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; 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 consist 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 services enable 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 after the passage of the Telecommunications Act of 1996 and their capture of an increasing share of subscribers shifted a greater amount of intercarrier traffic to ILEC tandem switches and amplified the complexity of carrier interconnections. This 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 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 128 markets as of September 30, 2009.

For the three months ended September 30, 2009, we increased revenue to $44.7 million, an increase of 43.5% compared to the three months ended September 30, 2008. The increase in revenue was primarily due to an increase of minutes of use to 23.0 billion minutes processed in the three months ended September 30, 2009 from 15.9 billion minutes processed in the three months ended September 30, 2008, an increase of 44.7%. Our income from operations for the three months ended September 30, 2009 was $17.3 million compared to $8.8 million for the three month ended September 30, 2008. Net income for the three months ended September 30, 2009, was approximately $11.1 million compared to net income of $6.2 million for the three months ended September 30, 2008.

For the nine months ended September 30, 2009, we increased revenue to $124.2 million, an increase of 44.5% compared to the nine months ended September 30, 2008. The increase in revenue was primarily due to an increase of minutes of use to 64.0 billion minutes processed in the nine months ended September 30, 2009 from 42.9 billion minutes processed in the nine months ended September 30, 2008, an increase of 49.0%. Our income from operations for the nine months ended September 30, 2009 was $47.8 million compared to $23.4 million for the nine months ended September 30, 2008. Net income for the nine months ended September 30, 2009, was approximately $30.8 million compared to net income of $15.8 million for the nine months ended September 30, 2008.

Revenue

We generate revenue from the sale of our managed 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 and nine months ended September 30, 2009 and 2008.

                                            Three Months Ended       Nine Months Ended
                                              September 30,            September 30,
                                             2009         2008        2009        2008
    Revenue (in thousands)                $    44,692   $ 31,154   $  124,176   $ 85,958
    Minutes of Use Billed (in millions)        22,953     15,855       63,961     42,936
    Average fee per billed minute         $    0.0019   $ 0.0020   $   0.0019   $ 0.0020

Minutes of use increase as we increase our number of customers, enter new markets, increase the penetration of existing markets, either with new customers or with existing customers and increase our service offerings. 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 28 additional markets we added during the first nine 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 and as a result of the competitive environment in our marketplace.

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 142 employees at September 30, 2009 from 134 employees at September 30, 2008.

Network and Facilities Expense. Our network and facilities expense includes 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 August 2019. 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. Interest income is earned primarily on our cash, cash equivalents and our investment in ARS.

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 nine months of 2009.

Results of Operations

The following table sets forth our results of operations for the three months
and nine months ended September 30, 2009 and 2008:



                                                  Three Months Ended             Nine Months Ended
                                                    September 30,                  September 30,
(Dollars in thousands)                           2009            2008           2009            2008
Revenue                                        $  44,692       $ 31,154       $ 124,176       $ 85,958
Operating expense:
Network and facilities expense (excluding
depreciation and amortization)                    13,093         11,215          36,987         29,711
Operations                                         4,991          4,288          14,795         12,485
Sales and marketing                                  467            466           1,465          1,461
General and administrative                         5,375          2,801          12,468          9,013
Depreciation and amortization                      3,506          3,561          10,746          9,647
Impairment of fixed assets                            -              -               -             195
Gain on disposal of fixed assets                     (28 )           -              (53 )           -

Total operating expense                           27,404         22,311          76,408         62,512

Income from operations                            17,288          8,823          47,768         23,446

Other (income) expense:
Interest expense, including debt discount
of $8, $22, $52 and $73, respectively                 49            208             276            757
Interest income                                     (159 )         (870 )          (707 )       (2,567 )
Other (income) expense                               (65 )           -             (306 )          550

Total other (income) expense                        (175 )         (662 )          (737 )       (1,260 )

Income before income taxes                        17,463          9,485          48,505         24,706
Provision for income taxes                         6,377          3,321          17,701          8,875

Net income                                     $  11,086       $  6,164       $  30,804       $ 15,831

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Revenue. Revenue increased to $44.7 million in the three months ended September 30, 2009 from $31.2 million in the three months ended September 30, 2008, an increase of 43.5%. The increase in revenue was primarily due to an increase of minutes of use to 23.0 billion minutes processed in the three months ended September 30, 2009 from 15.9 billion minutes processed in the three months ended September 30, 2008, an increase of 44.7%. 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 37 new markets since September 30, 2008.

Operating Expenses. Operating expenses for the three months ended September 30, 2009 of $27.4 million increased $5.1 million, or 22.8%, from $22.3 million for the three months ended September 30, 2008. The components making up operating expenses are discussed further below.

Network and Facilities Expenses. Network and facilities expenses increased to $13.1 million in the three months ended September 30, 2009, or 29.3% of revenue, from $11.2 million in the three months ended September 30, 2008, or 36.0% of revenue. Network and facilities expenses increased due to an increase in the number of switch locations we connect, increasing by 900 switch locations to 2,138 switch locations at September 30, 2009 from 1,238 switch locations at September 30, 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 September 30, 2009 grew to 33 compared to 30 locations at September 30, 2008.

