##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2010

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number:
001-33778





NEUTRAL TANDEM, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 31-1786871                       
|(State or other Jurisdiction of
Incorporation or Organization) |  | (IRS Employer
Identification No.)

One South Wacker Drive

Suite 200

Chicago, IL 60606

(Address of principal executive offices, including zip code)

(312) 384-8000

(Registrants telephone number, including area code)





Indicate by checkmark 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  x    No   ̈

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 definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |   |  |                                               |  |                           |  |  
|----------------------- |  | - |  | --------------------------------------------- |  | ------------------------- |  | -
|Large accelerated filer |  | x |  |                                               |  | 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   ̈    No  x

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 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

As of April 30, 2010, 33,038,452 shares of the registrants Common Stock, $0.001 par value, were issued and outstanding.









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NEUTRAL TANDEM, INC.

INDEX



|                              |  |                                                                                                         |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                         |  | Page
|PART I. FINANCIAL INFORMATION
|                              |  |                                                                                                        
|Item 1.                       |  | Condensed Consolidated Financial Statements                                                             |  | 3   
|                              |  |                                                                                                        
|                              |  | Condensed Consolidated Balance Sheets  March 31, 2010 and December 31, 2009                            |  | 3   
|                              |  |                                                                                                        
|                              |  | Condensed Consolidated Statements of Income  Three months ended March 31, 2010 and March 
31, 2009     |  | 4   
|                              |  |                                                                                                        
|                              |  | Condensed Consolidated Statements of Cash Flows  Three months ended March 31, 2010 and March 
31, 2009 |  | 5   
|                              |  |                                                                                                        
|                              |  | Notes to Condensed Consolidated Financial Statements                                                    |  | 6   
|                              |  |                                                                                                        
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                   |  | 13  
|                              |  |                                                                                                        
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                              |  | 18  
|                              |  |                                                                                                        
|Item 4.                       |  | Controls and Procedures                                                                                 |  | 18  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                        
|                              |  |                                                                                                        
|Item 1.                       |  | Legal Proceedings                                                                                       |  | 18  
|                              |  |                                                                                                        
|Item 1A.                      |  | Risk Factors                                                                                            |  | 19  
|                              |  |                                                                                                        
|Item 5                        |  | Other Information                                                                                       |  | 20  
|                              |  |                                                                                                        
|Item 6.                       |  | Exhibits                                                                                                |  | 20  



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|                                                                                                   |  |  |  | 
|-------------------------------------------------------------------------------------------------- |  |  |  | 
|                                                                                                  
|PART I. FINANCIAL INFORMATION

Item 1.     Condensed Consolidated Financial Statements
(Unaudited)

