(FORTUNE Small Business) – If Jeffrey Citron feels tarnished by his recent legal problems--he did, after all, pay a staggering $22.5 million settlement to the SEC just last year--he isn't letting on. He's brashly holding forth, seated at a makeshift conference table, which is covered by a cheap white tablecloth. The topic: his latest brain-storm-turned-business called Vonage. The 33-year-old Citron, who never went to college, is so wound up that he jumps to the next idea before he finishes the last one. "Right?" he'll ask repeatedly, trying to confirm that his point is understood before he nails the next one. He's so energetic he'll simply stand up mid-sentence, unable to stay still. "My involvement in any company is very emotional," he says, hours before he flies in his private jet to congressional meetings about potential industry regulation. "I commit every bit of energy and resources I can afford."

Surely he has ample reserves of both. Since 2002 he's invested more than $30 million of his own money--collected from two earlier ventures that were acquired--to start Vonage (pronounced VOH-nij), an upstart in the newly crowded field of Internet-based phone companies. This service allows residential and small-business users to make phone calls that are routed primarily over the Internet at cheaper rates than conventional phone service.

Since launching its product in January 2003, the privately held company, based in Edison, N.J., has attracted more customers than all the other industry players combined--100,000 of them, of which 20% are businesses with ten phone lines or fewer. But Vonage's domination may be short-lived: AT&T is coming this spring, behind such giants as Comcast and Time Warner Cable (owned by the parent of FSB's publisher), which have joined the fray in the past nine months. Shouldn't this entrepreneur seem more worried? "Citron always takes a very aggressive approach to the market," notes Harry Weller, a partner at New Enterprise Associates, a Menlo Park, Calif., venture capital firm that led a $35 million round of investment in Vonage in November. (A $40 million round led by Meritech and 3i was announced in February.)

Weller says his firm did "quite a bit of work," spending nine months conducting its due diligence before funding Vonage. Citron's last venture, Datek Online Holdings, launched in 1996, grew to be the fourth-largest online brokerage in just three years--which is about as long as Citron stayed in charge. In 1997 the Securities and Exchange Commission began investigating activity at Datek's day-trading division. Citron, along with others, was eventually cited for breaking NASD rules by making trades for institutions on a system designed for individual investors and then trying to cover those trades up.

What began with a $20,000 fine and a 20-day suspension for stock manipulation resulted in Citron stepping down in 1999. Recalls Mort David, then a Datek director: "Jeffrey finally understood that for everyone to realize the company's value, including him, he had to step aside." Citron sold his stake for an estimated $300 million the following year. Then, in January 2003, he agreed to pay a $22.5 million settlement to the SEC without admitting wrongdoing. He was also permanently barred from working with any brokers or dealers. By then, rival Ameritrade had plunked down $1.3 billion for Datek.

Citron insists, angrily, that the episode hasn't left any scars. "It hasn't affected me at all," he grumbles. Notes David: "It's hard to be regretful if you're 28 and have hundreds of millions in cash." Perhaps, but Citron acts like an entrepreneur with something to prove. He boasts of pulling all-nighters, shrugs off suggestions that his legal problems may not make him the ideal CEO, and swats away any mention of his well-heeled rivals. "Even if I capture a small percentage of the 25 million broadband users, this is a billion-dollar company" in annual revenue, he says. And if he doesn't? "Vonage is positioned really well," he says. "The pie is big enough for everyone. And we have great margins," he adds, standing up for emphasis.

Given Citron's résumé, it would be easy to mistake him for a tech geek. In 1992 he founded the Island ECN (electronic communication network), a computerized trading system for broker-dealers, which Instinet Group acquired in June 2002 for about $500 million. Citron, who left ECN in 1999, is less interested in technology breakthroughs than he is in retooling them for the masses. For him, it matters less that his three startups have been Internet-oriented than that their business models share other traits--a steady revenue stream, either from brokers or consumers, and the potential to grow to a mammoth scale. "I like technologies that can be highly disruptive to a controlled industry, shifting the market and bringing its costs down," he says.

It certainly wasn't apparent that Vonage's first incarnation--the name intends to invoke the age of Voice Over the Net--possessed such potential when Citron signed on. In 2000, not long after exiting Datek, he got a call from Jeffrey Pulver, co-founder of a company called Min-X.com in Melville, N.Y. Pulver, then 37, asked Citron to invest in an electronic trading network that sold telecom minutes for phone companies. Citron was intrigued because he was frustrated with phone services' high costs. He invested and soon signed on as an executive--he couldn't trade securities, but he could trade minutes.

Citron believed that Min-X.com had the potential to make many millions of dollars in annual revenues, but he wanted to build a multibillion-dollar business. That's why he suggested using the same system to offer Internet phone service to consumers. Citron rechristened the company Vonage in January 2001, and took over as CEO. "Jeffrey proposed we jump ahead and give the technology directly to the consumer," says Louis Holder, Vonage's head of product development. Citron "didn't care that no one had successfully deployed VOIP [Voice Over Internet Protocol] for real use."