Operations Expenses. Operations expenses increased to $5.0 million in the three months ended September 30, 2009, or 11.2% of revenue, from $4.3 million in the three months ended September 30, 2008, or 13.8% 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 September 30, 2009, or 1.0% of revenue, compared to $0.5 million in the three months ended September 30, 2008, or 1.5% of revenue. We have successfully increased revenues while maintaining the same approximate size of the sales and marketing force at September 30, 2009.

General and Administrative Expense.General and administrative expense increased to $5.4 million in the three months ended September 30, 2009, or 12.0% of revenue, compared with $2.8 million in the three months ended September 30, 2008, or 9.0% of revenue. The increase in our general and administrative expense is primarily due to an increase of $0.2 million in salaries, $0.5 million in non-cash compensation and $1.9 million in professional fees.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased to $3.5 million in the three months ended September 30, 2009, or 7.8% of revenue, compared to $3.6 million in the three months ended September 30, 2008, or 11.4% of revenue.

Gain on Disposal of Fixed Assets. In the three months ended September 30, 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 September 30, 2008, we did not have any gain or loss on disposal of equipment.

Other (Income) Expense. Other income of $0.2 million for the three months ended September 30, 2009 decreased $0.5 million compared to other income of $0.7 million for the three months ended September 30, 2008. Interest expense decreased due to lower average outstanding borrowing amounts while investment income decreased due to lower average investment rates.

Provision for Income Taxes. Provision for income taxes of $6.4 million for the three months ended September 30, 2009 increased by $3.1 million compared to $3.3 million for the three months ended September 30, 2008. The effective tax rate for the three months ended September 30, 2009 and 2008 was 36.5% and 35.0%, respectively.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Revenue. Revenue was $124.2 million for the nine months ended September 30, 2009, an increase of $38.2 million, or 44.5%, from $86.0 million for the nine months ended September 30, 2008. The increase in revenue was primarily due to an increase of minutes of use to 64.0 billion minutes processed in the nine months ended September 30, 2009 from 42.9 billion minutes processed in the nine months ended September 30, 2008, an increase of 49.0%.

Operating Expenses. Operating expenses were $76.4 million for the nine months ended September 30, 2009, an increase of $13.9 million from $62.5 million for the nine months ended September 30, 2008, or 61.5% and 72.7% of revenue, respectively. The components making up operating expenses are discussed further below.

Network and Facilities Expenses. Network and facilities expenses were $37.0 million for the nine months ended September 30, 2009, or 29.8% of revenue, an increase from $29.7 million for the nine months ended September 30, 2008, or 34.6% of revenue. Network and facilities expenses increased due to an increase in the number of switch locations we connect, increasing by 900 switch locations to 2,138 switch locations at September 30, 2009 from 1,238 switch locations at September 30, 2008. In addition, our switch related costs, primarily made up of facility rent and utilities costs, increased as our number of switch locations at the end of September 30, 2009 grew to 33 compared to 30 switch locations at September 30, 2008.

Operations Expenses. Operations expenses were $14.8 million for the nine months ended September 30, 2009, or 11.9% of revenue, an increase of $2.3 million compared to $12.5 million for the nine months ended September 30, 2008, or 14.5% of revenue. The increase in our operations expenses is primarily due to an increase of $1.3 million in payroll and benefits, due to an increase in the number of switch location personnel, along with an increase of $1.0 million due to higher switch repair, maintenance and insurance expenses.

Sales and Marketing Expense. Sales and marketing expense was $1.5 million for the nine months ended September 30, 2009, or 1.2% of revenue, is unchanged from $1.5 million for the nine months ended September 30, 2008, or 1.7% of revenue. We have successfully increased revenues while maintaining the same approximate size of the sales and marketing force.

General and Administrative Expense. General and administrative expense increased to $12.5 million in the nine months ended September 30, 2009, or 10.0% of revenue, from $9.0 million for the nine months ended September 30, 2008, or 10.5% of revenue. The increase in our general and administrative expense is primarily due to an increase of $0.4 million in salaries, $1.4 million in non-cash compensation and an increase of $1.5 million in professional fees.

Depreciation and Amortization Expense. Depreciation and amortization expense increased to $10.7 million in the nine months ended September 30, 2009, or 8.7% of revenue, compared to $9.6 million in the nine months ended September 30, 2008, or 11.2% of

revenue. The increase in our depreciation and amortization expense resulted from capital expenditures 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 $1.0 million was recorded in the nine months ended September 30, 2009 and 2008, respectively, which was related to our conversion to new switch equipment in our Illinois, Indiana and Minnesota locations in 2009 and our New York, Michigan and Ohio locations in 2008.

Impairment of Fixed Assets. Impairment of fixed assets was approximately $0.2 million for the nine months ended September 30, 2008 compared to no impairment of fixed assets for the nine months ended September 30, 2009. See footnote 2 to the condensed consolidated financial statements - "Long-lived Assets".

Gain on disposal of fixed assets. In the nine months ended September 30, 2009, . . .