will provide Company at least thirty (30) days prior written notice of such change and such change shall only occur upon Amdocs receipt of written approval from Company Use of Company Sites Except as may be expressly agreed by the Parties herein or otherwise in writing, Amdocs shall supply, at its own expense, all equipment, supplies and other materials necessary for Amdocs to render the Services hereunder. Company shall provide Amdocs, at no cost to Amdocs, suitable office space, office furnishings, utilities (including air conditioning), office-related equipment (excluding computers), supplies, duplicating services, premises security services, reasonable access to and use of Company s voice and data telecommunications equipment and telecommunications lines, including printers, terminals, and cabling and data lines connected to Amdocs Sites for Amdocs Personnel at the Company Sites as Amdocs reasonably requires for purposes of Amdocs performance of the Services as well as Additional Services, consistent with those that Company provides for its own Personnel. Company will enable Amdocs to access and use such facilities during Company s normal business hours, unless otherwise mutually agreed upon by the Parties. Such access shall be in effect throughout the Term and during any Termination Assistance Period All internal communications of Amdocs Personnel on Company s /telephone/fax systems will be considered Amdocs Confidential Information Physical Security Company is responsible for the physical security of the Company Sites Applicable Regulations While providing any Services at the Company Sites, Amdocs shall comply with, and cause the Amdocs Personnel to adhere to, the operational, safety and physical security policies, standards, requirements and procedures then in effect at the Company Sites that have been provided to Amdocs in writing and which, from time to time, may be amended by Company upon ten (10) Business Days prior written notice to Amdocs. In the event that any changes to such policies and procedures may lead to significant additional expense for Amdocs in complying with such changes in order to continue performing the Services, the parties will discuss in good faith an appropriate allocation of such incremental cost Amdocs and its Amdocs Personnel shall take all reasonable precautions to avoid injury and property damage at the Company Sites. 38

133 The Company Personnel that use the Amdocs Sites will be subject to the restrictions applicable to such facilities that have been provided to Company in writing and which, from time to time, may be amended by Amdocs upon ten (10) days prior written notice to Company Global Services Model Amdocs may deliver any or all of the Services using Amdocs Personnel located at Amdocs Sites outside the United States or connecting through a virtual private network connection to an Amdocs Site. Company shall have the right to approve, such approval not to be unreasonably withheld, conditioned or delayed, all geographical venues from which Services will be provided and/or Amdocs Personnel will be located for purposes of this Agreement. Currently, the Amdocs pricing for Outsourcing Services set forth in Schedule 6 is based on an [***]. In the event of a change in Amdocs Legal Requirements or Company Legal Requirements that adversely impacts the desirability of, having the Services provided by offshore Amdocs Personnel, upon either Party s written request, the Parties will cooperatively explore alternate service models that would minimize or eliminate such adverse impact. In the event a mutually satisfactory resolution is not achieved within [***] after a Party first requested the exploration of alternate Service models (or such earlier time as may be required to ensure compliance with applicable Laws), Amdocs thereafter shall perform the Services using United States-based Amdocs Personnel, provided that, (a) any impact on the Services and any increase in the costs to provide such Services resulting from [***], and (b) any impact on the Services and any increase in the costs to provide such Services resulting from [***]. 11. PERSONNEL Number of Amdocs Personnel Amdocs shall assign sufficient numbers of qualified and properly trained Amdocs Personnel to provide the Services and any Additional Services in accordance with this Agreement (and, in the case of Additional Services, the applicable Order) Key Personnel The Parties may designate in Schedule 15 certain Amdocs Personnel as Key Personnel to render Services or the Parties may subsequently agree in writing that additional individuals are Key Personnel required to render Services. If any Key Personnel are so designated, Amdocs shall provide Services through those Key Personnel and such additional Personnel as Amdocs may from time to time determine to be required for the performance of Services. If any Key Personnel terminate their employment with Amdocs or otherwise become unavailable to provide Services beyond Amdocs reasonable control, Amdocs may provide the Services through other Personnel with comparable training and experience, provided that: * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 39

134 (a) (b) (c) Amdocs shall promptly notify Company of the termination or unavailability of such Key Personnel; Amdocs shall provide Company with the resumes of any proposed replacement Key Personnel before they are assigned to perform any Services; and Company shall have the right to approve any replacement Personnel proposed by Amdocs for assignment to perform any Services, provided that such approval shall not be unreasonably withheld or delayed. In the event Company is dissatisfied with any Amdocs Personnel that replace Key Personnel pursuant to this Section 11.2, then Amdocs shall promptly replace such Personnel with an individual of suitable ability and qualifications Continuity and Replacement of Amdocs Personnel Amdocs shall use reasonable efforts to maintain the continuity of any Key Personnel performing Services hereunder and shall use reasonable efforts to refrain from reassigning such Personnel to other projects for periods of time during which such Personnel are scheduled to perform Services to Company, unless agreed to in writing by both Parties In the event that Company determines lawfully and in good faith that the continued assignment to any Company Sites of any Amdocs Personnel is not in the best interests of Company as a result of the performance or behavior of such Personnel, then Company shall give Amdocs written notice to that effect and provide Company s reasons for such conclusion Promptly after its receipt of such notice, Amdocs shall investigate the matters stated in the request and discuss its findings with Company. Company shall allow Amdocs a meaningful opportunity to discuss such findings with Company during a period of not less than ten (10) Business Days. Notwithstanding the foregoing, Amdocs shall immediately: (a) remove the individual in question from the Company Site; (b) prohibit such individual from obtaining access to Company Data, Company Confidential Information and the Amdocs Systems; and (c) remove such individual from performance of the Services, pending completion of Amdocs investigation and discussions with Company If, following discussions with Amdocs, Company lawfully and in good faith requests replacement of such individual, Amdocs shall replace such individual with an individual of suitable ability and qualifications Amdocs shall strictly enforce its own policies regarding fraudulent or violative behavior of its Personnel and shall be required to remove such Personnel from Company s account and restrict such Personnel from providing Services hereunder. Amdocs shall design and implement training programs designed to deter fraudulent activity and other misconduct. Without affecting the foregoing, the Parties may mutually agree on processes designed to address Company s concerns and complaints promptly regarding Amdocs Authorized Subcontractors or other Third Party representatives. Such a request shall in no way be interpreted as a request by Company 40

135 for Amdocs to discipline or determine the employment status of the individual in any way Substance Abuse In accordance and to the extent permitted by applicable governing Laws, Amdocs agrees to remove any Amdocs Personnel engaging in substance abuse while at the Company Sites or while performing Services. In the case of reasonable suspicion, such removal shall occur pending completion of the applicable investigation. Substance abuse includes the sale, attempted sale, possession or use of illegal drugs or drug paraphernalia, or, to the extent not permitted at the Company Sites, alcohol or the misuse of prescription or non-prescription drugs Responsibility for Personnel Each Party shall be responsible for the management, direction, control, supervision and compensation of its own Personnel In no event will any of Amdocs Personnel be considered employees of Company. For the avoidance of doubt, neither Amdocs nor any of its Personnel are entitled to any medical or dental coverage or life or disability insurance from Company, or entitled to participate in any Company pension or any other benefits afforded to any Company employees. All matters governing the employment of Amdocs Personnel shall be fully the responsibility of Amdocs or its Authorized Subcontractors. Amdocs assumes full responsibility for the actions of its Personnel while performing obligations under this Agreement. Amdocs shall be responsible for the supervision, direction and control of its Personnel as well as the payment of compensation (including withholding of taxes and Social Security), contribution to workers compensation and unemployment compensation, overtime, disability benefits, and any other legally-required benefits or compensation or discretionary benefits or compensation. Amdocs represents and warrants that it has, or will, complete the I-9 Process for all Personnel that will perform Services hereunder in the United States and all such Personnel are authorized to work for Amdocs in the United States. Amdocs acknowledges and agrees that Company is under no obligation to assist Amdocs in obtaining any work permits for such Personnel to work in the United States. Amdocs will be responsible for complying with all applicable Laws with respect to such Personnel and the performance of any Services outside of the United States including, but not limited to, the applicable Laws of the jurisdiction(s) in which the Services are being performed. Except with regard to Authorized Subcontractors, Amdocs agrees to fully defend, indemnify and hereby hold Company Indemnitees harmless from and against all demands, losses, liabilities, expenses, costs and damages, including reasonable attorney s fees, arising as a result of any Third Party claim against such Company Indemnitees due to (a) any violation of immigration law by Amdocs or its Personnel; and (b) Amdocs obligations to its employees. Any immunity or exclusivity of any labor, workers compensation, or similar statute applicable to Amdocs will not in any way limit or preclude Amdocs obligation to provide indemnification hereunder. The foregoing indemnity will not be limited in any manner whatsoever by any required or other insurance coverage maintained by Amdocs or with respect to Company s ability to pursue a claim against any Authorized Subcontractor with respect to (i) any violation of immigration law by 41

136 such Authorized Subcontractor; and (ii) Authorized Subcontractor s obligations to its employees Amdocs also acknowledges that all Amdocs Personnel shall be at least eighteen (18) years of age or older and are subject to a criminal background check to the extent permitted by applicable Law. Amdocs must conduct, at its own expense, checks of the criminal records and backgrounds of its Personnel subject to applicable Laws, which investigations shall include, but not be limited to, the: (a) personal information of each individual, including (i) name and all names used in the previous seven years; (ii) date of birth; (iii) city, state, and country of birth; (iv) passport number (if one is held) and issuing country, issue date and expiration date; (v) country visas issued; (vi) country identification number; (vii) current residential address; and (viii) residential addresses for previous seven years; and (b) historical information of each individual, including (i) educational attainments; (ii) previous employment and salary; (iii) professional credentials and memberships; (iv) reference check (professional and personal); (v) criminal check (local, state and country); and (vi) Banned Persons Database search. Company may prohibit any Personnel who is found to have a criminal record in any state from performing Services hereunder. With respect to the performance of Services hereunder, Amdocs shall comply with all applicable Laws promoting fair employment practices or prohibiting employment discrimination and unfair labor practices and shall not discriminate in the hiring of any applicant for employment nor shall any qualified employee be demoted, discharged or otherwise subject to discrimination in the tenure, position, promotional opportunities, wages, benefits or terms and conditions of their employment because of race, color, national origin, ancestry, age, sex, religion, disability, handicap, sexual orientation or for exercising any rights afforded by Law. 12. RELATIONSHIP MANAGEMENT Steering Committee The Parties shall establish and maintain a steering committee (the Steering Committee ), which shall be composed of an equal number of senior representatives of each Party, for the Term. The initial representatives of the Parties on the Steering Committee, and their current positions with Company and Amdocs, are specified in Schedule 15. The members appointed by either Party may be replaced upon written notice to the other Party The Steering Committee will function as the Parties highest authority responsible for the implementation of this Agreement. The general responsibilities of the Steering Committee include: (a) monitoring the general performance of the Services, (b) analyzing and attempting to resolve matters referred by the Project Management Office, and (c) considering and approving or rejecting amendments to this Agreement, provided that any amendments to this Agreement shall only be effected by the authorized representatives of each Party The Steering Committee shall meet on a monthly basis until the Initial Term Commencement Date and on a quarterly basis thereafter, or as otherwise agreed by the Parties or as requested by either Company or Amdocs with a minimum of ten (10) Business Days prior written notice, to discuss the status of the Services, the overall 42

137 development and implementation of the Amdocs Systems and significant events that have occurred since the previous meeting. Meetings will be held in person at a Site designated by the Company. Each Party shall be responsible for all of its own expenses of participating in the Steering Committee Project Management Office A project management office ( PMO ) will be established and maintained by the Parties and function until at least the Turn-On Date and thereafter, upon the mutual agreement of the Parties, until the Final Migration Date. The PMO will be staffed by representatives of both Parties The principal functions of the PMO, as specified in Schedule 27, will be to organize the flow of activities, track budgets and schedules, perform risk management, control action items, report to the Steering Committee on the status of ongoing projects, and perform basic managerial and administrative tasks designed to ensure that the Parties meet their contractual commitments to each other. The precise roles and responsibilities associated with the PMO will be defined and specified in writing by the Parties Project Managers Amdocs and Company will each appoint a full-time employee as the project manager for this Agreement (the Project Manager ) Each Party s Project Manager shall act as the primary liaison between such Party and the other Party s Project Manager, and shall have overall responsibility for managing such Party s day-to-day activities hereunder. The Project Managers shall be vested with all necessary authority to fulfill that responsibility, excluding approval of any amendment or Order to this Agreement, which may only be made by the express written consent of the authorized representative of each Party Milestone Meetings Amdocs agrees to participate [***], in periodic milestone review meetings scheduled by Company, in its reasonable discretion, upon not less than three (3) Business Days advance written notice to Amdocs to evaluate the progress of the performance of the Services and the delivery of the Amdocs Systems in accordance with the Milestone Schedule. Such milestone review meetings shall include a review of technical progress, schedule and management effectiveness, quality issues relating to coding style, system performance or product integration, additional resource requirements and other issues with an impact upon the success of the Services provided hereunder. Meetings will be held in person at a Site designated by Company. 13. WARRANTIES AND REPRESENTATIONS Mutual Warranties of Authorization, Enforceability and Ability to Perform Each Party warrants and represents that: (a) it is a corporation duly incorporated, validly existing and in good standing under the laws of its place of incorporation; * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 43

138 (b) (c) (d) (e) (f) (g) it has the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement; it has obtained all licenses, authorizations, approvals, consents or permits required to perform its obligations under this Agreement; the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by the requisite corporate action on the part of such Party; the execution, delivery, and performance of this Agreement shall not constitute (i) a violation of any judgment, order, or decree; (ii) a material default under any material contract by which it or any of its material assets are bound; or (iii) an event that would, with notice or lapse of time, or both, constitute such a default; it has obtained, or will obtain, all Required Consents that it is required to obtain, copies of which shall be provided to the other Party upon execution of this Agreement and otherwise upon the other Party s request; and without derogating from the foregoing, it is capable of performing its obligations under this Agreement, including such obligations that are required to be performed in order to enable the other Party to perform its obligations In the event of a delay in compliance or non-compliance with the foregoing warranties, to the extent not caused by or as the result of a Force Majeure Event, the following provisions will apply in addition to other rights and remedies: (a) (b) as soon as reasonably practicable after discovery of a non-compliance that adversely affects the performance of any obligation or the Services provided hereunder, the Party that is not in compliance (the Non-Compliant Party ) will take all measures required to comply with the applicable warranty as expeditiously as reasonably possible, and at no additional cost to the other Party. where the noncompliance or delay adversely affects the ability of the other Party to perform its obligations that are dependent on the specific, unfulfilled warranty, such other Party will have additional time to perform its affected obligations for a period equal to the same length as the period of the delay or non-compliance, as applicable, except as otherwise agreed by the Parties Additional Amdocs Warranties Amdocs warrants that: (a) the Services will be provided (i) by appropriately qualified and trained Personnel; (ii) with due care and diligence and to high standards of quality as is customary in the industry; and (iii) in a professional and workmanlike manner in accordance with all applicable professional standards for the field of expertise. Amdocs and its Authorized Subcontractors are sufficiently staffed and equipped to fulfill Amdocs obligations under this Agreement; 44