NEUTRAL TANDEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



|                                                                                                                                                                                       |  |               |         |                  |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                                                                                                                                                                                       |  | March 31,2010 |         | December 31,2009
|                                                                                                                                                                                       | 
|ASSETS                                                                                                                                                                                 |  |               |         |                  |   |        
|Current assets:                                                                                                                                                                        |  |               |         |                  |   |        
|Cash and cash equivalents                                                                                                                                                              |  | $             | 171,107 |                  | $ | 161,411
|Receivables                                                                                                                                                                            |  |               | 21,229  |                  |   | 24,836 
|Deferred income taxes-current                                                                                                                                                          |  |               | 980     |                  |   | 800    
|Other current assets                                                                                                                                                                   |  |               | 15,801  |                  |   | 18,912 
|                                                                                                                                                                                       |  |               |         |                  |   |        
|Total current assets                                                                                                                                                                   |  |               | 209,117 |                  |   | 205,959
|Property and equipment  net                                                                                                                                                           |  |               | 48,354  |                  |   | 49,679 
|Restricted cash                                                                                                                                                                        |  |               | 903     |                  |   | 440    
|Other assets                                                                                                                                                                           |  |               | 511     |                  |   | 512    
|                                                                                                                                                                                       |  |               |         |                  |   |        
|Total assets                                                                                                                                                                           |  | $             | 258,885 |                  | $ | 256,590
|                                                                                                                                                                                       |  |               |         |                  |   |        
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                   |  |               |         |                  |   |        
|Current liabilities:                                                                                                                                                                   |  |               |         |                  |   |        
|Accounts payable                                                                                                                                                                       |  | $             | 1,421   |                  | $ | 1,235  
|Accrued liabilities:                                                                                                                                                                   |  |               |         |                  |   |        
|Taxes payable                                                                                                                                                                          |  |               | 3,706   |                  |   | 429    
|Circuit cost                                                                                                                                                                           |  |               | 3,266   |                  |   | 4,012  
|Rent                                                                                                                                                                                   |  |               | 1,058   |                  |   | 1,073  
|Payroll and related items                                                                                                                                                              |  |               | 1,829   |                  |   | 1,914  
|Other                                                                                                                                                                                  |  |               | 2,326   |                  |   | 2,704  
|Current installments of long-term debt                                                                                                                                                 |  |               |        |                  |   | 235    
|                                                                                                                                                                                       |  |               |         |                  |   |        
|Total current liabilities                                                                                                                                                              |  |               | 13,606  |                  |   | 11,602 
|Deferred income taxes-noncurrent                                                                                                                                                       |  |               | 3,075   |                  |   | 4,157  
|                                                                                                                                                                                       |  |               |         |                  |   |        
|Total liabilities                                                                                                                                                                      |  |               | 16,681  |                  |   | 15,759 
|Commitments and contingencies                                                                                                                                                          |  |               |         |                  |   |        
|Shareholders equity:                                                                                                                                                                  |  |               |         |                  |   |        
|Preferred stock  par value of $.001; 50,000,000 authorized shares; no shares issued and outstanding at March 31, 2010
and December 31, 2009                                           |  |               |        |                  |   |       
|Common stock  par value of $.001; 150,000,000 authorized shares; 33,031,977 shares and 33,628,501 shares issued and
outstanding at March 31, 2010 and December 31, 2009, respectively |  |               | 33      |                  |   | 34     
|Additional paid-in capital                                                                                                                                                             |  |               | 164,286 |                  |   | 171,381
|Retained earnings                                                                                                                                                                      |  |               | 77,885  |                  |   | 69,416 
|                                                                                                                                                                                       |  |               |         |                  |   |        
|Total shareholders equity                                                                                                                                                             |  |               | 242,204 |                  |   | 240,831
|                                                                                                                                                                                       |  |               |         |                  |   |        
|Total liabilities and shareholders equity                                                                                                                                             |  | $             | 258,885 |                  | $ | 256,590
|                                                                                                                                                                                       |  |               |         |                  |   |        

The accompanying notes are an integral part of these
condensed consolidated financial statements.



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NEUTRAL TANDEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)



|                                                                         |  |                             |        |   |      |   |        |  
|------------------------------------------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                         |  | Three Months EndedMarch 31, |       
|                                                                         |  | 2010                        |        |   | 2009 |  
|Revenue                                                                  |  | $                           | 44,829 |   |      | $ | 38,249 |  
|Operating expense:                                                       |  |                             |        |   |      |   |        |  
|Network and facilities expense (excluding depreciation and amortization) |  |                             | 14,361 |   |      |   | 11,462 |  
|Operations                                                               |  |                             | 5,521  |   |      |   | 4,955  |  
|Sales and marketing                                                      |  |                             | 510    |   |      |   | 524    |  
|General and administrative                                               |  |                             | 6,400  |   |      |   | 3,389  |  
|Depreciation and amortization                                            |  |                             | 3,948  |   |      |   | 4,041  |  
|Gain on disposal of fixed assets                                         |  |                             | (45    | ) |      |   | (25    | )
|                                                                         |  |                             |        |   |      |   |        |  
|Total operating expense                                                  |  |                             | 30,695 |   |      |   | 24,346 |  
|                                                                         |  |                             |        |   |      |   |        |  
|Income from operations                                                   |  |                             | 14,134 |   |      |   | 13,903 |  
|                                                                         |  |                             |        |   |      |   |        |  
|Other (income) expense                                                   |  |                             |        |   |      |   |        |  
|Interest expense, including debt discount of $0 and $22, respectively    |  |                             | 4      |   |      |   | 133    |  
|Interest income                                                          |  |                             | (54    | ) |      |   | (291   | )
|Other income                                                             |  |                             | (125   | ) |      |   | (242   | )
|                                                                         |  |                             |        |   |      |   |        |  
|Total other income                                                       |  |                             | (175   | ) |      |   | (400   | )
|                                                                         |  |                             |        |   |      |   |        |  
|Income before income taxes                                               |  |                             | 14,309 |   |      |   | 14,303 |  
|Provision for income taxes                                               |  |                             | 5,840  |   |      |   | 5,259  |  
|                                                                         |  |                             |        |   |      |   |        |  
|Net income                                                               |  | $                           | 8,469  |   |      | $ | 9,044  |  
|                                                                         |  |                             |        |   |      |   |        |  
|Net income per share:                                                    |  |                             |        |   |      |   |        |  
|Basic                                                                    |  | $                           | 0.25   |   |      | $ | 0.28   |  
|                                                                         |  |                             |        |   |      |   |        |  
|Diluted                                                                  |  | $                           | 0.25   |   |      | $ | 0.27   |  
|                                                                         |  |                             |        |   |      |   |        |  
|Weighted average number of shares outstanding:                           |  |                             |        |   |      |   |        |  
|Basic                                                                    |  |                             | 33,390 |   |      |   | 32,529 |  
|                                                                         |  |                             |        |   |      |   |        |  
|Diluted                                                                  |  |                             | 33,852 |   |      |   | 33,533 |  
|                                                                         |  |                             |        |   |      |   |        |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



