This quarterly report on Form 10-Q contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectations relating to earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements concerning new products or services; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," or "will," and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to them. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to: the impact of current and future regulation affecting the telecommunications industry, including a current proceeding in Connecticut in which several of our customers have made filings in support of a cost based transit rate; technological developments; the effects of competition; natural or

man-made disasters; the impact of current or future litigation; the ability to attract, develop and retain executives and other qualified employees; the ability to obtain and protect intellectual property rights; changes in general economic or market conditions; and other important factors included in our reports filed with the Securities and Exchange Commission, particularly in the "Risk Factors" section of our Annual Report on Form 10-K for the period ended December 31, 2008 and included elsewhere in this report. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We provide tandem interconnection services principally to competitive carriers, including wireless, wireline, cable and broadband telephony companies. Competitive carriers use tandem switches to interconnect and exchange local and long distance traffic between their networks without the need to establish direct switch-to-switch connections. Prior to the introduction of our service, the primary method for competitive carriers to exchange traffic indirectly was through the use of the incumbent local exchange carriers, or ILECs', tandem switches. The tandem switching services offered by ILECs consists of transit services, which are provided in connection with local calls, and access services, which are provided in connection with long distance calls. Under certain interpretations of the Telecommunications Act of 1996 and implementing regulations, ILECs are required to provide tandem transit services to competitive carriers. ILECs generally set per minute rates and other charges for tandem transit services according to rate schedules approved by state public utility commissions, although the methodology used to review these rate schedules varies from state to state. ILECs are also required to offer access services to competing telecommunications carriers under the Telecommunications Act of 1996 and implementing regulations. ILECs generally set per minute rates and other charges for access services according to mandated rate schedules set by the Federal Communications Commission, or FCC, for interstate calls and by state public utility commissions for intrastate calls. Our solution enables competitive carriers to exchange traffic between their networks without using an ILEC tandem for both local and long distance calls.

The proliferation of competitive carriers over the past decade and their capture of an increasing share of subscribers has shifted a greater amount of intercarrier traffic to ILEC tandem switches and amplified the complexity of carrier interconnections. This has resulted in additional traffic loading of ILEC tandems, lower service quality and substantial costs incurred by competitive carriers for interconnection. A loss of ILEC market share to competitive carriers has escalated competitive tensions and resulted in an increased demand for tandem switching.

We founded our company to solve these interconnection problems and better facilitate the exchange of traffic among competitive carriers and non-carriers. By utilizing our managed tandem solution, our customers benefit from a simplified interconnection network solution which reduces costs, increases network reliability, decreases competitive tension and adds network diversity and redundancy.

We have signed agreements with major competitive carriers and non-carriers and we operated in 109 markets as of March 31, 2009. During the first quarter of 2009, our network carried 19.7 billion minutes of traffic. As of March 31, 2009, our network was capable of connecting calls to an estimated 416 million telephone numbers assigned to carriers. Telephone numbers assigned to a carrier may not necessarily be assigned to, and in use by, an end user.

For the three months ended March 31, 2009, we increased revenue to $38.2 million, an increase of 45.8% compared to the three months ended March 31, 2008. The increase in revenue was primarily due to an increase of minutes of use to 19.7 billion minutes processed in the three months ended March 31, 2009 from 12.9 billion minutes processed in the three months ended March 31, 2008, an increase of 52.7%. Our income from operations for the three months ended March 31, 2009 was $13.9 million compared to $6.2 million for the three month ended March 31, 2008. Net income for the three month ended March 31, 2009, was approximately $9.0 million compared to net income of $4.0 million for the three months ended March 31, 2008.

Revenue

We generate revenue from the sale of our neutral tandem interconnection services. Revenue is recorded each month based upon minutes of traffic switched by our network by each customer, which we refer to as minutes of use. The rates charged per minute are determined by contract between us and our customers. The following table sets forth our revenue, minutes of use and the average rate we charged per minute for the three months ended March 31, 2009 and 2008.

                                                     Three Months Ended
                                                         March 31,
                                                      2009         2008
             Revenue (in thousands)                $    38,249   $ 26,226
             Minutes of use billed (in millions)        19,669     12,859
             Average fee per billed minute         $    0.0019   $ 0.0020

Minutes of use increase as we increase our number of customers, enter new markets and increase the penetration of existing markets, either with new customers or with existing customers. The minutes of use decrease due to direct connection between existing customers, consolidation between customers, a customer using a different interconnection provider or a customer experiences a decrease in the volume of traffic it carries.