139 (b) (c) (d) (e) upon the Turn-On Date, the Amdocs Systems and any portion thereof, when and as delivered to Company, will in all material respects conform to the Specifications; the Deliverables have been, and will be throughout the Term, developed and provided hereunder, in compliance with all applicable Laws; the Deliverables shall be free from all liens and encumbrances or other restrictions that would have a material adverse affect on the rights granted to Company in such Deliverables; and it has sufficient rights in the Deliverables to grant to Company the rights and licenses, if applicable, granted under this Agreement and, as of the Effective Date, is not aware of any asserted or unasserted Third Party claims challenging or affecting any right granted hereunder In the event of a non-compliance with the foregoing warranties, as soon as reasonably practicable after discovery of a non-compliance or notice from Company thereof, Amdocs shall remedy such non-compliance in accordance with the applicable Service Levels, including the payment of any credits under the SLA, or if there are no applicable Service Levels, within [***] of the occurrence of such noncompliance [***]. If it is not reasonably practicable to remedy the applicable non-compliance within [***] then Amdocs shall provide the remedy as expeditiously as reasonably possible and in any event within [***], and [***]. If Amdocs fails to remedy a breach, then Company may terminate this Agreement pursuant to and in accordance with Section 16.4; provided that, there will be no additional cure period. The remedies set forth in this Section are in addition to, and not in lieu of, all of Company s other remedies at law and in equity Disclaimer AMDOCS WARRANTIES HEREUNDER DO NOT APPLY IN THE EVENT THE AMDOCS SYSTEMS OR ANY PORTION THEREOF IS (I) MODIFIED OR ADJUSTED IN ANY MANNER BY ANY PARTY OTHER THAN AMDOCS OR ITS PERSONNEL, AUTHORIZED SUBCONTRACTORS OR BY COMPANY OR A THIRD PARTY AT AMDOCS DIRECTION, (II) ABUSED, MISHANDLED, MISUSED OR DAMAGED IN VIOLATION OF THIS AGREEMENT, OR (III) USED OTHER THAN AS SPECIFIED IN THE PRODUCT DOCUMENTATION, IF APPLICABLE. ANY REPRESENTATIONS, WARRANTIES AND LIMITATIONS EXPRESSLY STATED IN THIS AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS, OR IMPLIED, INCLUDING (WITHOUT LIMITATION), IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. COMPANY EXPRESSLY AGREES THAT AMDOCS DOES NOT REPRESENT OR WARRANT THAT THE OPERATION OF THE SOFTWARE AND/OR THE AMDOCS SYSTEMS WILL BE UNINTERRUPTED OR ERROR-FREE. * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 45

140 14. INDEMNIFICATION AND LIMITATION OF LIABILITY Indemnification by Amdocs Subject to the procedures specified in Section 14.3, Amdocs shall defend, indemnify and hold Company, its Affiliates and their respective officers, directors, employees, successors, and assigns ( Company Indemnitees ) harmless from and against any demands, losses, liabilities, expenses, costs and damages, including reasonable attorney s fees, asserted by a Third Party in connection with any Third Party claim: (a) [***]; (b) [***]; (c) [***]; (d) [***]; (e) [***]; and (f) [***]. If any injunction or order is (or in Amdocs judgment is likely to be) obtained against Amdocs or Company s use of the Amdocs Software, Customizations and/or Amdocs Systems, as applicable, or applicable portion of the Amdocs Software and/or Customizations, Amdocs, at its sole discretion and expense, shall either (i) procure a license to continue to use the Amdocs Software, Customizations and/or Amdocs Systems, as applicable, or applicable portion of the Amdocs Software and/or Customizations, as applicable, (ii) modify the Amdocs Software, Customizations and/or Amdocs Systems, as applicable, or applicable portion of the Amdocs Software and/or Customizations, so the applicable component is not infringing or replace it with a non-infringing and functionally-equivalent substitute or (iii) if the right to continue using the affected Amdocs Software, Customizations and/or Amdocs Systems, as applicable, or applicable portion of the Amdocs Software and/or Customizations, cannot be procured using reasonable commercial efforts, or the affected Amdocs Software, Customizations and/or Amdocs Systems, as applicable, or applicable portion of the Amdocs Software and/or Customizations, cannot be replaced or modified using reasonable commercial efforts, Amdocs shall terminate the affected Service(s) and all associated licenses upon written notice to Company[*** * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 46

141 ***] Amdocs shall have no obligation to indemnify the Company Indemnitees, and Company shall defend, indemnify, and hold the Amdocs Indemnities harmless from and against, any and all demands, liabilities, losses, costs, damages, and expenses, including reasonable attorneys fees, arising out of any Third Party claim or action to the extent that it is based upon: (A) modification of the Amdocs Software, Customizations and/or Amdocs Systems, as applicable, by Company Personnel or a Third Party that is not an Authorized Subcontractor, unless such modification has been made at the direction of Amdocs or expressly approved in writing by Amdocs; (B) Company s combination, operation, or use of the Amdocs Software, Customizations and/or Amdocs Systems, as applicable, with Company or Third Party apparatus, data, or programs (1) unless the foregoing were furnished or approved by Amdocs, or (2) except to the extent that, absent the combination, operation or use of such Company or Third Party apparatus, data, or programs with the Amdocs Systems, the combination, operation or use of such Company or Third Party apparatus, data, or programs with a substitute system providing the same or substantially similar functionality of the Amdocs System would not be infringing; or (C) the use by Company of the Amdocs Software, Customizations and/or Amdocs Systems, as applicable, other than in accordance with relevant licenses granted pursuant to this Agreement; or (D) the use by the Company of the Amdocs Systems as part of a Company business process, including, but not limited to, Company s use pursuant to Section 4.3.2, except to the extent that, absent the use of the Amdocs Systems as part of such Company business process, the use of a substitute system as part of such business process would not be infringing, to the extent such claim or action would have been avoided absent such modification, combination or use (the occurrences set forth in clauses (A) through (D) above, the Company-Generated Claims ) Indemnification by Company Subject to the procedures specified in Section 14.3, Company shall defend, indemnify, and hold Amdocs, its Affiliates, and their respective officers, directors, employees, successors, and assigns ( Amdocs Indemnitees ) harmless from and against any demands, losses, liabilities, expenses, costs and damages, including reasonable attorney s fees, asserted by a Third Party in connection with any Third Party claim: (a) [***]; (b) [***]; (c) [***]; * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 47

142 (d) [***]; and (e) [***]. If any injunction or order is (or in Company s judgment is likely to be) obtained against Company s use of the Company Owned Software, Company Systems and/or Legacy Systems, as applicable, or applicable portion of the Company Owned Software, Company, at its sole discretion and expense, shall either (i) procure a license to continue to use the Company Owned Software, Company Systems and/or Legacy Systems as applicable, or applicable portion of the Company Owned Software, (ii) modify the Company Owned Software, Company Systems and/or Legacy Systems as applicable, or applicable portion of the Company Owned Software, so it is not infringing or replace it with a non-infringing and functionally-equivalent substitute or (iii) if the right to continue using the affected Company Owned Software, Company Systems and/or Legacy Systems as applicable, or applicable portion of the Company Owned Software, cannot be procured using reasonable commercial efforts, or the affected Company Owned Software, Company Systems and/or Legacy Systems as applicable, or applicable portion of the Company Owned Software, cannot be replaced or modified using reasonable commercial efforts, Company shall terminate the use of the Company Owned Software, Company Systems and/or Legacy Systems, as applicable, or applicable portion of the Company Owned Software, by Amdocs hereunder, including any license granted hereunder for such applications and software, upon written notice to Amdocs; provided that, termination shall be effective as of the date specified in the notice, and any affected Service(s) and the Outsourcing Service Fees shall be equitably adjusted to reflect the revised Service(s). Amdocs shall be relieved of any further performance obligations with respect to any affected Service(s) terminated hereunder. Company shall have no obligation to indemnify Amdocs, and Amdocs shall defend, indemnify, and hold the Company Indemnitees harmless from and against, any and all demands, liabilities, losses, costs, damages, and expenses, including reasonable attorneys fees, arising out of any claim or action to the extent that it is based upon: (A) modification of the Company Owned Software, Company Systems and/or Legacy Systems, as applicable, by Amdocs Personnel or a Third Party under Amdocs direction, unless such modification has been made at the direction of Company or expressly approved in writing by Company in advance; (B) Amdocs combination, operation, or use of the Company Owned Software, Company Systems and/or Legacy Systems, as applicable, with Amdocs or Third Party apparatus, data, or programs unless the foregoing were furnished or approved by Company; or (C) the use by Amdocs of the Company Owned Software, Company Systems and/or Legacy Systems, as applicable, provided by Company or any Third Party other than in accordance with relevant licenses granted pursuant to this Agreement, to the extent such claim or action would have been avoided absent such modification, combination or use (the occurrences set forth in clauses (A) through (C) above, the Amdocs-Generated Claims ) Procedure Any claims for indemnification hereunder shall be subject to the following procedures: * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 48

143 (a) The indemnified Party shall promptly notify the indemnifying Party in writing of a claim covered by this Section 14; (b) (c) (d) (e) (f) The indemnified Party shall not admit any liability whatsoever; The indemnifying Party shall be entitled to take sole control of the defense and investigation of the claim (the Defense ) at its own expense, and to use attorneys of its choice, by providing prompt written notice to the indemnified Party. The indemnifying Party shall not be liable to the indemnified Party for any costs of the Defense incurred after such notice, except for such Defense costs incurred at the indemnifying Party s request; The indemnified Party shall cooperate in all reasonable respects with the indemnifying Party and its attorneys in the Defense of such claim, and may reasonably participate at its own expense, through its attorneys or otherwise, in such Defense, provided that such participation does not interfere with the indemnifying Party s Defense; The indemnifying Party shall be subrogated to the rights and defenses of the indemnified Party to the extent of, and with respect to, the indemnifying Party s obligation to indemnify the indemnified Party under this Section 14; and All settlements of claims subject to indemnification under this Section 14 shall: (i) (ii) No Additional Liability. if requiring any admission of guilt or action by or if imposing any restriction on the indemnified Party, be entered into only with the consent of the indemnified Party, which consent shall not be unreasonably withheld; and include an appropriate confidentiality agreement prohibiting disclosure of the terms of such settlement SECTION 14.1 ABOVE STATES THE EXCLUSIVE REMEDY OF COMPANY AND THE ENTIRE LIABILITY OF AMDOCS WITH RESPECT TO INFRINGEMENT CLAIMS INVOLVING THE COMPONENTS DESCRIBED THEREIN OR ANY PORTIONS OR USE THEREOF, AND COMPANY SHALL HAVE NO ADDITIONAL REMEDY WITH RESPECT TO ANY ALLEGED OR PROVEN INFRINGEMENT SECTION 14.2 ABOVE STATES THE EXCLUSIVE REMEDY OF AMDOCS AND THE ENTIRE LIABILITY OF COMPANY WITH RESPECT TO INFRINGEMENT CLAIMS INVOLVING THE COMPONENTS DESCRIBED THEREIN OR ANY PORTIONS OR USE THEREOF, AND AMDOCS SHALL HAVE NO ADDITIONAL REMEDY WITH RESPECT TO ANY ALLEGED OR PROVEN INFRINGEMENT Limitation of Liability 49

144 The liabilities of the Parties to one another in respect of matters relating to this Agreement are subject to the following provisions and limitations of this Section REGARDLESS OF THE LEGAL OR EQUITABLE BASIS OF ANY CLAIM, NEITHER PARTY SHALL BE LIABLE FOR ANY CONSEQUENTIAL, SPECIAL, INDIRECT, INCIDENTAL, EXEMPLARY OR PUNITIVE DAMAGES INCLUDING WITHOUT LIMITATION, ANY DAMAGES RESULTING FROM INACCURATE DATA, OR LOSS OF USE, PROFITS, REVENUE OR DATA ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT (INCLUDING ANY ORDER HEREUNDER OR OTHER COLLATERAL AGREEMENT), EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND REGARDLESS OF THE FORM IN WHICH ANY ACTION IS BROUGHT (E.G., CONTRACT, TORT, NEGLIGENCE, OR OTHERWISE) [***] THE FOREGOING EXCLUSIONS OF AND LIMITATIONS ON LIABILITY SHALL NOT APPLY [***]. THE EXCLUSIONS OF LIABILITY SET FORTH IN SECTION SHALL NOT APPLY (BUT, FOR THE AVOIDANCE OF * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 50

145 DOUBT, THOSE IN SECTION SHALL) TO [***]. FOR THE AVOIDANCE OF DOUBT, THE COST OF SUBSTITUTE GOODS OR SERVICES SHALL BE DEEMED TO BE A DIRECT DAMAGE HEREUNDER. THE LIMITATIONS ON LIABILITY SET OUT IN THIS SECTION 14.5 SHALL APPLY TO THE AGGREGATED LIABILITY OF ASSL AND INC. UNDER THIS AGREEMENT (SO THAT, FOR THE AVOIDANCE OF DOUBT, ALTHOUGH THERE ARE TWO AMDOCS ENTITIES, THE LIMITATION SHALL NOT GIVE RISE TO AN AGGREGATE LIMIT OF LIABILITY EQUAL TO DOUBLE THE AMOUNT SET OUT IN THIS SECTION 14.5 AND THE LIMIT ON LIABILITY OF BOTH AMDOCS ENTITIES JOINTLY SHALL BE THAT SET OUT IN THIS SECTION 14.5). EACH AMDOCS ENTITY MAY BE A PARTY TO ANY ACTION BY EITHER AMDOCS ENTITY AGAINST COMPANY AND EITHER AMDOCS ENTITY, OR BOTH AMDOCS ENTITIES, MAY ENFORCE ANY RIGHTS OF, AND SEEK ANY REMEDIES AVAILABLE TO, AMDOCS HEREUNDER, PROVIDED THAT, IN ALL OF THE ABOVE INSTANCES, THERE SHALL BE NO DOUBLE RECOVERY IN RESPECT OF ANY LOSS, COST OR LIABILITY AS A RESULT OF SUCH ACTION. COMPANY (AND VONAGE AMERICA INC. PURSUANT TO SECTION ) MAY BRING A CLAIM AGAINST ANY AMDOCS ENTITY OR AGAINST BOTH AMDOCS ENTITIES AND, IF BROUGHT AGAINST BOTH, THE AMDOCS ENTITIES SHALL HAVE JOINT AND SEVERAL LIABILITY IN RESPECT OF THE CLAIM, PROVIDED THAT, IN ALL OF THE ABOVE INSTANCES, THERE SHALL BE NO DOUBLE RECOVERY IN RESPECT OF ANY LOSS, COST OR LIABILITY AS A RESULT OF SUCH ACTION. NOTHING HEREIN SHALL PREVENT OR RESTRICT EITHER OR BOTH AMDOCS ENTITIES FROM DEFENDING, OR COUNTERCLAIMING AGAINST, ANY CLAIM BROUGHT BY VONAGE AMERICA INC. 15. PAYMENT Payments by Company to Amdocs Upon the signing of this Agreement, Company will pay to Amdocs any applicable Fees designated in Schedule 6 to be paid upon signing In consideration for ASSL s performance of the Implementation and Migration Services, Company will pay to ASSL the Implementation and Migration Service Fees, including, but not limited to, any Milestone Payments. In consideration for the granting of the License as set out in Section 4, Company will pay to ASSL the License Fees. In consideration for INC s performance of the PMO activities and the Outsourcing Services Company will pay to INC. (a) the Project Management Fee; and (b) the Outsourcing Service Fees respectively as set out in Schedule 6. * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 51

146 [***] In the event that the Parties execute Orders and Amdocs provides an aggregate amount of Additional Services pursuant to such Orders equal to [***], Company may continue to request Additional Services to be provided by Amdocs during the Term and Additional Service Fees incurred in connection with such Additional Services shall be charged to Company in accordance with Schedule 6 or any other prices or fees to be agreed between the Parties and specified in the applicable Order. Any ongoing development activities, Change Requests, Additional Services and/or Customizations to the Amdocs Systems that are the subject of an Order executed by the Parties, including, but not limited to, any expenses incurred in connection with the performance of such Services, may be applied by Company to its obligations to acquire [***] pursuant to this Section Company shall not be required to reimburse Amdocs for any travel expenses of Amdocs Personnel providing Services except as set forth in Schedule 6. Company will be responsible for any travel expenses of Amdocs Personnel providing Services to the extent it has expressly approved such expenses in advance and in writing and that Amdocs has complied with Company s travel policy, attached to this Agreement as Schedule 24. Receipts for such expenses are required to be submitted to Company in order to obtain reimbursement. [***] Invoicing On or before the fifth (5th) Business Day of each month, Amdocs will provide Company with a correct monthly itemized invoice with such substantiating back-up documentation as may be agreed by the Parties is reasonably necessary (an Invoice ), in U.S. Dollars, for the License and Services, including, but not limited to, Additional Services, provided during the preceding month, in such form, format and detail as reasonably required by Company. All Invoices will be directed to accountspayable@vonage.com with a copy to Company s Project Manager All payments shall be made in U.S. Dollars. Subject to the following sentence and except as may otherwise be set forth in Schedule 6 or an Order, all undisputed amounts, less any adjustments expressly permitted pursuant to this Agreement, for all Fees payable hereunder shall be due and payable to Amdocs within [***] after receipt of an Invoice by Company. To the extent that any portion of an invoiced amount is not disputed in good faith in accordance with the process set forth in Section * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 52