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NEUTRAL TANDEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                  |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Three Months EndedMarch 31, |        
|                                                                                  |  | 2010                        |         |   | 2009 |  
|Cash Flows From Operating Activities:                                             |  |                             |         |   |      |   |         |  
|Net income                                                                        |  | $                           | 8,469   |   |      | $ | 9,044   |  
|Adjustments to reconcile net cash flows from operating activities:                |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                             | 3,948   |   |      |   | 4,041   |  
|Deferred income taxes                                                             |  |                             | (1,262  | ) |      |   | 35      |  
|Gain on disposal of fixed assets                                                  |  |                             | (45     | ) |      |   | (25     | )
|Non-cash share-based compensation                                                 |  |                             | 2,391   |   |      |   | 921     |  
|Amortization of debt discount                                                     |  |                             |        |   |      |   | 22      |  
|Changes in fair value of ARS                                                      |  |                             | (65     | ) |      |   | (433    | )
|Changes in fair value of ARS rights                                               |  |                             | (60     | ) |      |   | 191     |  
|Excess tax benefit associated with stock option exercise                          |  |                             | (54     | ) |      |   | (2,781  | )
|Changes in assets and liabilities:                                                |  |                             |         |   |      |   |         |  
|Receivables                                                                       |  |                             | 3,607   |   |      |   | (609    | )
|Other current assets                                                              |  |                             | (114    | ) |      |   | 549     |  
|Other noncurrent assets                                                           |  |                             | 1       |   |      |   | 75      |  
|Accounts payable                                                                  |  |                             | 117     |   |      |   | 206     |  
|Accrued liabilities                                                               |  |                             | 2,107   |   |      |   | 5,644   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash flows from operating activities                                          |  |                             | 19,040  |   |      |   | 16,880  |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Cash Flows From Investing Activities:                                             |  |                             |         |   |      |   |         |  
|Purchase of equipment                                                             |  |                             | (2,555  | ) |      |   | (1,000  | )
|Proceeds from sale of equipment                                                   |  |                             | 46      |   |      |   | 27      |  
|Increase in restricted cash                                                       |  |                             | (463    | ) |      |   |        |  
|Proceeds from the redemption of ARS                                               |  |                             | 3,350   |   |      |   |        |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash flows from investing activities                                          |  |                             | 378     |   |      |   | (973    | )
|                                                                                  |  |                             |         |   |      |   |         |  
|Cash Flows From Financing Activities:                                             |  |                             |         |   |      |   |         |  
|Proceeds from the issuance of common shares associated with stock option exercise |  |                             | 15      |   |      |   | 416     |  
|Excess tax benefit associated with stock option exercise                          |  |                             | 54      |   |      |   | 2,781   |  
|Payments made for repurchase of common stock                                      |  |                             | (9,556  | ) |      |   |        |  
|Principal payments on long-term debt                                              |  |                             | (235    | ) |      |   | (882    | )
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash flows from financing activities                                          |  |                             | (9,722  | ) |      |   | 2,315   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net Increase In Cash And Cash Equivalents                                         |  |                             | 9,696   |   |      |   | 18,222  |  
|Cash And Cash Equivalents  Beginning                                             |  |                             | 161,411 |   |      |   | 110,414 |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Cash And Cash Equivalents  End                                                   |  | $                           | 171,107 |   |      | $ | 128,636 |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Supplemental Disclosure Of Cash Flow Information:                                 |  |                             |         |   |      |   |         |  
|Cash paid for interest                                                            |  | $                           | 242     |   |      | $ | 69      |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Cash paid for taxes                                                               |  | $                           | 1,595   |   |      | $ | 198     |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Supplemental Disclosure Of Noncash Flow Items:                                    |  |                             |         |   |      |   |         |  
|Investing Activity  Accrued purchases of equipment                               |  | $                           | 1,115   |   |      | $ | 1,041   |  
|                                                                                  |  |                             |         |   |      |   |         |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