The average fee per minute varies depending on market forces and type of service, such as switched access or local transit. The market rate in each market is based upon competitive conditions along with the switched access or local transit rates offered by the ILECs. Depending on the markets we enter, we may enter into contracts with our customers with either a higher or lower fee per minute than our current average. For example, although we regard the 9 additional markets we added during the first three months of 2009 and the 36 additional markets added in 2008 as financially attractive, the rates we charge in those markets for local transit services are generally lower than the rates we charge in the markets we initially opened in 2004. We expect the average fee per billed minute to continue to decrease as we add new markets with lower fees per minute than our current average. Although we expect that the total number of minutes switched by our network will increase as we enter new markets, our revenues would decrease if our average fee per minute were to continue to decline and we were unable to increase the total number of minutes switched by our network.

Our service solution incorporates other components beyond switching. In addition to switching, we provision trunk circuits between our customers' switches and our network locations at our own expense and at no direct cost to our customers. We also provide quality of service monitoring, call records and traffic reporting and other services to our customers as part of our service solution. Our per minute fees are intended to incorporate all of these services.

While generally not seasonal in nature, our revenues are affected by certain events such as holidays, the unpredictable timing of direct connects between our customers, the loss of a customer and installation and implementation delays. These factors can cause our revenue to both increase or decrease unexpectedly.

Operating Expense

Operating expenses include network and facilities expense, operations expenses, sales and marketing expenses, general and administrative expenses, depreciation and amortization and the gain on the disposal of fixed assets. Personnel-related costs are the most significant component as we grew to 138 employees at March 31, 2009 from 130 employees at March 31, 2008.

Network and Facilities Expense. Our network and facilities expense include transport and signaling network costs, facility rents and utilities, together with other costs that directly support the switch locations. We do not defer any costs associated with the start-up of new switch locations and we do not capitalize any costs. The start-up of an additional switch location can take between three months to six months. During this time we typically incur facility rent, utilities, payroll and related benefit costs along with initial non-recurring circuit installation costs. Revenues generally follow sometime after the sixth month.

Network transport costs typically occur on a repeating monthly basis, which we refer to as recurring costs, or on a one-time basis, which we refer to as non-recurring costs. Recurring transport costs primarily include monthly usage charges from telecommunication carriers and are related to the circuits utilized by us to interconnect our customers. As our traffic increases, we must utilize additional circuits. Non-recurring transport costs primarily include the initial installation of such circuits. Facility rents include the leases on our switch facilities, which expire through May 2018. Additionally, we pay the cost of all the utilities for all of our switch locations.

The largest component of our other costs relates to charges we pay to utilize the ILEC services. We incur some monthly charges from the ILECs as we diversify our network and provide alternative routes to complete our customers' traffic. In some cases, we may not have sufficient capacity of network transport lines installed in our own network to handle the volume of traffic destined for a particular customer. In this case, we will incur these charges, generally temporarily, in order to maintain a high quality of service. We attempt to minimize these charges by managing our network, recognizing when additional capacity is required and working with our customers to augment the transport capacity required between our network and theirs.

Operations Expenses. Operations expenses include payroll and benefits for both our switch location personnel as well as individuals located at our corporate office who are directly responsible for maintaining and expanding our switch network. Other primary components of operations expenses include switch repair and maintenance, property taxes, property insurance and supplies.

Sales and Marketing Expense. Sales and marketing expenses primarily include personnel costs, sales bonuses, marketing programs and other costs related to travel and customer meetings.

General and Administrative Expense. General and administrative expenses consist primarily of compensation and related costs for personnel and facilities associated with our executive, finance, human resource and legal departments and fees for professional services. Professional services principally consist of outside legal, audit and other accounting costs. The other accounting costs relate to work surrounding compliance with the Sarbanes-Oxley Act.

Depreciation and Amortization Expense. Depreciation and amortization expense is applied using the straight-line method over the estimated useful lives of the assets after they are placed in service, which are five years for switch equipment and test equipment, three years for computer equipment, computer software and furniture and fixtures. Leasehold improvements are amortized on a straight-line basis over an estimated useful life of five years or the life of the respective leases, whichever is shorter.

Gain on disposal of fixed assets. We have disposed of switch equipment in connection with converting to new technology and computer equipment to replace old or damaged units. When there is a carrying value of these assets, we record the write-off of these amounts to loss on disposal. In some cases, this equipment is sold to a third party. When the proceeds from the sale of equipment identified for disposal exceeds the asset's carrying value, we record a gain on disposal.