147 below, such undisputed portion shall be paid within [***] of invoice as aforesaid, and (b) Additional Service Fees shall be due and payable to Amdocs within [***] after receipt of an Invoice by Company. Unless otherwise agreed by Company in writing, Amdocs may not invoice Company, and Company will not be obligated to pay for any charges for initial Invoices delivered after [***] [***] for Third Party charges and increases in fees due to Envelope Parameters and [***] for expenses) from the end of the month following the month in which the charge accrued, provided that Amdocs may inform Company of any unbilled charges or fees for which Company may accrue without such limitations applying, provided that the invoicing for such accrued charges or fees shall be concluded within [***] after the applicable maximum period set forth above If a portion of an Invoice is paid and subsequently disputed by Company, Amdocs shall investigate and the parties shall in good faith resolve such dispute within [***] of notification from Company. If the Parties agree that Company has overpaid the applicable Invoice for Services, Amdocs shall, within [***] following notification by Company, credit or, in the event no amounts are due by Company, refund such overpayment against any other amounts owed by Company to Amdocs. [***] Payment In Arrears Solely upon three (3) days prior written notice by Payee to Payer and Payer s failure to cure during such three (3) day period, payments in arrears of more than [***] from the original due date shall bear Late Payment Interest from [***] after the original due date until the payment date, unless the amount in arrears is disputed in good faith and until such dispute is resolved in accordance with Section If the claim of the Party claiming a right to payment (the Payee ) for any unpaid amount is resolved in favor of the Payee, the Party that owes such amount (the Payer ) shall pay the Payee Late Payment Interest from the original due date in accordance with this Section Prior to such resolution, any undisputed amounts shall be paid in accordance with this Agreement and any applicable Order Resolution of Payment Disputes In the event the Payer disputes any portion of an invoice in good faith, the Parties will use good faith efforts to resolve any such dispute as soon as practicable in accordance with the following procedures: (a) In the event the Payer is of the opinion that an invoice contains a disputed amount, the Payer s Project Manager will, as soon as reasonably possible, but within thirty (30) days after receipt of the invoice, prepare a memorandum explaining the basis for the dispute, and submit such memorandum, together * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 53

148 (b) (c) (d) with any documentation that substantiates the Payer s position, to the Payee s Project Manager. The Parties Project Managers will attempt to resolve the dispute within thirty (30) days following the Payee s receipt of such material. If the Parties Project Managers are unable to resolve the dispute, the Project Managers will jointly brief and provide the Steering Committee with information and background material necessary to resolve the matter through negotiations. The Steering Committee will attempt to resolve the dispute within ten (10) days following their receipt of such material. If the Steering Committee is unable to resolve the dispute, the dispute will be resolved in accordance with the dispute resolution procedures following escalation to the Steering Committee as specified in Section Subject to Section , Amdocs [***] in the event of any payment disputes, provided that, Company may not withhold from payment [***], and all undisputed amounts will be paid by Company in accordance with the provisions of this Agreement. In the event Company fails to pay disputed amounts in excess [***] within a period of fourteen (14) days after such amount becomes due and payable hereunder and receipt of Amdocs notice of such failure to pay, Amdocs may terminate this Agreement, provided that there will be no additional cure period Rights of Set-off Either Party may set off against any amounts payable by it hereunder any amounts owed by the other Party, and any such set-off will be deemed to be payment by such Party for all purposes Price Adjustment Amdocs shall provide the Services for the Outsourcing Service Fees with respect to the number of Subscribers of Company and the Company Affiliates as of the Effective Date as well as Subscribers that are acquired after the Effective Date as set forth on Schedule Taxes Amdocs Fees set forth in this Agreement (and any other fees payable to Amdocs pursuant to an Order) do not include sales tax, value added tax, and similar taxes or duties as well as any city, municipal, state or corporate taxes or any withholding taxes, whether currently imposed or to be imposed in the future, other than taxes based upon Amdocs net income. If any such tax or duty is found to be applicable, the appropriate amount of tax or duty shall be invoiced to and paid by Company to Amdocs at the same time and on the same conditions as applied to the payment due. 16. TERM AND TERMINATION Term of Agreement * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 54

149 Initial Term - This Agreement will have an initial term commencing on the Effective Date and continuing for a period of five (5) years following the Turn-On Date on which (such five (5) year period, the Initial Term ) unless terminated prior to the end of the Initial Term by written consent of both Parties or otherwise in accordance with the provisions of this Agreement Extension of Agreement - The Initial Term of this Agreement shall automatically be extended for two (2) additional one (1) year periods (each a Renewal Term ) unless Company provides written notice of its intention not to renew to Amdocs not less than six (6) months prior to the end of the Initial Term or any Renewal Term (as the case may be). This Agreement may be extended for additional Renewal Terms thereafter upon terms and conditions to be agreed between the Parties. The Initial Term and all Renewal Terms referred to collectively as the Term. For the avoidance of doubt, all Orders issued and executed under the Agreement and intended to be valid during the Term (e.g., where the Order does not specifically state otherwise) shall expire (subject to applicable provisions of the Agreement) upon expiration of the Term as aforesaid Termination for Insolvency This Agreement may be terminated by either Party if the other Party shall become insolvent, cease doing business as a going concern, make a general assignment for the benefit of its creditors, or admit in writing its general inability to pay debts, or if proceedings are instituted by or against it in bankruptcy, under applicable insolvency laws, or for receivership or dissolution, provided such proceedings are not dismissed within sixty (60) days of their commencement All rights and licenses granted under or pursuant to this Agreement by Amdocs are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code, or replacement provision therefor (the Code ), licenses to rights to intellectual property as defined in the Code. The Parties agree that each Party, as licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Code. The Parties further agree that, in the event of the commencement of bankruptcy proceedings by or against Amdocs under the Code, Company shall be entitled to retain all of its rights under the Agreement Termination for Force Majeure If a Force Majeure Event delays Amdocs performance of Services hereunder for a period of thirty (30) days or more (the Force Majeure Period ), and such delay has a material adverse effect on Company s business, and if Amdocs has not implemented or is in material breach of its obligations under the Disaster Recovery Plan, Company may, at its option, either: (a) immediately terminate the Agreement by providing Amdocs with a Termination Notice, provided the Force Majeure Event has not ceased to exist before the termination date; or (b) engage an alternate provider on an interim basis, subject to the confidentiality obligations hereunder, to perform the Services that Amdocs is unable to perform as a result of the Force Majeure Event at Amdocs sole cost and expense, until such time as Amdocs is again able to perform the Services, provided that, Company continues to pay the full amount of all Outsourcing Fees to 55

150 Amdocs and Amdocs pays such alternate provider. If an alternate provider is used, and Amdocs is unable within ninety (90) days thereafter to itself resume performance of the Services in accordance with the terms of the Agreement, then Company shall have the right to terminate the Agreement, provided, however, that irrespective of whether Company exercises its right to terminate the Agreement under this Section 16.3, following such ninety (90) day period, Company will be required to bear the amount by which the cost of such substitute services exceeds the amount of the fees payable by Company under the Agreement for such substitute services Termination for Cause Except as otherwise provided in Sections (b), , , , and 17.3 below, in the event that either Party (the Breaching Party ) commits a material breach of this Agreement, the other Party (the Terminating Party ) may, after providing the Breaching Party with written notice of such material breach and a sixty (60) day period to cure such breach, submit the matter to the escalation procedures set forth in Section (Governing Law and Dispute Resolution). If, as a result of such procedure, the Arbitrators determine that the Breaching Party did in fact commit a material breach, then the Terminating Party shall have the right to terminate this Agreement by sending the Breaching Party a Termination Notice specifying a Termination Date, provided that such Termination Date shall be fifteen (15) days or more subsequent to the date of such Termination Notice. Termination shall be effective at 11:59 p.m. on the Termination Date. Termination shall not constitute the Terminating Party s exclusive remedy for such a material breach, and the Terminating Party shall not be deemed to have waived any of its rights accruing hereunder prior to such material breach It is agreed that material breaches of this Agreement will include, without limitation, the following: (a) An assignment or attempted assignment of this Agreement in violation of Section 17.13; (b) (c) Company s failure to pay Amdocs an aggregated and undisputed amount of [***] within a period of [***] after such amount becomes due and payable hereunder and receipt of Amdocs notice of such failure to pay, provided that there will be no additional cure period as described in Section ; Amdocs fails within the time frame specified in the applicable Corrective Plan to correct any SOX Deficiencies identified in such Corrective Plan; and (d) Amdocs fails to implement a Change Request submitted by Company following an Arbitrator s decision pursuant to Section requiring Amdocs to implement such Change Request If Amdocs has not commenced implementation of the Disaster Recovery Plan (other than as a result of a Force Majeure Event preventing Amdocs implementing the Plan) within seven (7) days following Company s declaration of a Disaster pursuant to the terms and conditions of this Agreement and if such Disaster is capable of being cured, * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 56

151 Company may immediately terminate the Agreement by providing Amdocs with a Termination Notice, provided the Disaster has not ceased to exist before the termination date In the event that Amdocs fails to achieve or continuously maintain PCI compliance, or provide reasonable proof of compliance, pursuant to Section 17.4, Company may, after providing Amdocs with written notice of such material breach and a [***] period to cure such breach (or such other period as may be agreed in writing by the parties), immediately terminate this Agreement by sending Amdocs a Termination Notice Company may terminate this Agreement for cause by sending Amdocs a Termination Notice without any further opportunity for cure in accordance with its rights set forth in Schedule 11. Termination shall not constitute Company s exclusive remedy for such a material breach, and Company shall not be deemed to have waived any of its rights accruing hereunder prior to such material breach Termination for Convenience Company may terminate this Agreement for convenience and without cause at any time (a) prior to the Turn-On Date, as scheduled at the time notice is being given, by giving Amdocs at least thirty (30) days prior written notice designating the termination date, or (b) following the Turn-On Date by giving Amdocs at least six (6) months prior written notice designating the termination date, provided that Company shall (i) pay Amdocs all outstanding fees and the applicable early termination fee set out in, and in accordance with, Schedule 6; (ii) be released from any liabilities resulting from its termination pursuant to this Section 16.5 and its obligations pursuant to Section ; and (iii) be able to obtain Termination Assistance during such notice period. The Parties agree that the early termination fee will be determined and become payable as of the effective date of termination. Further, in the event that Company gives notice of termination for convenience prior to the Turn-On Date, Amdocs may promptly cease all work (except with respect to any Termination Assistance pursuant to Section 16.9, which must commence promptly following Company s notice of termination in such case) under this Agreement and (a) the license grant set forth in Section in respect of the Customizations and New Releases shall only apply to the extent that all applicable fees for such Customizations and/or New Releases have been paid in full and are implemented by Amdocs in the Amdocs System prior to the date on which notice of termination is given; and (b) the license to the CRM Application under Section shall not apply, except, in the event the Parties agreed and integrated the CRM Front-End into the Amdocs Systems pursuant to Section prior to the date on which notice of termination is given and all applicable license fees have been paid; and (c) Amdocs shall not be obliged to provide Maintenance except as set forth in Section (e) Termination for Change of Control of Amdocs If there is a Change of Control of Amdocs (that Company has not consented to in writing) and the controlling party is a Company competitor or a Third Party adversarial * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 57

152 to Company within the prior [***], then Company will have the right to terminate this Agreement by providing not less than [***] prior written notice to Amdocs which notice to be effective must be received by Amdocs not later than five (5) Business Days after Company s receipt of written notice of the Change of Control Effect of Termination For the avoidance of doubt, any termination under this Section 16 (Term and Termination) shall be effective with regard to Company and any Affiliate of Company receiving Services under this Agreement, but shall not be effective with regard to any Affiliate of Company that has entered into its own agreement with Amdocs Additional Termination Procedures In the event of termination or expiration of this Agreement, the following procedures will apply: (a) (b) (c) (d) (e) Subject to the provision of Termination Assistance pursuant to Section 16.9 of this Agreement, Amdocs will cease performing Services and incurring costs in connection with this Agreement. Each Party will return to the other any Confidential Information of the other Party in its possession, including without limitation, the Company Data in Amdocs possession, and any of Amdocs software or related information in Company s possession. Company will pay Amdocs within thirty (30) days of the Termination Date for all Services performed by Amdocs until the Termination Date in accordance with this Agreement (including any early termination fees payable by Company in the event of a termination for convenience). Each Party s liability and remedies will be subject to any limitations specified in this Agreement. For [***] following the general availability date of any release of the Amdocs Software, at Amdocs then-current rates, Amdocs shall make available for purchase by Company on an annually renewable basis support and maintenance services for the Amdocs Systems. Such maintenance services shall be subject to the applicable terms and conditions of the Agreement and the scope and nature of the support and maintenance services to be provided by Amdocs shall include those support and maintenance services then generally offered by Amdocs to its other customers of its Preferred Support maintenance services package, a current description of which is attached as Schedule 26, which Schedule will be updated from time to time by Amdocs and made available to Company on Amdocs website, provided that, a current copy of such Schedule shall be provided by Amdocs to Company promptly upon receipt a Termination Notice. Company, at its own cost and expense, shall be responsible for continuing to upgrade to recent versions of the Amdocs Software (as described above in this Section) to ensure the continued availability of * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 58

153 (f) (g) support and maintenance services following expiration of the Termination Assistance Period. Except in the event of termination of this Agreement by Amdocs for an uncured breach by Company of Section (non-payment of disputed Fees [***]) or Section (b) (non-payment of undisputed fees of [***]) or Company s material breach of Section 4.1, 4.3, 4.7(c) or 17.3, provided that, a final determination of such material breach of Section 4.1, 4.3, 4.7(c) or 17.3 is subject to Section 17.11, and provided that Company has not otherwise obtained the Source Materials pursuant to Section 4.7 (in which case Section 4.7 shall govern the release and use of the Source Materials), Amdocs shall deliver to Company the Source Materials, but not the Core Source Materials as part of the provision of Termination Assistance and in accordance with the timelines set forth in the Termination Assistance Plan, which timelines have been mutually agreed-upon by the Parties. Further, Company shall have elected as part of Termination Assistance to implement the applicable portions of the Amdocs System in a non-amdocs data center for continued use by Company and Company, at such time, is operating or planning to operate the applicable portions of the Amdocs Systems itself or through a Third Party (to the extent permitted hereunder and, without limitation, subject to the requirements of Section 4.7(c)) on behalf of Company to support its Subscribers. In such event, Company is granted a License to the Source Materials, but not the Core Source Materials, on the same the terms and conditions as those set forth in Section 4.7(c). In addition, Company shall not provide access to, or use of, the Source Materials to any Amdocs Competitor in connection with release pursuant to this Section (f) and all applicable limitations and restrictions relating to use of Amdocs Confidential Information and the Source Materials as set forth in Sections 4.7(c), 16.9 and 17.3 shall apply. Company shall retain liability for all unauthorized use or disclosure of Source Materials by any persons or entities to whom such Materials are disclosed pursuant to this Section (f). Except in the case of termination of this Agreement for an uncured breach by Company of Section (non-payment of disputed Fees [***]) or Section (b) (non-payment of undisputed fees of [***]) or Company s material breach of Section 4.1, 4.3, 4.7(c) (including, with respect to Section 4.7(c), a Third Party service provider s breach of the Sub-License) or Section 17.3, provided that, a final determination of such material breach of Section 4.1, 4.3, 4.7(c) or 17.3 is subject to Section 17.11, upon termination or expiration of this Agreement, as part of the provision of Termination Assistance and in accordance with any applicable timelines set forth in the Termination Assistance Plan, which timelines have been mutually agreed-upon by the Parties, Company shall receive a license to the Amdocs Tools * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 59

