Many independent industry analysts expect the market for VoIP-based communication services in the United States to expand dramatically from its current size. Several analysts have estimated compound annual growth rates for the U.S. or North American residential VoIP markets in the range of 61% to 99% over the period from 2004 to 2009.

Independent industry analysts also expect the consumer VoIP market to experience significant growth abroad. For example, Gartner forecasts that the worldwide VoIP market will grow from an estimated 9.4 million subscribers at the end of 2004 to 74.1 million by the end of 2009, representing a 51.0% compound annual growth rate. Europe and Asia in particular represent large and growing markets. Gartner estimates that there were 1.1 million VoIP subscribers in Europe at the end of 2004 and projects that there will be 12.6 million at the end of 2009, representing a 62.2% compound annual growth rate. Gartner estimates that there were 7.1 million VoIP subscribers in Asia at the end of 2004 and projects that there will be 24.1 million by the end of 2009, representing a 27.8% compound annual growth rate.

While projecting dramatic growth for this market, industry analysts have also noted a number of challenges to achieving this strong growth. Until recently, VoIP providers have tended to focus on selling their services to early adopters, people who generally seek out new types of technologies and services. As the early adopter market becomes saturated, VoIP providers must attract mainstream consumers to their services if they are going to continue to grow. Mainstream consumers tend to be more resistant to new technology or unfamiliar services. Fundamental differences between VoIP and traditional telephone networks, such as network unavailability in the event of a power outage and the lack of a traditional E-911 service, may deter mainstream consumers from adopting VoIP in their homes.

The Company also offers other plans, including Residential Fax Service, Business Fax and SoftPhone. As of September 30, 2005, approximately 88% of the Company’s U.S. subscriber lines were for residential service, and approximately 67% of those residential subscriber lines were the premium unlimited plan. The Company offers similar plans in Canada and the United Kingdom.

The Company also offers a number of premium services for additional costs. A customer can have additional inbound telephone numbers that ring on a primary subscriber line, each for an additional fee. A customer can have toll free numbers that ring on an existing subscriber line. A SoftPhone is a software application that can be downloaded and installed on computers, laptops and WiFi-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.

The Company offers 250 minutes of outgoing fax service within the United States, Puerto Rico and Canada on a dedicated fax line for $9.99 per month, plus unlimited incoming faxes, with customers charged a per minute fee of 3.9 cents thereafter. The Company offers 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.

The Company offers its customers a range of equipment alternatives for their Vonage-enabled devices based upon its relationships with leading technology companies.

Customer equipment and shipping revenue increased by $4.0 million, or 148%, from $2.7 million for the nine months ended September 30, 2004 to $6.7 million for the nine moonths ended September 30, 2005.

Direct cost of goods sold increased by $18.3 million, or 151%, from $12.1 million for the nine months ended September 30, 2004 to $30.5 million for the nine moonths ended September 30, 2005.

Interest income and other increased by $2.7 million from $581 thousand for the nine months ended September 30, 2004 to $3.3 million for the nine moonths ended September 30, 2005.

Net loss increased by $146.9 million, or 344%, to $189.6 million for the nine months ended September 30, 2005 from $42.7 million for the nine months ended September 30, 2004.