Interest Income (Expense). Interest expense consists of interest paid each month related to our outstanding equipment loans associated with our security agreement with an affiliate of Western Technology Investment. We record accrued interest each month associated with a final payment for each loan equal to 9.6% of the original principal loan amount. Interest expense also includes an amount related to the amortization of the value of debt discount associated with warrants issued to an affiliate of Western Technology Investment in accordance with the terms of our agreement. Interest income is earned primarily on our cash, cash equivalents or non-current investments.

Other(Income) Expense. Other (income) expense includes adjustments to the fair value of the ARS, adjustments to the fair value of the ARS Rights and expenses incurred in connection with the secondary offering by certain of our shareholders completed in the first quarter of 2008.

Income Taxes. Income tax provision includes U.S. federal, state, and local income taxes and is based on pre-tax income. The interim period provision for income taxes is based upon our estimated annual effective income tax rate. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which earnings will be generated, the impact of state and local income taxes and our ability to use tax credits and net operating loss carryforwards.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, which we filed with the Securities and Exchange Commission on March 13, 2009, includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenues or expenses during the first three months of 2009.

Results of Operations

The following table sets forth our results of operations for the three months
ended March 31, 2009 and 2008:



                                                                   Three Months Ended
                                                                        March 31,
(Dollars in thousands, except per share data)                       2009          2008
Revenue                                                          $   38,249     $ 26,226
Operating Expense:
Network and facilities expense (excluding depreciation and
amortization)                                                        11,462        9,110
Operations                                                            4,955        4,072
Sales and marketing                                                     524          544
General and administrative                                            3,389        3,018
Depreciation and amortization                                         4,041        3,263
Gain on disposal of fixed assets                                        (25 )         -


Total operating expense                                              24,346       20,007


Income from operations                                               13,903        6,219

Other (income) expense
Interest expense, including debt discount of $22 and $28,
respectively                                                            133          299
Interest income                                                        (291 )       (898 )
Other (income) expense                                                 (242 )        550


Total other (income) expense                                           (400 )        (49 )


Income before income taxes                                           14,303        6,268
Provision for income taxes                                            5,259        2,245


Net income                                                       $    9,044     $  4,023

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Revenue. Revenue increased to $38.2 million in the three months ended March 31, 2009 from $26.2 million in the three months ended March 31, 2008, an increase of 45.8%. The increase in revenue was primarily due to an increase of minutes of use to 19.7 billion minutes processed in the three months ended March 31, 2009 from 12.9 billion minutes processed in the three months ended March 31, 2008, an increase of 52.7%. The increase in the number of minutes processed by the Company's network was a result of further penetration of current markets and customers, as well as the entry into 38 new markets since March 31, 2008.

Operating Expenses. Operating expenses for the three months ended March 31, 2009 of $24.3 million increased $4.3 million, or 21.5%, from $20.0 million for the three months ended March 31, 2008. The components making up operating expenses are discussed further below.

Network and Facilities Expenses. Network and facilities expenses increased to $11.5 million in the three months ended March 31, 2009, or 30.1% of revenue, from $9.1 million in the three months ended March 31, 2008, or 34.7% of revenue. Network and facilities expenses increased due to an increase in the number of switch locations we connect, increasing by 510 switch locations to 1,448 switch locations at March 31, 2009 from 938 switch locations at March 31, 2008. In addition, our switch related costs, primarily made up of facility rent and utilities costs, increased as our number of locations at the end of March 31, 2009 grew to 32 compared to 24 locations at March 31, 2008.

Operations Expenses. Operations expenses increased to $5.0 million in the three months ended March 31, 2009, or 13.1% of revenue, from $4.1 million in the three months ended March 31, 2008, or 15.6% of revenue. The increase in our operations expenses resulted from an increase in payroll and benefits, due to an increase in the number of switch location personnel, as well as individuals located at our corporate office who are directly responsible for maintaining and expanding our switch network.

Sales and Marketing Expense. Sales and marketing expense remained the same at $0.5 million in the three months ended March 31, 2009, or 1.3% of revenue, compared to $0.5 million in the three months ended March 31, 2008, or 1.9% of revenue. We have successfully increased revenues while maintaining the same approximate size of the sales and marketing force at March 31, 2009.

General and Administrative Expense. General and administrative expense increased to $3.4 million in the three months ended March 31, 2009, or 8.9% of revenue, compared with $3.0 million in the three months ended March 31, 2008, or 11.5% of revenue. The increase in our general and administrative expense is primarily due to an increase of $0.9 million in salary and wages offset by a decrease of $0.5 million in professional fees.