154 and Methodologies under the terms and conditions of Amdocs then current form of license for non-productized tools In the event of an uncured breach by Company of Section (non-payment of disputed Fees [***]) or Section (b) (nonpayment of undisputed fees [***]) or in the event of Company s material breach of Sections 4.1, 4.3, 4.7(c) (including, with respect to Section 4.7(c), a Third Party service provider s breach of the Sub-License) or Section 17.3, Company acknowledges and agrees that Amdocs shall not be restricted from suspending or terminating the provision of the Services and shall not be restricted from seeking injunctive relief, provided that, except with regard to an uncured breach by Company of Sections and/or (b), a final determination of any such material breach is subject to Section Except in the foregoing circumstances, (a) Amdocs understands and agrees that (i) the Services and the Amdocs Systems provided to Company under this Agreement are critical to Company s operations and that under no other circumstances may Amdocs seek to [***]; and (ii) Amdocs [***] remedy for any other breach of this Agreement by Company is [***]; and (b) Amdocs hereby [***] Company in connection with any other breach that [***]. Further, Amdocs may terminate the License granted pursuant to Section 4 hereof (Customizations and New Releases shall only apply to the extent that all applicable fees for such Customizations and/or New Releases have been paid in full and are implemented by Amdocs in the Amdocs System prior to the date on which notice of termination is given, and the license to the CRM Application under Section shall not apply, except, in the event the Parties agreed and integrated the CRM Front-End into the Amdocs Systems pursuant to Section prior to the date on which notice of termination is given and all applicable license fees have been paid) in the event of Company s material breach of Section 4.1, 4.3, 4.7(c) (including, with respect to Section 4.7(c), a Third Party service provider s breach of the Sub-License ) or Section 17.3 provided that, a final determination of such material breach is subject to Section In the event that Amdocs terminates the License granted pursuant to Section 4 in accordance with the terms of this Section , the Parties may reasonably discuss the availability, cost and scope of any Termination Assistance to be provided Termination Assistance At Company s request, Amdocs shall provide Company for a period of twelve (12) months, which period may be extended for an additional six (6) months upon Company s reasonable request, following the Termination Date ( Termination Assistance Period ) with assistance for the transitioning of responsibility for the Amdocs Systems components to Company or another Third Party service provider ( Termination Assistance ) in accordance with a Termination Assistance Plan to be agreed upon by the Parties. In the event that such Third Party service provider is to be given access to the Source Materials (and, if applicable, the Core Source Materials) * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 60

155 pursuant to Section 4.7, the provisions of Section 4.7(c) shall apply. The Termination Assistance Plan will specify the Termination Assistance to be performed, including the respective obligations of the Parties. Amdocs will cooperate with Company and, subject to the provisions of Section 2.5 (and, if applicable, Section 4.7) with respect to Amdocs cooperation with Third Parties, its designee of Company s choosing and otherwise take all steps set forth in the Termination Assistance Plan in order to assist with the transition to Company (or the designee) within a reasonable time after Company s request. Without limiting the generality of the foregoing, Amdocs shall provide all information regarding the Services and Amdocs Systems or as otherwise needed for transition, including (a) for extension of software licenses, including, but not limited to, the licenses for the Amdocs Third Party Software listed on Schedule 5 and/or the CRM Application (solely if the user interface component of the CRM Application has not been integrated into the Amdocs Systems prior to any Termination Notice provided hereunder), (b) for procurement of equipment which is capable of functioning in a substantially similar manner as the Amdocs Equipment, (c) for data conversion, interface specifications and related professional services, and (d) product documentation for Amdocs Third Party Software. Amdocs shall provide for the prompt or orderly conclusion of all work, as Company may direct, including completion or partial completion of projects, documentation of work in process and other measures to assure an orderly transition to Company or its designee. Within ten (10) Business Days of an expiration of this Agreement or a Termination Notice, Company will provide its ramp-down plan to Amdocs Amdocs shall provide Termination Assistance in accordance with the Fees set forth in Schedule 6. After the expiration of any Termination Assistance Period, Amdocs shall answer questions from Company regarding the Services and/or the Amdocs Systems on an as needed basis at a rate based upon the pricing model for professional services described in Section of this Agreement. If at any time during the Termination Assistance Period, Company requests that Amdocs continue to provide the Services provided by Amdocs prior to the termination or expiration of this Agreement, then Amdocs will continue to provide such Services during the Termination Assistance Period at the same price and on the same terms and conditions specified in this Agreement. Without limiting the generality of the foregoing, the quality and level of performance during the Termination Assistance Period shall not be subject to the Service Levels that applied during the Term. 17. GENERAL TERMS AND CONDITIONS Compliance with Laws Amdocs will comply with the Amdocs Legal Requirements and Company will comply with the Company Legal Requirements. Each Party s compliance with its Legal Requirements will be undertaken at no additional cost to the other Party, except as otherwise specified in this Agreement. Notwithstanding the foregoing, to the extent any Company Legal Requirements or Security Requirements are included in the Final Requirements and the Specifications, Amdocs shall incorporate such requirements into the Amdocs Systems at no additional cost. 61

156 Company will consult and cooperate with Amdocs in order to assist Amdocs with understanding and complying with the Company Legal Requirements. Such cooperation will include, without limitation, a Party notifying the other Party as soon as it has cause to believe the other Party is not in full compliance with its legal requirements, and jointly developing a plan for achieving such compliance Except as otherwise set forth in Section or Section 17.4 below, in the event that taking the measures necessary to achieve full compliance with its own Legal Requirements will cause a Party to incur significant costs that were not reasonably foreseeable prior to execution of this Agreement, the Parties will negotiate in good faith the allocation of such costs Changes in Law and Regulations. Each Party shall identify and notify the other of any changes in applicable Law that may relate to: (i) the use or delivery of the Amdocs Systems and/or Services; or (ii) the impact on Company s business and its performance of its obligations hereunder. Amdocs and Company shall work together to identify the impact of such changes on how Company uses, and Amdocs delivers, the Amdocs Systems and Services. Amdocs shall use commercially reasonable efforts to perform the Services regardless of changes in applicable Law. If such changes prevent Amdocs from performing its obligations under this Agreement, Amdocs shall develop and, upon Company s approval, implement a suitable workaround until such time as Amdocs can perform its obligations under this Agreement in accordance with applicable Law without such workaround. If the changes are required as a result of Amdocs Legal Requirements, then Amdocs shall develop and implement such workaround at its own expense. If the changes are required solely as a result of Company Legal Requirements, then Company shall pay to Amdocs an amount equal to Amdocs reasonable, actual and direct costs preapproved by Company in writing associated with the workaround. In all cases, workaround accommodations with respect to changes in applicable Law shall be made pursuant to Section 7 of this Agreement governing Changes Intellectual Property Rights Company or its Affiliates or licensors shall be the sole and exclusive owner of all Company Data, Legacy Systems and Company Systems, including, but not limited to, the Company Equipment, Company Owned Software and Company Third Party Software, including all Intellectual Property Rights therein. To the extent Amdocs has or obtains any rights in the Company Data, Legacy Systems and/or Company Systems, including, but not limited to, the Company Equipment, Company Owned Software and/or Company Third Party Software, to the extent required, hereby acknowledges, assigns and agrees to assign exclusively to Company all right, title, and interest therein, including all Intellectual Property Rights therein. For avoidance of doubt, the Company Data, Legacy Systems and Company Systems, including, but not limited to, the Company Equipment, Company Owned Software and Company Third Party Software are deemed to include any modification, compilation, or derivative work therefrom, excluding any Amdocs Confidential Information to the extent contained in such modification, compilation, or derivative work. Except as otherwise expressly set 62

157 forth herein, Amdocs shall not have any right to use (other than to perform its obligations hereunder), sell, assign, transfer, rent, lease, sublicense, redistribute or disseminate to, provide access to, or use for the benefit of Third Parties, any Company Data, Legacy Systems and/or Company Systems or any Intellectual Property Right associated therewith. Company hereby grants to Amdocs a non-exclusive, non-transferable, royalty-free, fully paid-up, revocable right and license to use the Company Data solely for the purposes of providing the Amdocs Systems to Company hereunder. The Company Data, Legacy Systems and Company Systems are deemed to be Company Confidential Information and, except as permitted herein, shall not be used or disclosed by Amdocs without Company s express written approval Company acknowledges and agrees that all right, title, and interest to, and all Intellectual Property Rights in, the Amdocs Systems, Work Product and Product Documentation are and will remain solely the property of Amdocs and/or Amdocs licensors (or Affiliates) from the date of conception, of creation, or of fixation in a tangible medium of expression (whichever occurs first). For avoidance of doubt, the Amdocs Systems, Work Product and Product Documentation are deemed to include any modification, compilation, or derivative work therefrom, excluding any Company Confidential Information to the extent contained in such modification, compilation, or derivative work. Company is granted no title or ownership rights in the above. Company acknowledges that Amdocs considers the Amdocs Systems and Product Documentation to contain trade secrets of Amdocs and/or its licensors. Such trade secrets include, without limitation, the source code version of the Amdocs Systems, the specific design, structure and logic of individual programs, their interactions with other portions of programs, both internal and external, and the programming techniques employed therein. Except as otherwise permitted with respect to Company s use of any Source Materials and any developments created by Company with respect thereto, Company, to the extent required, hereby acknowledges, assigns and agrees to assign exclusively to Amdocs all right, title, and interest therein and acknowledges that the Parties do not intend Company to be a joint author of the Amdocs Systems or Product Documentation within the meaning of the applicable Laws, as amended, and that in no event shall Company be deemed the joint author of the Amdocs Systems, Product Documentation or any component thereof Each Party shall be and remain the sole and exclusive owner of all Confidential Information that it provided to the other Party for performance of this Agreement Each Party shall reproduce any copyright notice and any other legend of ownership and/or confidentiality on the original and on any copies made of any Confidential Information of the other Party Confidentiality Confidential Information of the other Party may be used by the receiving Party and its Personnel only in connection with the performance of, or as specifically authorized by, this Agreement. Each Party undertakes not to use the Confidential Information of the other for any purposes other than for the purpose of performing its obligations under this Agreement, and shall not sell, grant, make available to, or otherwise allow the use of the other party s Confidential Information by any Third Party, directly or indirectly, 63

158 except as expressly permitted herein. Each Party will protect the confidentiality of Confidential Information of the other Party in the same manner that it protects the confidentiality of its own proprietary and confidential information, including, without limitation, by entering into appropriate confidentiality agreements with Personnel to ensure that such Personnel maintain the confidentiality of the Confidential Information. Unless otherwise permitted pursuant to Section below, access to Confidential Information will be restricted to those of Amdocs and Company s Personnel engaged in a use permitted under this Agreement. Confidential Information may not be copied or reproduced without the disclosing Party s prior written consent, except as necessary for use in connection with this Agreement. Except as otherwise provided herein, disclosure of the disclosing Party s Confidential Information to the receiving party shall in no way serve to create, on the part of the receiving party, a license to use, or any proprietary right in, the disclosing party s Confidential Information or in any other proprietary product, trademark, copyright or other right of the disclosing party Additionally, each Party will use reasonable efforts to mark its tangible Confidential Information as confidential, restricted or proprietary Except as set forth in Section , any subcontractors of either Party, including, but not limited to, Authorized Subcontractors, or other Third Parties who have a need to know or may have access to Confidential Information of the other Party shall first sign a non-disclosure agreement containing terms substantially similar to the terms set forth in this Section For avoidance of doubt, for purposes of this Section 17.3, individuals providing services as independent contractors (i.e., not as employees of Third Parties) to either Party shall be considered employees of such Party, and not as subcontractors or Third Parties. Each Party may disclose Confidential Information to attorneys, accountants, financial advisors, banks and other financing sources and other similar advisors who have a need to know such Confidential Information pursuant to this Section 17.3, but only to the extent minimally necessary and provided that such Third Party shall first sign a non-disclosure agreement containing terms substantially similar to the terms set forth in this Section Each Party shall be responsible for any breach of this Section 17.3 by its subcontractors, including, but not limited to, Authorized Subcontractors, or other Third Parties to which it has disclosed Confidential Information pursuant to this Section Prior to enabling any Third Parties to access any Source Materials, Core Source Materials, specifications or other documentation of the Amdocs Systems or other proprietary software of Amdocs, Company will inform Amdocs of such Third Party s identity. In the event of disclosure of the Source Materials or Core Source Materials, the requirements of Section 4.7(c) shall apply. In the event of disclosure of any other Amdocs Confidential Information to a Third Party that is an Amdocs Competitor, Company shall not enable such Third Party to access such material without a direct non-disclosure and confidentiality agreement between Amdocs and such Third Party in the form attached as Exhibit 2. For purposes of this Agreement, Amdocs Competitors are the entities listed on Schedule 20 that directly compete with Amdocs with respect to the Services and Amdocs Systems provided hereunder. 64

159 Except as otherwise specified in this Agreement, all Confidential Information made available under this Agreement, including copies thereof, will be returned or destroyed (which destruction shall be certified by a duly authorized officer of the applicable Party) upon the first to occur of: (a) the termination or expiration of this Agreement; or (b) a request by the disclosing Party; provided, that, subject to the terms of this Section 17.3, each Party may retain copies of the other Party s Confidential Information required by applicable Law or for purposes of complying with its obligations or rights and remedies under this Agreement Nothing in this Agreement will prohibit or limit either Party s use of information that is: (a) previously known to it without obligation of confidence; (b) independently developed by it or for it without use of or reference to the Confidential Information of the other Party hereto; (c) acquired by it from a Third Party that is not under an obligation of confidence to the other Party hereto with respect to such information; or (d) publicly known through no breach of this Agreement In the event either Party receives a subpoena, or other validly-issued administrative or judicial process, requesting that Confidential Information of the other Party be disclosed, or is otherwise obligated to comply with a rule or requirement of the Securities and Exchange Commission and/or any stock exchange to disclose Confidential Information of the other Party, it will promptly notify the other Party of such receipt. The Party receiving such request will thereafter be entitled to comply with such subpoena, other process, rule or requirement, only to the extent required by Law; provided that the Confidential Information so disclosed shall continue to be Confidential Information as between the Parties hereto. Each Party shall immediately notify the other Party s Project Manager both orally and in writing if any information in the receiving Party s possession is improperly used, copied or removed by anyone except an authorized representative of the disclosing Party or is requested by any federal or state agency or instrumentality other than the disclosing Party The Parties agree that disclosure of Confidential Information by either Party may cause irreparable damage to the other Party and therefore, in addition to all other remedies available at law or in equity, the other Party shall have the right to seek equitable and injunctive relief, and to recover the amount of damages (including reasonable attorneys fees and expenses) incurred in connection with such unauthorized use. Each Party shall be liable under this Agreement to the other Party for any use or disclosure in violation of this Section 17.3 by itself, its Affiliates, subcontractors, including, but not limited to, Authorized Subcontractors, or other Third Parties who have a need to know or may have access to Confidential Information of the other Party or its or their respective Personnel, attorneys, accountants or other advisors Data Privacy and Security In performance of its obligations hereunder, Amdocs shall comply with the security and other requirements set forth in Schedule 17 in addition to the following requirements. Amdocs agrees to comply with (a) Company s security requirements and guidelines, and (b) the Company Supplier Data Security Standards and the Outsourcer Personnel Responsibility Requirements as attached hereto in Schedule 17 ( Security Guidelines ). Amdocs agrees that it and its Affiliates and Authorized 65

160 Subcontractors are responsible for the security of cardholder data received, processed or transferred by it. Amdocs represents that on or before (i) the Turn-On Date, Amdocs will have an external audit performed to assess its ability to conform to the standards of Payment Card Industry (PCI) for information security; and (ii) the Final Migration Date, it and its Affiliates and Authorized Subcontractors will conform (and, to the extent applicable and necessary, it shall ensure that any Services subcontracted to Affiliates or Authorized Subcontractors will also conform) to the standards of Payment Card Industry (PCI) for information security and they will continue to comply at all times with these standards and shall provide to Company promptly, upon request from time to time as considered necessary by Company, proof of certification of Amdocs by a recognized certifying organization. In the event that the PCI standards undergo material changes which would result in material costs to either Party, then the Parties shall review the changes within the guidelines of Section Where there is a conflict between the standards used by ISO/IEC and PCI, the most current PCI standard should be used. The current standards are currently found at Without limiting Company s other remedies, Amdocs agrees to be responsible for any and all fines or penalties incurred by Company on account of any PCI violation by Amdocs or its Affiliates or Authorized Subcontractors provided that such fines or penalties would not have been incurred but for Amdocs violation and provided that Amdocs liability shall be limited with respect to that portion of such fines or penalties as is equivalent to the proportion of Amdocs violation relative to all other causes of such claims as determined by a root cause analysis of the causes Amdocs agrees to cooperate fully with Company in ensuring that all Deliverables Amdocs develops or designs under this Agreement and the provision of the Services comply with the Security Guidelines and all other security requirements contained in this Agreement. As Amdocs representatives assigned to Company s account are terminated or removed from Company s account, Amdocs will immediately (within one (1) Business Day) provide notice to Company and the access codes or user ids of such individuals will be immediately terminated. Failure to provide timely notice or termination by Amdocs shall subject Amdocs to all liability for any unauthorized access using such access codes If Amdocs discovers or is notified of a breach or potential breach of security relating to the Company Data in its possession or otherwise in connection with the Services ( Security Incident ) Amdocs shall immediately: (a) notify the Steering Committee of the Security Incident; and (b) investigate and take all actions required to mitigate the effects of the Security Incident and provide Company with assurance reasonably satisfactory to Company that Amdocs has instituted effective safeguards to prevent or attempt to prevent the reoccurrence of such Security Incident. In addition, Company shall have the right to investigate any such Security Incident and Amdocs shall, and shall cause its representatives to, fully cooperate with Company s investigation. At the request of Company, Amdocs will: (i) reconstruct any Company Data maintained by Amdocs pursuant to this Agreement that is lost or destroyed while in Amdocs possession; (ii) reconstruct any Company Data contained in Company s computer systems and accessed by Amdocs pursuant to this Agreement that is lost or destroyed 66