VOIP technology routes phone calls primarily over the Internet rather than exclusively over phone lines. A flat monthly fee covers unlimited national calls through a little box that customers hook up to their phone and into their broadband modems. Since the mid-1990s equipment-laden hobbyists have experimented with iterations of this technology, but it usually involved talking directly into a computer and communicating only with users of the same system. Citron made the technology accessible, turning a regular phone into an Internet appliance about as complicated as an answering machine. And his phone service is cheaper because he avoids traditional phone companies' expensive infrastructure and overhead and he circumvents portions of Baby Bells' and rural phone companies' pricey access fees.

Citron's drive to make the technology appeal to Laymen has been especially apparent in Vonage's marketing. "VOIP was a bad word in the industry; it meant crappy technology. Outside the industry people don't care about acronyms," Citron says. "We called it 'broadband phone.'" Vonage's appeal was just as simple. "Price is key!" Citron shouts. In an entry-level plan, any user pays just $17 (including taxes) for 500 minutes of calls around the U.S. and to Canada. The list of extras includes such features as the ability to receive voicemail as an attachment to e-mail. And the company targets small businesses by offering them such options as the ability to create additional "virtual" phone numbers in other area codes. That provides convenience for customers while creating the impression that the Vonage user has branch offices. (For details on cost savings, see "Free Speech?" on the next page.)

Consumers seem to be picking up Citron's message. In the year since launching its VOIP service, Vonage has become a $36-million-a-year business, growing 50% a quarter for the past three quarters. Citron expects the company to show a net profit in the second half of this year. To solidify Vonage's roughly 65% market share, Citron has penned deals with retailers such as Amazon and Best Buy. He has also signed partnerships with five cable companies and two Internet service providers so that Vonage can bundle its service with their broadband or Internet access. Such arrangements give Vonage access to a raft of cheaply acquired customers, while its partners can sell Vonage's service under their names. But Citron's success has also attracted competitors. "When AT&T said it was going to release a Vonage-like service, nothing made me happier," boasts Citron. "It acknowledges there's no other way to do what we do." Maybe so, but the arrival of a $34.5 billion competitor may yet change Citron's mood.

Citron likes to wear his "first-mover advantage" label as if it were just coming into fashion. But plenty of companies--do Webvan, eToys, and Netscape ring any bells?--have proven how handily an innovator can get squashed by latecomers. Where is Vonage vulnerable? One weak spot could be service quality. "Vonage has to buy capacity from other telecom and broadband companies," which could cause customers to experience a delay while talking if suppliers don't prioritize Vonage's business, according to Muayyad Al-Chalabi, an Internet telephony consultant at RHK, a telecom research firm in San Francisco.

Vonage's competitors, by contrast, own more of their own infrastructure. "Because Vonage's calls go on the public Internet, they can't fully guarantee the quality of service," claims Keith Cocozza, a spokesman for Time Warner Cable. Furthermore, companies including AT&T and Time Warner start with huge bases of potential customers and can position themselves as the convenient choice--bundling cable, broadband, and VOIP service on one bill. "Consumers," says Cocozza, "love the all-inclusive flat rate and the single point of contact." Another disadvantage for Vonage: It doesn't offer phone numbers in all area codes.

Citron rejects each looming challenge as if he's rushing to cross items off a grocery list. Vonage's quality is consistent, he argues. Plus its options are more advanced and its customer service more personal than at a larger company. Cable operators may be able to bundle services, he notes, but because they are regional they can't offer such Vonage perks as the ability to transfer a number nationwide and "virtual" numbers in far-flung area codes. And even though AT&T plans to target both business and home customers, Citron contends that it will focus on large-scale enterprises, leaving him the homes and small businesses. "There will be a subset of people who don't want to deal with a huge company like AT&T," echoes Weller, the venture capitalist.

If Citron manages to co-exist with his competitors, will impending FCC regulation be the real enemy? Now Vonage is regulated as an Internet company and is subject to the taxes and regulations phone companies face only for the portion of its business that uses telecom infrastructure. "Congress recognizes how dangerous it could be if regulation pushes the industry overseas, losing jobs and tax dollars and minimizing government access to phone records for homeland security," says Citron. Maybe so, but the industry will probably be regulated to some degree by 2005, predicts Aryeh Bourkoff, an analyst at UBS, voicing a commonly held industry sentiment.

By then, though, Citron admits that he could very well have taken Vonage public or sold it off. Whatever happens, he's not going to sit still. He can't. "Jeffrey has always been very, very aggressive, and in this company there's some level of redemption involved," says Weller. "He wants to build an honorable business."