Depreciation and Amortization Expense. Depreciation and amortization expense increased to $4.0 million in the three months ended March 31, 2009, or 10.5% of revenue, compared to $3.3 million in the three months ended March 31, 2008, or 12.6% of revenue. The increase in our depreciation and amortization expense resulted from capital expenditures primarily related to the expansion of switch capacity in existing markets and the installation of switch capacity in new markets. Accelerated depreciation of $0.8 million and $0.5 million was recorded in the three months ended March 31, 2009 and 2008, respectively, related to the conversion of new switch equipment in our Illinois, Minnesota and Indiana locations in 2009 and our New York location in 2008.

Gain on Disposal of Fixed Assets. In the three months ended March 31, 2009, we sold equipment in which we received less than $0.1 million. The equipment did not have any carrying value at the time of sale. During the three months ended March 31, 2008, we did not have any gain or loss on disposal of equipment.

Other (Income) Expense. Other income of $0.4 million for the three months ended March 31, 2009 increased $0.3 million compared to other income of $0.1 million for the three months ended March 31, 2008. Interest expense decreased due to lower average outstanding borrowing amounts while investment income decreased due to lower average investment rates. Other income of $0.2 million in the first quarter of 2009 is due our net gain associated with the fair value of the ARS and ARS Rights (see note 7-Investments and Fair Value Measurements). Other expense in the first quarter of 2008 includes costs to the Company of completing a secondary offering by certain selling stockholders in April 2008.

Provision for Income Taxes. Provision for income taxes of $5.3 million for the three months ended March 31, 2009 increased by $3.1 million compared to $2.2 million for the three months ended March 31, 2008. The effective tax rate for the three months ended March 31, 2009 and 2008 was 37.1% and 34.9%, respectively. The effective tax rate for 2009 increased primarily due to the Company's decrease in municipal interest income which is non-taxable.

Liquidity and Capital Resources



                                                       Three Months Ended
                                                  March 31,       December 31,
                                                     2009             2008
       Working capital                            $  135,340     $      120,431
       Cash and cash equivalents                     128,636            110,414
       Long-term investments                          18,486             18,244
       Restricted cash                                   440                440

                                                       Three Months Ended
                                                  March 31,        March 31,
                                                     2009             2008
       Net cash flows from operating activities   $   16,880     $        7,584
       Net cash flows from investing activities         (973 )          (29,320 )
       Net cash flows from financing activities        2,315                348

At December 31, 2008, we had $110.4 million in cash and cash equivalents, $18.2 million in long term investments and $0.4 million in restricted cash. In comparison, at March 31, 2009, we had $128.6 million in cash and cash equivalents, $18.5 million in long term investments and $0.4 million in restricted cash. Cash and cash equivalents consist of highly liquid money market funds and long-term investments consist of auction rate securities and ARS Rights. The restricted cash balance amounts are pledged as collateral for certain commercial letters of credit.

Cash flows from operating activities

Our largest source of operating cash flows is payments from customers which are generally received between 35 to 45 days following the end of the billing month. Our primary uses of cash from operating activities are for personnel related expenditures, facility and switch maintenance costs.

Cash provided by operations for the period ended March 31, 2009 of $16.9 million was attributable to net income of $9.0 million plus non-cash charges of $5.2 million consisting primarily of depreciation and amortization, stock-based compensation expense and changes in fair value of ARS Rights partially offset by a non-cash tax benefit of $2.8 million and changes in fair value of ARS of $0.4 million. Receivables, other current assets and other non-current assets remained even with year-end 2008. Accounts payable and accrued liabilities increased by $5.9 million primarily due to the increase in tax payables and payroll related accruals partially offset by the reduction of amounts reserved for circuit costs.

In the first quarter of 2008 we generated positive cash from operations of $7.6 million. We generated net income for the period of $4.0 million and had non-cash charges of $3.1 million consisting primarily of depreciation and amortization and stock-based compensation expense. Receivables decreased by $0.1 million and were offset by an increase in other current and non-current assets of $0.1 million. Accounts payable increased by $0.8 million and accrued liabilities decreased by $0.3 million due to payments made during the period.

Recent economic conditions have made the availability of credit for working capital purposes more difficult to obtain. If these conditions continue, it may impact our customers' ability to pay their obligations to us as they become due and consequently impact our cash flows from operating activities. While we do not believe we have been materially impacted by these conditions to date, the magnitude of such impact, if any, is not known.

We believe that cash flow from operating activities, in addition to cash and cash equivalents currently on-hand, will be sufficient to fund our operations, including our anticipated growth plans, for the foreseeable future and in any . . .