161 through Amdocs negligence or willful misconduct; and (iii) provide reasonable assistance to Company for the reconstruction of any other Company Data relating to the Services; provided, however, to the extent the loss or destruction is not caused by Amdocs, Company will reimburse Amdocs for Amdocs reasonable costs in connection with the foregoing. Amdocs shall be fully responsible for all damages arising from its or its Personnel, Authorized Subcontractors or any other Third Party providing Services on behalf of Amdocs hereunder misappropriation or fraudulent use of Company Data. Each substantiated incident of intentionally unauthorized or fraudulent use of Company Data will subject Amdocs to, and may, in Company s discretion, be [***] penalty per incident, in addition to the exercise of any other remedies available to Company. Any failure of Amdocs to abide by, train its representatives on or enforce any of Company s Security Guidelines will be considered a material breach of this Agreement. Amdocs shall retain and identify a fraud manager responsible for reviewing and investigating and resolving suspected incidents of agent fraud or other misconduct, and who shall promptly respond to and implement Company s requests for information and assistance to identify, resolve, mitigate and prevent such incidents Non-Solicitation of Employees During the Term and for [***] thereafter, each Party shall not, without the other Party s prior written consent, in its reasonable discretion, directly or indirectly solicit any employee of such other Party whose duties and responsibilities include participation, directly or indirectly, in the performance of this Agreement, to leave the other Party s employ in order to accept employment with the soliciting Party, its Affiliates, contractors or any other Person, or hire such employee. Notwithstanding any of the foregoing, a Party (the Recruiting Party ) will not have violated the terms set forth in this Section 17.5 if an employee: (a) responds to a general, non-targeted solicitation for employment issued by the Recruiting Party, such as a newspaper or Internet advertisement; (b) is contacted by a recruiter for the Recruiting Party, where the recruiter has not been instructed by the Recruiting Party to target the employees of the other Party or its Affiliates; or (c) directly contacts a Party and seeks employment without any solicitation by such Party. This provision shall not operate or be construed to prevent or limit any employee s right to practice his or her profession or to utilize his or her skills for another employer or to restrict any employee s freedom of movement or association No Waiver No waiver of rights arising under this Agreement or Orders shall be effective unless in writing and signed by the Party against whom such waiver is sought to be enforced. No failure or delay by either Party in exercising any right, power or remedy under this Agreement shall operate as a waiver of any such right, power or remedy and/or prejudice its rights to bring any action in respect thereof or constitute waiver of any prior, concurrent, or subsequent right, remedy, or duty within the Agreement Force Majeure * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 67

162 No Party shall be liable for any default or delay in the performance of its obligations under this Agreement (including but not limited to breach) if and to the extent such default or delay is caused, directly or indirectly, by circumstances beyond a Party s reasonable control, including but not limited to fire, flood, epidemic, power failure, earthquake, elements of nature or acts of God, act of governmental body or military authority, wars, riots, civil disorders, labor disputes, blockades, embargoes, terrorist activities, civil insurrection, rebellions or revolutions or any other similar cause beyond the reasonable control of such Party (each, a Force Majeure Event ), except to the extent that the non-performing Party is at fault in failing to prevent or causing such default or delay, and provided that such default or delay cannot, by commercially reasonable efforts of the non-performing Party, be circumvented by the non-performing Party through the use of the DRP (if a Disaster has been declared pursuant to this Agreement and provided that the Force Majeure Event does not prevent implementation of the DRP), alternate sources, workaround plans or other means In the case of a Force Majeure Event, the non-performing Party shall be excused from further performance or observance of the obligation(s) so affected for as long as such circumstances prevail (and a reasonable period of time for overcoming the effects thereof has passed) and such Party continues to use commercially reasonable efforts to re-commence performance or observance whenever and to whatever extent possible without delay. Any Party so prevented, hindered or delayed in its performance shall, as quickly as practicable under the circumstances, notify the Party to whom performance is due by telephone and describe at a reasonable level of detail the circumstances of such Force Majeure Event Upon the occurrence of a Force Majeure Event, Amdocs shall, to the extent it is not prevented from doing so by another Force Majeure Event, implement promptly, as appropriate, the Disaster Recovery Plan. The occurrence of a Force Majeure Event shall not relieve Amdocs of its obligation to implement the Disaster Recovery Plan If Amdocs fails to provide the Services in accordance with this Agreement due to the occurrence of a Force Majeure Event, all amounts payable to Amdocs hereunder shall be equitably adjusted in a manner such that Company is not required to pay any amounts for Services that it is not receiving from Amdocs Without limiting Amdocs obligations under this Agreement, whenever a Force Majeure Event causes Amdocs to allocate limited resources between or among Amdocs customers, Company and its Affiliates shall receive at least the same treatment as the majority of other Amdocs customers. In no event shall Amdocs re-deploy or re-assign any Key Personnel to another customer or account in the event of the occurrence of a Force Majeure Event until such Force Majeure Event is no longer existing or materially affecting Company s business Audits and Records Records. Amdocs shall retain for a period of seven (7) years from the date of final payment under this Agreement, or such longer period as may be agreed upon and/or required by the Company Legal Requirements of which Company has notified Amdocs in writing, all records and information required to verify amounts invoiced and 68

163 payments made by Company under this Agreement in accordance with generally accepted United States accounting principles (consistently applied) Audit Generally. Amdocs shall provide Company s independent auditors (subject to Section ) under a duty of confidentiality consistent with Section 17.3, access to the pertinent portions of its records and books of accounts to enable Company (through such independent auditors) to conduct appropriate validations ( Audits ) of Amdocs invoices or the Services to Company. Such records and reports shall be maintained by Amdocs at a principal business office of Amdocs, and Company, upon prior written notice, may examine and make extracts of information and copy parts thereof to the extent necessary for Company to validate the accuracy of Amdocs invoices, at any agreed time during normal business hours Conduct. Audits shall: (a) (b) (c) (d) solely with respect to Audits of Amdocs invoices, occur no more than [***] (except ad hoc Audits may be conducted to investigate discovered discrepancies, errors or possible violative activity); not disrupt or adversely impact Amdocs standard business operations (including, without limitation, performance of the Services; be conducted expeditiously, efficiently, and at mutually agreed upon business hours; and be conducted upon reasonable prior written notice, which, in the case of Audits of Amdocs invoices, shall be at least ten (10) Business Days, and which, in the case of Audits of the Services provided, shall be at least seven (7) days, subject to Section Third Party Auditor. Company shall be permitted to designate a Third Party auditor who is not an Amdocs Competitor to perform the Audit at Company s expense, subject to Section Audit of Charges. If an Audit demonstrates that Amdocs invoices for the Services for the audited period were not correct: (a) Amdocs shall promptly credit Company for the amount of any paid overcharges (plus Late Payment Interest), which credit shall be treated, for invoicing and payment purposes, as a credit in arrears for the month in which the overcharge is discovered or in which the final resolution occurs; or (b) Company shall promptly pay Amdocs for the amount of any undercharges (plus Late Payment Interest), as the case may be, which payment shall be treated, for invoicing and payment purposes, as an adjustment in the next invoice to Company following the date in which the undercharge is discovered or on which the final resolution occurs. In the event that any Audit reveals an overcharge greater than [***] for the audited period, Amdocs shall pay the direct expenses associated with such Audit Services Audit. Amdocs shall provide Company and its independent auditors and their respective designees with: (a) access to Amdocs Sites and all hardware, software, data and systems used to provide the Services; (b) access to all books, records, information and documentation maintained by Amdocs with respect to the Services (excluding, without limitation, any books, records, information and documentation that would be * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 69

164 made available pursuant to Section ); and (c) all cooperation and assistance that they may require, in each case, for the purposes of performing Audits, investigations or inspections with respect to the Services, the business of Company relating to the Services, and any claims that may be brought in connection with the Services and to verify compliance by Amdocs with the terms of this Agreement, including with the Requirements. Without limiting the generality of the foregoing, in coordination with and as requested by Company, Amdocs and its representatives will cooperate with any Audit, review, request or investigation by any governmental authority and demonstrate compliance with any applicable Law. If any such Audit, review, request or investigation results in Amdocs being notified that Amdocs is not in compliance with any applicable Law, Amdocs shall promptly take all actions to comply with the same and shall bear the cost thereof. Company shall bear all costs of its personnel and agents in performing such Audits Security Audit. Amdocs shall, at its sole expense, perform or cause to have performed, on a regular basis but not less than [***] during the Term, external audits of the security procedures in effect at Amdocs Sites. Notwithstanding the foregoing, Company may also carry out such audit at any time on twenty-four (24) hours prior notice in the event of the occurrence of a security breach directly involving the Amdocs System. Amdocs shall provide to Company the results of such audit, including any findings and recommendations made by the entity making the audit. Company or its designees may, at its expense, perform the audits described in this Section If any such audit results in a determination that Amdocs is not in full compliance with the requirements of this Agreement, the Parties will meet and agree upon the steps Amdocs must take to bring it into full compliance, and Amdocs, at its cost, shall promptly take such steps. Company reserves the right to retain a consultant to certify Amdocs degree of compliance SAS 70 Type II Audits. (a) (b) Amdocs shall cooperate with Company and its independent auditor as reasonably necessary to facilitate Company s ability to comply with its obligations under the SOX Laws, including by complying with the further terms of this Section Attached hereto as Schedule 19 is a list of Company s control objectives (as the same may be modified as described in this Section the Control Objectives ) for the initial SAS 70 Type II Audit to be conducted hereunder. On an annual basis, but not later than ninety (90) days prior to the next-scheduled start date of Amdocs annual SAS 70 Type II Audit, Company shall have the right to add to, delete or otherwise change the Control Objectives. Such additions or changes will be treated as Changes for purposes of the Agreement but, unless they result in a net increase of control objectives to be audited, shall be provided to Company for no additional cost. On an annual basis and at Amdocs sole cost and expense (subject to Section (a)), Amdocs shall cause a reputable, national independent auditor reasonably acceptable to Company to conduct SAS 70 Type II Audits with respect to Amdocs facilities and controls, and to prepare and deliver to * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 70

165 (c) Company full and complete copies of written reports prepared following such audits, by November 1st of each year during the Term and any Termination Assistance Period (covering October 1st of the prior year through September 30th of the then-current year). In addition, if requested by Company, Amdocs shall deliver to Company a letter from a knowledgeable financial executive of Amdocs that: (i) contains a written representation that Amdocs internal controls as represented in the most recent SAS 70 Type II Audit report remain in all material respects unchanged through the date of the letter; or (ii) identifies all material changes in Amdocs internal controls as they affect the Control Objectives since the most recent SAS 70 Type II Audit report. All SAS 70 Type II Audits conducted by Amdocs pursuant to this Section shall include a review of all of Amdocs internal controls as they relate to the Control Objectives. At Company s sole cost and expense and upon reasonable prior written notice to Amdocs, but no more frequently than once per year (unless additional audits are necessary for Company to address a SOX Laws requirement), Company shall have the right through its auditors to conduct audits of Amdocs internal controls as they affect the Control Objectives. In order to facilitate such audits, Amdocs shall collect and maintain appropriate books and records documenting Amdocs internal controls (as they affect the Control Objectives) (for purposes of this Section, collectively, Records ). Further, with respect to such audits, Company s auditors shall have the right to: (i) examine and audit the Records; (ii) question and interview any Amdocs Personnel, in each case as reasonably necessary or desirable to facilitate Company s and its Affiliates ability to comply with the SOX Laws; and (iii) conduct such tests as are designed to confirm that the internal controls operate as designed and documented. In addition, Amdocs shall: (A) before making any substantial change to any of the internal controls of the Amdocs Systems or the Services as they affect Company and/or the Records, if Amdocs reasonably believes such change will, or is likely to, affect Company s and/or its Affiliates compliance under the SOX Laws (including by way of example and not of limitation, back-up procedures, Disaster procedures, change control and segregation of duties), notify Company in writing of the proposed change, and Company thereafter shall have a period of thirty (30) days to notify Amdocs of any objections to the proposed change (in which case the Parties shall work together cooperatively to resolve such objections); (B) in the event Amdocs becomes aware of any significant deficiencies or material weakness in Amdocs internal controls as they relate to the Control Objectives that may result in or be deemed a material weakness in Company s internal controls, notify Company in writing of such event and all details related thereto; and (C) annually on the anniversary of the Effective Date and to the extent a significant change in the control environment occurred, submit to Company written documentation describing all internal controls maintained by Amdocs that impact the Control Objectives. 71

166 (d) (e) If any SAS 70 Type II Audit report and/or Company s auditor s inquiries pursuant to Section reveal significant deficiencies in Amdocs internal controls as they relate to the Control Objectives so that they fail, in whole or in part, to constitute effective controls over financial reporting (the SOX Deficiencies ), Amdocs shall prepare and deliver to Company a detailed plan (the Corrective Plan ) that includes, among other things, a specific time frame for correcting such SOX Deficiencies and that otherwise is reasonably acceptable to Company. Amdocs shall deliver such Corrective Plan to Company and its auditor following: (i) Amdocs delivery to Company of the SAS 70 Type II Audit report containing the SOX Deficiencies, if the SOX Deficiencies were identified in a SAS 70 Type II Audit report prepared pursuant to Section ; and/or (ii) Amdocs receipt of written notice from Company that contains a description of such SOX Deficiencies, if the SOX Deficiencies were identified by Company or its auditor through the exercise of the rights described in Section Amdocs shall bear all costs and expenses associated with correcting all SOX Deficiencies. Company shall have the right to confirm to its reasonable satisfaction, through inquiries with Amdocs representatives or otherwise, that all SOX Deficiencies have been corrected in accordance with the applicable Corrective Plan, and Amdocs shall cooperate with Company in all reasonable respects in connection therewith. Subject to Section 17.3 above, Company shall have the right to use all Amdocs Confidential Information received by Company s auditors pursuant to the terms of this Section as necessary to facilitate its ability to comply with the SOX Laws Affiliated Companies. Amdocs shall use commercially reasonable efforts to ensure that Company shall also have such above described auditing rights with respect to Amdocs Affiliates and Primary Subcontractors directly or indirectly engaged in providing any or all of the Services Severability If any provision of this Agreement is held invalid, illegal or unenforceable, the remaining provisions of the Agreement shall in no way be affected or impaired, and the invalid, illegal or unenforceable provision will be deemed to be deleted, and the rights and obligations of Amdocs and Company will be interpreted accordingly. The Parties shall cooperate in good faith to restate or replace the invalid, illegal or unenforceable provision with a valid, legal and enforceable one that achieves the same ends (to the maximum legal extent) as the provision determined to be invalid or unenforceable Entire Agreement and Changes This Agreement, including any Schedules and Exhibits attached hereto and Orders executed by the Parties hereunder, shall constitute the entire agreement between Company and Amdocs with respect to the subject matter hereof and shall supersede all oral and written quotations, communications, representations, agreements and understandings of the Parties, with respect to the subject matter thereof. Orders and 72

167 other documents or instruments required to be signed by Amdocs shall designate the particular Amdocs entity (ASSL or INC.) that is executing such Order, document or instrument. This Agreement and any Orders may not be modified except by a written instrument signed by a duly authorized representative of each Party. Any terms that may appear on Amdocs invoices or any of Company s documents that add to, vary from or conflict with the provisions of this Agreement or the applicable Orders, shall be void Governing Law and Dispute Resolution The laws of the State of New York will govern the construction and enforcement of all of the rights, duties, and obligations arising under, or relating in any manner to, the subject matter of this Agreement, notwithstanding any conflicts of law principles Company and Amdocs will use their best efforts to resolve any controversy or claim arising out of or relating to this Agreement or an Order through good faith negotiations, including the following escalation procedure and time limits, unless otherwise agreed in writing by the Parties: Escalation Level If any escalation level does not resolve any matter to the Parties mutual satisfaction, the persons at such level will jointly brief and provide the next level with all information and background material necessary to resolve the matter through negotiations. Except as otherwise provided in this Agreement, for avoidance of doubt, the Parties shall not make any claims for remedies based on an alleged breach of a Party s obligations, assert any right to terminate or provide notice of termination, or commence any other dispute resolution process, without first attempting to resolve the matter through the foregoing escalation procedure. Such procedure shall not prejudice any other rights hereunder (e.g., specified time periods shall be extended as necessary to allow for completion of the escalation procedure time periods). 73 Time Limit to Resolve Matter (unless relevant personnel agree to extend) I Steering Committee Fourteen (14) days II Company s Senior Vice President, Information Technology and Amdocs responsible Vice President Fourteen (14) days III Company s CEO and Amdocs responsible Division President Fourteen (14) days Except as specifically otherwise provided under this Agreement, any claim, whether based on contract, tort or other legal theory (including, but not limited to, any claim of fraud or misrepresentation), arising out or relating to this Agreement or any Order, including its interpretation, performance, breach or termination, not resolved by good faith negotiations and escalation as specified above, shall be resolved exclusively by arbitration conducted in New York, NY, in the English language by a panel of three (3) arbitrators ( Arbitrators ) in accordance with the International Arbitration Rules of

168 the American Arbitration Association ( AAA ). The Arbitrators must have the following qualifications: a practicing lawyer or retired judge with proven experience in the telecommunications industry and contracts related thereto. Each Party will select one Arbitrator, and the two chosen Arbitrators will then select the third Arbitrator. The Arbitrators will be bound by the provisions of this Agreement and shall be made aware of the terms hereof prior to his appointment. Upon rendering a decision, the Arbitrators shall state in writing the basis for the decision. The Arbitral award shall be final and binding, provided however that a Party may petition a court of competent jurisdiction to vacate the Arbitrators award or decision on the grounds of the Arbitrators failure to abide by the provisions of this Agreement. Judgment on the award or any other final or interim decision rendered by the Arbitrators may be entered, registered or filed for enforcement in any court having jurisdiction thereof The arbitration proceedings shall be confidential and private. To that end, the Parties shall not disclose the existence, content (including without limitation all materials and information created or provided as part thereof) or results of any proceedings conducted in accordance with this Section 17.11, and materials submitted in connection with such proceedings shall not be admissible in any other proceeding, provided, however, that this confidentiality provision shall not prevent a petition to vacate or enforce an arbitral award, and shall not bar disclosures strictly required by law Except with respect to Section and notwithstanding the foregoing, each Party retains the right to seek judicial assistance as permitted hereunder: (a) to compel arbitration; (b) to obtain interim measures of protection prior to or pending arbitration; (c) to seek injunctive relief in the courts of any jurisdiction as may be necessary and appropriate to protect the unauthorized disclosure of Confidential Information or a threatened breach of Section by Amdocs; (d) to enforce any decision of the Arbitrators, including the final award; and (e) in relation to disputes regarding the validity, scope or enforceability of Intellectual Property Rights Except with respect to Section and notwithstanding anything else to the contrary, in no event nor for any reason shall Amdocs interrupt the provision of Services to Company, unless authority to do so is granted by Company in writing or conferred by the Arbitrators or a court of competent jurisdiction The Parties waive the right to a jury trial of any issue that is properly the subject of arbitration under this Agreement Nothing in the Agreement affects any statutory rights that cannot be waived or limited by contract under applicable Law Independent Contractors Amdocs, in furnishing services to Company hereunder, is acting as an independent contractor. No employer-employee relationship exists between a Party and the other Party s employees or subcontractors employees. Amdocs is not an agent of Company and has no right, power or authority, expressly or impliedly, to represent or bind Company as to any matters, except as expressly authorized in this Agreement. Company is not an agent of Amdocs and has no right, power or authority, expressly or 74

169 impliedly, to represent or bind Amdocs as to any matters, except as expressly authorized in this Agreement Assignment and Subcontracts Any assignment, subcontract or other transfer of a Party s rights or obligations under this Agreement or any Order hereunder requires the prior written consent of the other Party. Prior to any such assignments, the assignee will be required to provide the other Party with a written undertaking to comply with all the assignor s obligations under this Agreement and the applicable Orders. Notwithstanding the foregoing, in the event of the sale or other transfer of all or substantially all of the assets or equity of Company or Amdocs to another entity, or the transfer of such assets or equity to an Affiliate or such other entity due to a corporate reorganization, such entity will be entitled to all benefits of this Agreement and of the Orders hereunder without the prior written consent of the other Party, provided that such entity first provides Amdocs or Company, respectively, with a written undertaking to comply with all of Company s or Amdocs, respectively, obligations under this Agreement and the Orders. For the avoidance of doubt, any permitted assignee of a Party shall have financial capabilities greater than or substantially similar to that of the assignor Party. Any attempted assignment that does not comply with the foregoing shall be null and void Notwithstanding the foregoing, it is agreed that Amdocs may subcontract or assign the provision of licenses, services or Third Party products hereunder to any of Amdocs Affiliates and/or to Authorized Subcontractors; provided that: (a) (b) (c) Amdocs shall be responsible for the performance (or non-performance, as the case may be) of any part of this Agreement and any Order hereunder which is subcontracted to an Affiliate or an Authorized Subcontractor; Amdocs obligations under this Agreement and the Orders hereunder shall remain in full force and effect, despite the involvement of an Affiliate or an Authorized Subcontractor in performance of this Agreement; and the applicable terms of this Agreement (including, without limitation, those referred to in Section 17.14) shall also apply to the Authorized Subcontractors. Company and Amdocs agree that Amdocs will serve as the prime contractor for each Authorized Subcontractor that Amdocs utilizes in its performance under this Agreement, and that Amdocs shall (i) submit each proposed Primary Subcontractor to Company for written approval prior to engaging any such Primary Subcontractor to provide services or other materials under this Agreement; and (ii) be responsible for managing each such Authorized Subcontractor s performance under this Agreement; and (iii) bear all responsibility for the performance of such Authorized Subcontractor. The Authorized Subcontractors that require access to the Legacy Systems, Company Systems, Company Equipment, the Company Sites, the Company Owned Software, and/or the Company Third Party Software in order to provide the Services and/or Additional Services will receive such access subject to Section 17.2 and Section 17.3, 75

170 and the Authorized Subcontractors personnel will be treated in all respects as Amdocs Personnel Amdocs and Company Insurance Amdocs agrees that it will comply with the insurance requirements set forth in Schedule 23A attached hereto Company agrees that it will comply with the insurance requirements set forth in Schedule 23B attached hereto [***] Survival of Obligations Sections 1, 4.1.1, 4.3, 4.7, 13 (except Section 13.2 in the event of termination pursuant to Section 16.5), 14 (except Section 14.1 in the event of termination pursuant to Section 16.5), 16.7, , 16.9, 17.2, 17.3, 17.4, 17.5, 17.6, 17.8 (provided that any audit must be conducted no later than twelve (12) months after the conclusion of the Termination Assistance Period), 17.9, 17.10, 17.11, 17.13, 17.15, 17.16, 17.17, 17.18, 17.19, 17.20, 17.21, 17.22, 17.23, and of this Agreement shall survive the termination, expiration or other ending of this Agreement Headings not Controlling The headings of the Sections of this Agreement are inserted for convenience only and are not intended to affect the meaning or interpretation of this Agreement Notices Any notification, demand or communication which under the terms of this Agreement or otherwise must or may be given or made by a Party shall be in writing and shall be: (a) given in person, (b) made by any delivery (courier) services requiring signature of receipt or fax, addressed or transmitted to the respective Parties addresses specified below, or (c) sent by postal services as provided below. Notwithstanding the foregoing, notices given under this Agreement pursuant to Sections 3.3.7, 14 and 16 shall only be sent by courier services to ensure prompt and actual receipt Amdocs and Company may also communicate with each other, for their day-to-day project activities and management to be performed under this Agreement, by electronic means, including via . An identification code (called a user ID) contained in an * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 76

171 electronic document will be deemed sufficient to verify the sender s identity and the document s authenticity Unless otherwise specified in the Agreement, when either Party is required to provide notice to the other, such notice shall be deemed given: (a) (b) when delivered within the same country: (i) the day of receipt, if delivered in person; (ii) the third (3rd) Business Day after being given to an express courier with a reliable system for tracking delivery; (iii) after the transmission by fax or electronically and receipt by the sender of a confirmation of transmission showing successful completion of the transmission; or (iv) the fifth (5th) Business Day after the date of mailing, when using local postal services for registered or certified mail (airmail or first class mail), return receipt requested, postage prepaid. when delivered to Amdocs or Company in a different country: (i) the day of receipt, if delivered in person; (ii) after the transmission by fax or electronically and receipt by the sender of a confirmation of transmission showing successful completion of the transmission; or (iii) if by express courier or postal services, within the time frames for delivery generally stated by the courier service or the local postal service, respectively, but no greater than ten (10) Business Days. Amdocs and Company shall provide notices under this Agreement to the following addresses and persons: If to Amdocs Inc: Amdocs Inc 1390 Timberlake Manor Parkway St. Louis. MO, Fax: (314) Attention: Division President, Managed Services If to Company: Vonage Network LLC 23 Main Street Holmdel NJ Fax: Attention: SVP- IT and Product Development If to Amdocs Software Systems Limited: Amdocs Software Systems Limited First floor, Block S, East Point Business Park, Dublin 3, Ireland Fax: Attention: Division President; Managed Services With copies to: Vonage Network LLC 23 Main Street Holmdel NJ Fax: Attention: Chief Legal Officer, Vonage Holdings Corp. With copies to: Amdocs, Inc. Harborside Financial Center Plaza 5, Suite 2700 Jersey City, NJ Attention: General Counsel Fax: (314) Either Party may change its address, phone and facsimile numbers and address for notification purposes by giving the other prior written notice of the new information and its effective date. 77

172 Successors and Assignees This Agreement shall be binding upon and inure to the benefit of the Parties hereof and to their permitted successors and assignees Publicity Each Party must obtain the other s prior written consent before publicly using or disclosing any advertising, written sales promotion materials, press releases, or other publicity matters relating to this Agreement, except with respect to a Party s public referral to the other Party as its customer or vendor, as applicable, and to the existence of this Agreement (but not any of the contents hereof). Each Party may include the names of the Parties, the existence of the Agreement, and a factual description of the work performed under the Agreement without such written consent: (a) (b) (c) (d) on employee bulletin boards; in internal business planning documents; in its public filings required by applicable Law; and whenever necessary to comply with generally accepted accounting principles or applicable Laws The Parties agree that, upon the execution of this Agreement, Company and Amdocs may issue a joint press release regarding the scope of this Agreement, provided that the content of the press release and the timing of its distribution are agreed to by both Parties and the press release has received the prior written approval and consent of Company and Amdocs Export Each Party expressly acknowledges its obligation to comply with all applicable Legal Requirements regarding export from the United States of computer hardware, software, technical data or derivatives thereof, as such requirements may be modified from time to time. Each Party will reasonably cooperate with the other Party and will provide to such other Party promptly upon request any end-user certificates, affidavits regarding re-export or other certificates or documents as are reasonably requested to obtain approvals, consents, licenses and/or permits required for any payment or any export or import of products or Services under this Agreement. Additionally, upon the request of Company, Amdocs will identify for Company each component of the Amdocs Software or any Customizations included in the Amdocs System that are of United States origin, identify whether such components contain encryption technology and assist Company in identifying or obtaining an Export Control Classification Number for such component Third Party Beneficiaries This Agreement is entered into solely between, and may be enforced only by, Company and Amdocs. This Agreement shall not be deemed to create any benefits, rights, claims, obligations, or causes of action in, to, or on behalf of any Third Parties, including, without limitation, Affiliates, Third Parties, employees, suppliers and customers of a Party, or to create any obligations of a Party to any such Third Parties 78

173 other than to Company and Amdocs under the Agreement, except solely with respect to (a) Vonage America Inc that is a beneficiary of the Amdocs Systems and Services provided under this Agreement, subject to the terms of the Agreement, and (b) as set forth in Section Covenant of Good Faith Each Party agrees that, in its respective dealings with the other Party under or in connection with this Agreement, it shall act in good faith Acknowledgment The Parties each acknowledge that the terms and conditions of this Agreement have been the subject of active and complete negotiations, and that such terms and conditions should not be construed in favor of or against any Party by reason of the extent to which any Party or its professional advisors participated in the preparation of this Agreement Order of Preference In the event of conflict in substance or impact between this Agreement and any Schedule or Exhibit, this Agreement controls, subject to the right of Company and Amdocs to mutually amend this Agreement and Schedules as set forth herein Execution of Agreement This Agreement may be executed in duplicate counterparts and both together will constitute one and the same document. IN WITNESS WHEREOF, Company and Amdocs, pursuant to due corporate authority, have caused this Agreement to be signed in their respective names on the date(s) set forth below. ACCEPTED: VONAGE NETWORK LLC ( Company ) ACCEPTED: AMDOCS, INC. ( INC ) By: /s/ John Rego By: /s/ Thomas C. Drury (Signature) (Signature) Name: John Rego Name: Thomas C. Drury (Typed or Printed) (Typed or Printed) Title: President Title: President (Typed or Printed) (Typed or Printed) Date: 12/23/09 Date: ACCEPTED: 79

174 AMDOCS SOFTWARE SYSTEMS LIMITED ( ASSL ) By: Name: /s/ Alan Weldrick (Signature) Alan Weldrick (Typed or Printed) Title: Deputy General Manager (Typed or Printed) Date: 23 December

175 EXHIBIT 1 ORDER FORM The following is the Order form referred to in Section of the Agreement: This Order shall be governed by the terms and conditions of the Agreement. Any terms and conditions in this Order that explicitly modify or change the terms and conditions of such Agreement shall apply to this Order only. 1. Description of Additional Services and Customizations Amdocs will provide [fill in what Amdocs will provide and reference any Appendix that describes the applicable Services]. 2. Additional Requirements 3. Additional Specifications 4. Schedules and Milestone Dates 5. Term of Order: [State the term required to perform Services.] 6. Designated Amdocs Personnel to Perform the Services: [State whether there is any designated Amdocs Personnel required to perform Services.] 7. Location: [Set forth where Services will be performed.] 8. Price: [State the applicable price.] 9. Payment: [State whether payment is linked to milestones; for instance, delivery of Materials or performance of Service.] 10. Invoices and Billing Information: Invoices and billing information are to be sent to: 11. Project Manager/Point of Contact: The project manager and/or point of contact shall be: 12. Additional Terms: Other special terms and conditions applicable to the Order are:

176 IN WITNESS WHEREOF, the Parties have caused this Order to be executed by duly authorized representatives: AMDOCS By: Name: Title: Date: VONAGE NETWORK LLC By: Name: Title: Date:

177 EXHIBIT 2 AMDOCS FORM OF NON-DISCLOSURE & CONFIDENTIALITY AGREEMENT THIS NON-DISCLOSURE AND CONFIDENTIALITY AGREEMENT ( Agreement ) is made as of the day of, 20 (the Effective Date ) BY AND BETWEEN: Amdocs [ ], a company organized and existing under the laws of [ ], having offices at [ ] (hereinafter referred to as Amdocs ); AND, a [corporation, partnership, etc.] organized and existing under the laws of, having its principal offices at (hereinafter referred to as the Receiving Party ). WHEREAS Amdocs (or any of its affiliated companies) is the owner and/or the author of and/or has the right to license certain valuable proprietary routines, computer programs, documentation, trade secrets, systems, methodology, know-how, marketing and other commercial knowledge, techniques, specifications, plans and other proprietary information, including but not limited to material associated with and forming part of the proprietary software systems of Amdocs known as [ ], all of which, including any related ideas and look-and-feel, are referred to in this Agreement as the Amdocs Proprietary Information ; and WHEREAS the Receiving Party has been engaged as a [, consultant, vendor, subcontractor etc.] by Company (hereinafter referred to as Company ) for (add description of services) (hereinafter referred to as the Consulting Services ); and WHEREAS Company has asked Amdocs to allow the Receiving Party access to the Amdocs Proprietary Information for the purpose of being provided with the Consulting Services; and WHEREAS Amdocs agrees to provide the Receiving Party with the requested access to the Amdocs Proprietary Information, but only subject to the Receiving Party first becoming obligated to confidentiality by signing this Agreement; and WHEREAS Amdocs and the Receiving Party wish to evidence by this Agreement the manner in which the Amdocs Proprietary Information will be treated; NOW, THEREFORE, the parties agree as follows: 1. The Receiving Party agrees to hold strictly confidential the Amdocs Proprietary Information and shall not copy, distribute, disseminate or otherwise disclose the Amdocs Proprietary Information to anyone other than to employees or contractors of Company or the Receiving Party who have a need to know such information for purposes of providing the Consulting Services. 2. Furthermore, the Receiving Party hereby undertakes:

178 (a) (b) (c) (d) (e) not to use the Amdocs Proprietary Information for any purposes other than the Consulting Services; not to make the Amdocs Proprietary Information available to, nor permit its use by any third party, directly or indirectly, with the exception of Company as aforesaid; not to sell, grant or in any other way enable any third party to use the Amdocs Proprietary Information; without derogating from the foregoing, during the term of this Agreement, not to use the Amdocs Proprietary Information: (i) (ii) (iii) (iv) in developing such software system(s) for itself or any third party; in competing with Amdocs in the area of selling or licensing such software system(s); in providing software maintenance or support services with respect to the Amdocs products, other than the Consulting Services; and/or in operating a service bureau for others; and that its personnel who receive access to the Amdocs Proprietary Information will not: (i) use the name of the Disclosing Party in any marketing materials, publicity materials or materials submitted to a client or prospective client, except for Company, without the prior written consent of Amdocs; and (ii) disclose to any third parties that they have any familiarity with or knowledge of the Amdocs Proprietary Information disclosed under this Agreement. 3. Upon the termination and/or expiration of this Agreement for any reason and/or upon the conclusion of the Consulting Services and/or at the request of Amdocs, the Receiving Party shall: (a) (b) (c) return to Amdocs any document or other material in tangible form in its possession being part of the Amdocs Proprietary Information; and/or destroy any document or other material in tangible form that contains the Amdocs Proprietary Information together with proprietary information of Company; and confirm such return and/or destruction in writing to Amdocs. 4. Disclosure of the Amdocs Proprietary Information to the Receiving Party may be made in writing, in any tangible form, electronically, orally, or occur by demonstration of any of Amdocs products. 5. Disclosure of the Amdocs Proprietary Information to the Receiving Party shall in no way serve to create, on the part of the Receiving Party, a license to use, or any proprietary right in, the Amdocs Proprietary Information or in any other proprietary product, trade mark, copyright or other right of Amdocs. 6. Any use by the Receiving Party of the Amdocs Proprietary Information permitted under this Agreement is conditioned upon the Receiving Party first taking the safeguards and measures required to secure the confidentiality of such information. Without limiting the generality of the foregoing, the Receiving Party shall draw to the attention of its

179 employees, who shall have access to the Amdocs Proprietary Information, all the obligations contained in this Agreement, and shall cause each such employee to be bound by confidentiality obligations substantially similar to those herein. 7. The confidentiality obligations of the Receiving Party regarding the Amdocs Proprietary Information shall not apply to such information which: (a) (b) (c) (d) (e) becomes public domain without fault on the part of the Receiving Party; is lawfully obtained by the Receiving Party from any source other than Amdocs free of any obligation to keep it confidential; is previously known to the Receiving Party without an obligation to keep it confidential, as can be substantiated by written records; or is expressly released in writing from such obligations by Amdocs; or is required to be disclosed pursuant to law, regulation, judicial or administrative order or request by a governmental or other entity authorized by law to make such request; provided, however, that the Receiving Party first notifies Amdocs to enable it to seek relief from such requirement, and renders reasonable assistance requested by Amdocs (at Amdocs expense) in connection therewith. 8. This Agreement shall be in full force and effect for a period commencing on the date first stated above and ending either four (4) years after the conclusion of the Consulting Services referred to herein or five (5) years from the date first stated above, whichever occurs later. 9. In the event that the Receiving Party discloses, disseminates, releases or uses any part of Amdocs Proprietary Information, except as provided for in this Agreement, such disclosure, dissemination, release or use, or the threat thereof, shall be deemed to be a material breach of this Agreement. In the event of any material breach of this Agreement by the Receiving Party (including but not limited to the foregoing), the Receiving Party, upon demand from Amdocs, shall immediately discontinue access to the Amdocs Proprietary Information and immediately return to Amdocs all Amdocs Proprietary Information, including any copies thereof. In the event that a copy of any part of the Amdocs Proprietary Information cannot be returned as a result of physical impossibility, such copy shall be promptly destroyed and such destruction shall be certified in writing by the Receiving Party. The provisions of this paragraph are in addition to any other legal or equitable rights and remedies that Amdocs may have. 10. The Receiving Party acknowledges that a breach of this Agreement may cause Amdocs extensive and irreparable harm and damage, and agrees that Amdocs shall be entitled to seek injunctive relief to prevent use or disclosure of the Amdocs Proprietary Information not authorized by this Agreement, in addition to any other remedy available to Amdocs under applicable law. Furthermore, the Receiving Party hereby acknowledges that any breach of this Agreement may cause the termination of its employment and/or the provision of the Consulting Services to Company as a result of Amdocs activities to protect its rights under this Agreement, and agrees that it shall have no recourse or claim of action against Amdocs and/or Company based upon or in connection with such activities.

180 11. This Agreement constitutes the entire Agreement between the parties and supersedes any prior or contemporaneous oral or written representation with regard to the subject matter hereof. This Agreement may not be modified except by a written instrument signed by both parties. If, however, any provision of this Agreement is determined to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate or render unenforceable the entire Agreement, but rather the entire Agreement shall be construed as if not containing the particular invalid or unenforceable provision, and the rights and obligations of the parties shall be construed and enforced accordingly. In addition, the parties hereby agree to cooperate with each other to replace the invalid or unenforceable provision with a valid and enforceable provision which will achieve the same result (to the maximum legal extent) as the provision determined to be invalid or unenforceable. 12. The validity, performance, construction and effect of this Agreement shall be governed by the laws of the State of New York, U.S.A., without reference to its conflict of laws rules. IN WITNESS WHEREOF, the parties hereto have executed this Agreement through their authorized representatives as of the Effective Date. ( Receiving Party ) By Name: Title: Date: Amdocs ( Amdocs ) By: Name: Title: Date:

181 1. Implementation and Migration Services Fees and License Fees SCHEDULE 6 Subscriber means a customer of Company s services and products whose account is maintained on the Amdocs Systems. [***] [***] [***] [***] [***] FEES 1.1. Definitions. The following definitions shall apply to this Schedule 6: 1.2. Further to Section of the Agreement, Company will pay Amdocs the Implementation and Migration Services Fees and License Fees in the total amount of [***], collectively referred to herein as the Implementation, Migration and License Fees. The individual components of the Implementation, Migration and License Fees are as follows: * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 1

182 Component Fee US$ [*** ***] [*** ***] [*** ***] Total $[***] Amdocs may invoice Company, and Company shall pay, for the Implementation, Migration and License Fees as follows: a. Two hundred thousand US Dollars ( $200,000 ) paid by Company in October 2009, which the Parties acknowledge has been paid by Company prior to the Effective Date. b. Eight and one-half million US Dollars ( $8,500,000) ; upon execution of the Agreement by the Parties (includes [***] c. [***] due upon [***]. d. [***] due upon [***]; and e. [***] due upon [***] 1.3. In the event additional Subscribers will be added to the Amdocs Systems as a result of mergers, acquisitions or other business combinations, Company will pay Amdocs a one time fee as will be mutually agreed by the Parties to cover costs related to the migration or such combination pursuant to an Order (in addition to such incremental fees as may be due under Section 1.4 hereof). * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 2

183 1.4. Amdocs shall have the right to invoice for, and Company will pay to Amdocs a one time incremental License fee of [***] for each Subscriber in excess of [***]. For purposes of counting [***] subject to incremental License fees, only [***] are counted. Upon payment of a [***], the License shall be deemed to be fully-paid with respect to all such Subscribers at the end of each calendar month during the Term. For the avoidance of doubt, in the event that a Subscriber for which Company previously paid such [***] license fee is no longer deemed to be a Subscriber for the purposes of the License Fees, Company s license shall remain fully-paid up for the number of Subscribers for which License Fees have been paid. 2. PMO Fees As provided in Section 12.2 of the Agreement, Company will pay Amdocs for PMO Services [***] from [***] until [***]. 3. Monthly Fees 3.1. In accordance with the terms set forth in Section of the Agreement, commencing on [***], Amdocs shall have the right to invoice for, and Company will pay to Amdocs, a Fixed Monthly Fee for the provision of the Outsourcing Services in connection with up to [***] in accordance with the table set forth below: Fixed Monthly Fee Period [***] until [***] $ [***] [***] to [***] $ [***] [***] to [***] $ [***] [***] to [***] $ [***] The above Fixed Monthly Fee includes Maintenance fees at [***]. In the event that Company requests Amdocs to provide Maintenance following any termination or cessation of the Outsourcing Services, Maintenance shall be charged at Amdocs then applicable standard rates. US$ * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 3

184 3.2. In addition to the Fixed Monthly Fee set forth above, Amdocs shall charge Company, and Company shall pay to Amdocs, an incremental monthly price per Subscriber ( PPS ) as follows: [***] [***] [***] [***] [***] [***] [***] [***] [***] 3.3. Operational Credits - Starting October 2010, Amdocs shall provide Company with an operational credit of $[***] out of the monthly fee but no more than accumulated total of $[***] for such credit In the event that Company purchases an Amdocs CRM Front-End license by December 31, 2013, Amdocs will provide Company a onetime credit of [***] to be used for the CRM implementation services. 4. Travel Expenses Effective [***], Company will reimburse Amdocs for its reasonable travel and related expenses for Amdocs Personnel who must travel to Company * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 4

185 Sites or at Company s request in connection with providing the Services under the Scope of this Agreement, provided that such travel and expenses are pre-approved by Company and are incurred in accordance with Company s Travel Policy, including its limitations. All travel expenses must be submitted for reimbursement within sixty (60) days of the last travel date, with copies of substantiation. 5. Envelope Parameters To the extent that Schedule 7 (Envelope Parameters) to the Agreement contemplates any additional fees to be payable by Company to Amdocs in the event that an envelope parameter stated therein is exceeded, then Company shall pay such undisputed fees to Amdocs as invoiced. 6. Additional Services 6.1. For Additional Services requested by Company, Amdocs blended hourly rates that will be charged for such Services are as follows, provided however, that if more than [***] of the hours performed for such Additional Services for any Order are to be performed offshore, Company has the right to cause Amdocs to renegotiate the rates based on commercially reasonable rates and terms taking into account offshore pricing. Commencing [***], the Parties agree to renegotiate the rates below in good faith. Activity Hourly Rate Development Services $[***] Termination Assistance Services $[***] (based on more than [***]% on-shore services) 6.2. Commencing in [***], and occurring every [***] thereafter, the above hourly rates will be subject to an annual cost of living adjustment ( COLA ). The COLA shall be equal to [***] The applicable Additional Services Order will include reimbursement for reasonable travel expenses, as agreed to in advance by Company that Amdocs incurs in performance of the Additional Services. Such expenses will be agreed in advance as part of the Order and expenses shall be incurred in accordance with the terms of the Company s Travel Policy Any Additional Services shall be paid for by Company in accordance with the provisions set forth in Section 8.2 of the Agreement. Amdocs shall invoice Company for such Additional Services monthly, unless a fixed price arrangement is agreed upon by the Parties, where, in such a case, the Parties will mutually agree on the payment terms. 7. Termination Fees * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 5

186 7.1. The early termination fees set forth below are payable by Company upon termination of the Agreement for convenience pursuant to Section 16.5 of the Agreement and prior to the Turn-On Date (the Pre Turn-On Date Early Termination Fees )., The applicable Early Termination Fees and all then outstanding and undisputed invoiced fees are payable within five (5) Business Days from receipt of Company s notice of termination pursuant to Section 16.5 of the Agreement[***]: During the period of [***] to [***]: [***] less any amount paid by Company prior to termination During the period of [***] to [***]: [***] less any amount paid by Company prior to termination In the event that Amdocs is able to reuse or resell any hardware or Third party Software, the actual cost benefits (cost reductions achieved or payments received) will be allocated towards the termination fees set forth above and shall reduce them accordingly The Pre Turn-On Date Early Termination Fees set forth above include the License Fees for use of the Amdocs Software in connection with up to [***], subject to the terms and conditions of the Agreement Early termination fees payable by Company upon termination of the Agreement for convenience pursuant to Section 16.5 of the Agreement and after the Turn-On Date are set forth below. The applicable termination fee and all then outstanding and undisputed invoiced fees are payable within five (5) Business Days from receipt of Company s notice of termination pursuant to Section 16.5 of the Agreement[***]: Number of Months Effective Termination Date is From Turn-On Date [***] $[***] [***] $[***] [***] $[***] [***] $[***] [***] $[***] Termination Fee (US Dollars) The above termination fees have been calculated on the basis that the Implementation, Migration and License Fees have been paid in full as of the effective termination date. Any undisputed unpaid amount will be due upon termination. * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 6

187 8. Excluded Services The following items not included in the pricing above are available from Amdocs at an additional charge as indicated below or to be agreed upon by the Parties: 8.1. Subject to Section 7.3 of the Agreement, ongoing Change Requests and modifications to the Amdocs Systems requested by Company (other than as contemplated by the Agreement) Print and Mail services Communication lines between Company Sites and Amdocs Sites in North America All equipment, software or services designated as the responsibility of Company on Schedule During the Term, Company will bear all costs of licenses, maintenance, monthly updates and implementation services for [***] software and, at Company s cost, obtain such rights, as necessary for Amdocs to use such software solely for the provision of the Amdocs Systems and the Services. * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. 7

188 Background SCHEDULE 7 ENVELOPE AND STORAGE PARAMETERS Envelope Parameters The Envelope Parameters specified in the table immediately below represent the mutually agreed sizing and capacity assumptions relating to the Outsourcing Services. As part of its Outsourcing Services-related responsibilities, Amdocs and Company continuously shall monitor the Envelope Parameters and, in mutual consultation, proactively engage in capacity planning aimed at avoiding having any of the Envelope Parameters exceed their respective metric for longer than the applicable Tolerance Period. In connection with Amdocs capacity planning activities, to the extent it reasonably is able to do so, Company shall use commercially reasonable efforts to provide Amdocs with advance notice of any known event which will make the Envelope Parameters exceed their respective metric for longer than the applicable Tolerance Period. [***] Table Definitions Hardware, Software, Storage and Staffing columns Concurrent Users Tolerance Period Monthly Fee & Growth Interval A checkmark in the Hardware, Software, Storage or Staffing columns represents the areas of cost that might be impacted if the applicable Envelope Parameter metric is exceeded beyond its Tolerance Period. The number of Company connections (human or automated) to the applicable system ( e.g., web server, Citrix, API, DB, etc.) simultaneously requesting such system to execute a transaction. The Tolerance Period column represents the number of calendar days in a [***] period by which an Envelope Parameter metric is allowed to exceed its metric before Amdocs may [***]. The Tolerance Period must be exceeded [***] An estimate of the approximate cost [***] to increase the applicable Envelope Parameter metric by the applicable metric increase amount ( i.e., growth interval). General The Envelope Parameters may need to be altered, added or removed throughout the Term of the Agreement as products and/or functionality changes. All such alterations, additions and/or removals shall be implemented through mutual written agreement as provided in the Agreement. * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. -1-

189 Envelope Parameter Metric Hardware Software Storage Staffing Production CRM Backend Concurrent Connections to CRM backend per [***] Subscribers AMSS Concurrent Users per [***] Subscribers Tolerance Period (days) Comments and Notes Description of Envelope Parameter [***] [***] Example: [***] Number of Concurrent connections to CRM backend software per [***] System Subscribers [***] [***] Example: [***] Number of Concurrent Users of the AMSS software per [***] System Subscribers Billing cycles [***] [***] The total amount of billing cycles the Amdocs Systems will handle in a month. AVG Rated Events per Subscriber per day [***] [***] The number of postpaid events (voice and data) per Subscriber which will be Rated Events. Rated Event(s) means all the events that are rated as per the business logic in the Amdocs Systems. Fee & Growth Interval [***] [***] [***] [***] * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. -2-

190 Envelope Parameter Metric Hardware Software Storage Staffing DR Capacity of DR as percentage of Production Training Number of training environments hosted by Amdocs Number of Concurrent Users per training environment hosted by Amdocs Number of accounts across all training environments hosted by Amdocs Tolerance Period (days) [***] [***] Comments and Notes Description of Envelope Parameter [***] [***] Amdocs will initially provide [***]. On a permanent basis following [***], Amdocs will provide [***] [***] [***] Maximum number of Concurrent Users per single training environment. Concurrent users are physical testers and does not include loadtesting and other mechanized testing harnesses. [***] [***] The number of synthesis subscriber information records that will be used for the training environments. Fee & Growth Interval [***] * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. -3-

191 Envelope Parameter Metric Hardware Software Storage Staffing UAT/ITV/ST Number of testing environments hosted by Amdocs Number of Concurrent Users per testing environment hosted by Amdocs Number of accounts across all testing environments hosted by Amdocs Tolerance Period (days) Comments and Notes Description of Envelope Parameter [***] [***] Total number of separate testing environments concurrently hosted by Amdocs. [***] [***] Maximum number of Concurrent Users that can access a single testing environment hosted by Amdocs. [***] [***] The number of synthesis subscriber information records that will be used for the testing environments. Fee & Growth Interval [***] * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. -4-

192 Storage Parameters The storage parameters specified in the attached table represent the mutually agreed storage sizing assumptions relating to the Services. As part of its Services-related responsibilities, Amdocs and Company continuously shall monitor the storage parameters and, in mutual consultation, proactively engage in storage capacity planning. In connection with Amdocs storage capacity planning activities, to the extent it reasonably is able to do so, Company shall provide Amdocs with advance notice of any significant, known increases or decreases in Company s storage capacity requirements. Notwithstanding anything herein to the contrary, Company shall only be liable for additional fees or costs to the extent set forth in an Order for Additional Services mutually agreed by the Parties in accordance with the Agreement. Storage Parameter Active Subscriber info (such as charges, memos, service agreements, etc.) Suspended and cancelled accounts and Subscribers Available Online Note: The applicable amounts in the Available Online and Offline columns below are consecutive (not concurrent). Offline -5- Unit of measurement Comments Description of Parameter [***] [***] [***] Number of months active Subscriber accounts in the Amdocs Systems include all information associated with the applicable active Subscriber. [***] [***] [***] Number of months Subscriber accounts that are suspended or cancelled include all information associated with the applicable Subscriber. Order History (Equipment/Device) [***] [***] Number of months information about the history of the order for the Subscriber is stored in the Amdocs Systems. All current orders will remain intact beyond the 24 months RAW Event s [***] [***] [***] Number of days events not yet processed into the Amdocs Systems are stored in the Amdocs Systems (in the format they arrive from the switch). * Confidential treatment has been requested. The redacted material has been separately filed with the Commission.

193 Processed Events (in usage DB) Number of Subscriber Bill Images Number of Application Logs Number of Security Logs Historical Data for conversions [***] [***] [***] Number of months events processed in the Amdocs Systems are stored in the Amdocs Systems. [***] [***] [***] Number of months bill images available for viewing with Care and AMSS are stored in the Amdocs Systems. [***] [ ***] [***] Number of months Tuxedo and middleware MQ logs used for debugging purposes are stored in the Amdocs Systems. [***] [ ***] [***] Number of months security monitoring logs of the Amdocs Systems are stored in the Amdocs Systems. [***] [ ***] [***] Number of months after the Final Acceptance the converted data stays in the staging areas for validation purposes. * Confidential treatment has been requested. The redacted material has been separately filed with the Commission. -6-

194 SCHEDULE 8 IMPLEMENTATION AND MIGRATION SERVICES The purpose of this Schedule 8 is to provide a general description of the Implementation and Migration Services and approach for commercial availability and migration of Company s existing Subscribers from the Legacy Systems to the Amdocs Systems. This Schedule addresses (at a high-level) the preparation and implementation of the Amdocs Systems, migration of Subscribers from the Legacy Systems, and consolidation of operations. The Parties acknowledge and agree that this Schedule 8 is intended to generally describe the principal Implementation and Migration Services and that all the Implementation and Migration Services are not set forth in this Schedule. Any Services that are not described in this Schedule 8 or elsewhere in the Agreement that are an inherent part of the Services described in this Schedule or are reasonably required for the proper implementation of the Amdocs Systems or migration of Company s existing Subscribers from the Legacy Systems to the Amdocs Systems that are not set forth in the Agreement as the responsibility of Company or a Third Party shall be deemed to be included within the Scope of the Implementation and Migration Services to be provided by Amdocs without any Change Request, additional charge or cost in excess of the Implementation and Migration Services Fees otherwise payable by Vonage to Amdocs under the Agreement. Included in this Schedule are general descriptions of the following: Chapter 1 of this Schedule defines the scope of the implementation of the Amdocs Systems and migration of Company s existing Subscribers from the Legacy Systems to the Amdocs Systems. Chapter 2 of this Schedule defines the project approach which will be finalized and mutually agreed upon as a result of the Scoping effort, to include the following categories: 1. Amdocs Systems Implementation 2. Legacy Systems Migration 3. Timeline Construct Chapter 1. Scope & Definitions 1.1 Scope The Implementation and Migration Services involves the migration of Company s Subscribers from the Legacy Systems in a phased approach as described in Section 2.2. Relevant Company s databases will be migrated to the Amdocs Systems, which will be located, as of the beginning of User Acceptance Testing, in Amdocs data centers in Champaign, IL and/or Norcross, GA. All aspects related to the scope and business processes supported by the Amdocs Systems are discussed in Schedule Definitions The following definitions shall apply to this Schedule. CTL means the management process of ordering and implementing all Third Party hardware and software. -1-

195 IA means impact assessment. IA is reflection of the changes made to the code base that is documented and delivered to Company. Prior to the document being delivered, a walkthrough of the document is done with Company to ensure the Parties agree and understand the Changes being made to the Amdocs Systems. ITV means the independent testing validation team that is a pre production test team made up of Amdocs Personnel and whose task it is to certify all code prior to delivery to the production environments. BV means billing validation, whereby testers validate that the results of billing cycle runs meet the expected results of the cycle. PLAB means performance environment that is a scaled down version of the production environment, used for assessing the performance of Changes to the Amdocs Systems for New Releases or code changes when appropriate. PP Mapping means the process of mapping all Company price plans from the Legacy Systems to the price plans of the Amdocs Systems. SQA means software quality assurance or testing. RT Maintenance means maintenance performed in the reference tables used by the Amdocs Systems. UAT means user acceptance testing. UF means the universal format of the extracted data from the Legacy Systems used as the input file by Amdocs for the conversion process. Section of this Schedule describes this in more detail. Chapter 2: Implementation and Migration Services Approach 2.1. Amdocs Systems Implementation Amdocs will provide a hosted solution, the Amdocs Systems, which will support all Requirements (including, without limitation, the Specifications), on a consolidated product-based platform within a managed services program as described in Schedule 9 that meets the Company s current and future business needs. The Amdocs Systems implementation will also contain the interfaces, and all Customizations described in Schedule 2 or in an Order. The Amdocs Systems will be commercially available to Company for Subscriber activations and migrations on or before the date specified in Schedule 13 of the Agreement Legacy Systems Migration The Legacy Systems migration will provide for Vonage Subscriber conversions to be executed pursuant to Attachment 1 of this Schedule 8. The Parties acknowledge and agree that Attachment 1 will not be completed as of the Effective Date and that the Parties will develop and agree upon Attachment 1 following Company s Acceptance of the Specifications Timeline See Schedule 13 for the applicable timeline Acceptance Amdocs Systems Acceptance shall be determined as set forth in the Agreement. -2-

196 2.4. Standard Life Cycle Methodology Figure 1: Standard Life Cycle Methodology Amdocs has a standard life-cycle methodology for implementation and conversion based on experiences and best practices for large-scale, complex system integration and large-scale conversion efforts (see Figure 1). This lifecycle approach as presented to Company depicts stages where the appropriate work stream will engage. Amdocs presents this information with acknowledgement that production Releases and developing versions will require overlaps based on deliverables for specific Releases. Conversion work streams will also have overlap as to meet the conversion Releases. Amdocs performs readiness review at the beginning of each stage. All relevant criteria and quality gates must be met before the project can proceed to the next stage. Plan This stage includes a combined effort with all work streams to produce an integrated program plan and reduce overall risk in the project. This stage will be performed in conjunction with Company. Requirements Management Scoping integrates the work streams, thereby reducing the duplication of effort, in order to produce an integrated program scope. Requirements analysis includes collection and analysis of Company s submission of Change Requests. At the end of this phase, the scope should be closed from content (list of CRs) and budget perspective. -3-

197 Design This stage introduces the high-level (impact assessment) and detailed design of the agreed-upon changes to be made to the Amdocs Systems code and data model that will support the functionality of the Amdocs Systems as proposed. Also included in this stage are impact assessment walkthroughs on high-level design, screen layout, reports, and interfaces, as well as development readiness reviews. Other activities performed during the Design stage are: Definition and documentation of design testing activities for all testing levels (activities are documented in the Test Plan). Preparation of the infrastructure plan for setting up the development and testing environments, as well as preparation if the technical release notes for the version. Training to ensure that the required types of course offerings and re-usability of materials can be accomplished. Development The Development stage provides for the new version development, including incorporation of the Changes to all affected software units as was defined during the version design activities. The preparation for the testing stage is completed during the Development stage. Other activities performed during the Development stage are: Completion of the design for testing activities started during the Design stage and execution of unit testing. Conversion development, which includes system test, integration test, and shake out. Verification of functionality, solutions, and full coverage of Change Requests ( CRs ) and their requirement traceability along the test design. Testing The Testing stage incorporates all aspects of Amdocs Systems testing (and the support of UAT), which includes using the test cases, scenarios, and calendars created during the detailed test design process. These tests are aligned with a comprehensive traceability matrix and are mapped to requirements from the Scoping stage. Other activities performed during the Testing stage are: Creation of a detailed test strategy that includes strict entry and exit criteria before moving to production. Tracking and management of defects reported during the testing of Amdocs Systems applications until the applicable Nonconformities are closed. Nonconformities can be reported on the Amdocs Systems in production or during any testing level (subsystem, system, and so forth). Mock testing (occurs during the testing phase for conversion). Training (training that is conducted during the Testing stage measures the capabilities of executables used for training). Implementation The Implementation stage takes a program-oriented view of all deployment activities to provide a structured and consolidated deployment across the program. Quality assurance gates are introduced to ensure that process-aligning deployment activities are in line -4-

198 with our integrated teams and Company. Detailed implementation and launch plans are key to the success of the overall implementation. Post-Production The Post-Production stage provides an integrated framework for setting up the ongoing support (OGS) function with Company, including, but not limited to, defect handling, production testing, and ongoing maintenance. The following table summarizes key implementation activities and the anticipated leader of the respective area. This table only references key activities and is not a comprehensive roles and responsibilities schedule. The Roles and Responsibilities are set forth in Schedule 10. To the extent there is any conflict between the table set forth below and Schedule 10, Schedule 10 shall control. Phase Activity Company Amdocs Requirements Management Requirements confirmation Participant Lead Detailed Walk Through (DWT) Participant Lead High Level Estimation Lead Preparation Provide High Level Estimation to Vonage Support Lead Design High Level design Lead IA Preparation + Internal Reviews Lead IA Walk through (IAW) with Participant Lead Vonage Revised IA and Delivery Participant Lead Development Detailed Design Lead -5-

199 Phase Activity Company Amdocs Screen / Process Review and Tune-Up Participant Lead Programming Participant Lead Subsystem Test Lead Conversion Gap Analysis Lead Hardware & Infrastructure Lead PP Mapping Participant Lead Extract Lead Participant Mock Testing Participant Lead Implementation Lead Testing Amdocs Systems Test Visibility Lead UAT Lead Participate PLAB Visibility Lead Bill Validation Lead ITV Lead Usage Validation Lead Implementation Workforce Readiness Review Participant Lead PMO Participant Lead Business Readiness Review Participant Lead User Communications Lead Visibility Implementation Participant Lead Deployment Kick-offs Participant Lead -6-

200 Phase Activity Company Amdocs Post-Launch Production Support Visibility Lead Lesson Learned Lead Participate 2.5. Migration and Data Conversion Migration is a multidimensional process. It concerns not only the technical transition to the Amdocs Systems, but also the conversion of business data and corresponding changes to the existing business processes of Vonage. Although production migration is the last stage of the System Development Life Cycle for the Implementation and Migration Services, it requires planning and preparation from the very early stages of the project. There are three dimensions to the Amdocs Systems migration: 1) Process, 2) Data and 3) System. Each focuses on different issues. Throughout the migration life cycle, there are stages of which all migration dimension and issues should be considered and resolved. Amdocs will provide Implementation and Migration Services to address and resolve issues from all dimensions, including the planning stage, the testing stage, and the execution of the data conversion stage. Amdocs will prepare and execute a detailed plan for migration and conversion of relevant Company Data from the Legacy Systems to the Amdocs Systems (the Conversion Plan ). Migration control and monitoring tools are essential for successful completion of various migration activities during the project life cycle and productive migration. Amdocs will provide the necessary tools as part of the Implementation and Migration Services and to be used by both Parties to orchestrate smooth changeovers from the Legacy Systems to the Amdocs Systems Data Mapping As part of, or immediately following the IA Walkthrough, Amdocs and Company will perform data mapping analysis. The output of data mapping analysis is a complete data dictionary document prepared by Amdocs as part of the Implementation and Migration Services detailing the relationship between the data in the Legacy Systems and the Amdocs Systems Universal File Format The data conversion during the performance of the Implementation and Migration Services is based on the processing of Universal Format files ( UF files ). These UF files are used as an intermediate repository between the Legacy Systems and the Amdocs Systems. The UF files are used as an output of the conversion preparation (data extract) process and as an input to the conversion loading process. The Party responsible for data extraction as set forth in Schedule 4 will develop an extract process that will populate the UF file with data from the Legacy Systems as defined in the data mapping document. Amdocs will develop the conversion load process for processing data from the UF file and populating data directly or with the help of translation algorithms and or translation tables defined during data mapping into the Amdocs Systems. Amdocs and Company will agree on an acceptable level of quality of the UF file as part of the UF Workshop. -7-

201 Customer Conversion Testing Amdocs will support Company in executing customer conversion testing ( CCT ) for the Amdocs Systems, prior to the migrations of the Legacy Systems to the Amdocs Systems for commercial availability. The scope of CCT is to verify the information from the Legacy Systems produced from the data mapping and UF files are converted into the Amdocs System and meet Company s Requirements and expectations Migration and Conversion Timing Conversions shall be scheduled to minimize the System down time during the conversion. During the live conversion, all relevant call center and on-line activities for those Subscribers being converted shall be frozen until the finalization of the conversion to the Amdocs Systems. Company s care centers will be able to sell new products and/or services and create new Subscribers throughout the regular business day during conversions but account maintenance will not be able to be done on migrating Subscribers Train the Trainer Services Related to Amdocs Systems Operations Amdocs will provide Company with Train-the-Trainer training Services and will create and maintain training environments for Company. Amdocs will deliver the Train-the-Trainer Services as per the Project Plan defined in Schedule 13. The instructor-led training is comprised of three main phases: -8-