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NEUTRAL TANDEM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.
DESCRIPTION OF THE BUSINESS

Neutral Tandem, Inc. (the Company) provides 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 the Companys service, the primary method for competitive carriers to exchange traffic indirectly was through tandem switches of the incumbent local exchange carriers, or
ILECs. 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. The Companys solution enables competitive carriers to exchange traffic between their networks without using an ILEC tandem for both local and long distance calls.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation  The condensed consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Interim Condensed Consolidated Financial Statements  The accompanying condensed consolidated balance sheets as of
March 31, 2010 and December 31, 2009, the condensed consolidated statements of income for the three months ended March 31, 2010 and 2009, and the condensed consolidated statements of cash flows for the three months ended
March 31, 2010 and 2009 are unaudited. The condensed consolidated balance sheet data as of December 31, 2009 was derived from the audited consolidated financial statements which are included in the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2009. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2009.

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with United States generally accepted accounting principles (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission applicable to interim periods. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, the unaudited interim condensed consolidated financial statements as of March 31, 2010 and for the
three months ended March 31, 2010 and 2009 have been prepared on the same basis as the audited consolidated statements and reflect all adjustments, which are normal recurring adjustments, necessary for the fair presentation of its statement of
financial position, results of operations and cash flows. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the operating results for any subsequent quarter, for the full fiscal year or any
future periods.

Cash and Cash Equivalents  The Company considers all highly liquid investments with an
original maturity of 90 days or less to be cash and cash equivalents. The carrying values approximate fair value. At March 31, 2010 the Company had $5.3 million of cash in banks and $165.8 million in two money market mutual funds. At
December 31, 2009, the Company had $4.0 million of cash in banks and $157.4 million in two money market mutual funds.

Short-term Investments  The Company considers all investments with remaining time to maturity of one year or less to
be short-term investments. At March 31, 2010, the Companys short-term investments consisted of $13.8 million (par value) of auction rate securities (ARS) recorded within the other current asset category of the Companys condensed
consolidated balance sheet. See note 7 to the condensed consolidated financial statements for further details on the Companys ARS and related ARS Rights.

The Companys ARS Rights are required to be recognized as a free-standing asset, separate from the Companys ARS. Upon
entering into a settlement agreement with UBS in the fourth quarter of 2008, the Company elected to treat the ARS as trading securities and elected to measure the ARS Rights at fair value. As such, in the first quarter of 2010, the Company recorded
a gain of $0.1 million related to the ARS Rights and a gain of $0.1 million on the Companys ARS portfolio related to the change in fair value during the three months ended March 31, 2010. These amounts are reflected within other (income)
expense in the Companys condensed consolidated statements of income.



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The Company does not intend to hold these securities until final maturity because it intends
to exercise its rights under the ARS Rights agreement which allows the Company to sell its ARS back to UBS beginning June 30, 2010. The ARS and ARS Rights will be revalued to fair market value on a quarterly basis until the sale of these
securities has been completed.

Fair Values of Financial Instruments  The Companys financial
instruments include cash and cash equivalents, receivables, accounts payable, debt, ARS and ARS Rights. The types of instruments valued based on unobservable inputs in which there is little or no market data, which require the Company to develop its
own assumptions, include the Companys ARS and related ARS Rights. See Note 7 to the condensed consolidated financial statements for further details on investment and fair value measurements.

The carrying amounts of our cash and equivalents, receivables and accounts payable approximate fair value.

The Company applies a discounted cash flow model approach to value its financial assets and liabilities, which include its ARS and ARS
Rights. The discounted cash flow model approach takes into consideration the anticipated coupon rate for the securities, a market-based discount rate, an illiquidity premium and an anticipated workout period, or likely timeframe to redemption or
liquidation in the open market. The fair value disclosures required by ASC section 820-10-50, Fair Value Measurements and Disclosures: Disclosure (formerly Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements
(SFAS 157)), are included in Note 7, Investments and Fair Value Measurements.

Long-Lived Assets  The
carrying value of long-lived assets, primarily property and equipment, is evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred. A potential impairment has occurred if projected undiscounted cash
flows are less than the carrying value of the assets. The estimated cash flows include managements assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. The impairment test is a two-step process.
If the carrying value of the asset exceeds the expected future cash flows from the asset, impairment is indicated. The impairment loss recognized is the excess of the carrying value of the asset over its fair value.

The Company had no impairment of long-lived assets in the three months ended March 31, 2010 and March 31, 2009.

Revenue Recognition  The Company generates revenue from sales of its tandem interconnection services. The Company
maintains executed service agreements with each of its customers in which specific fees and rates are determined. Revenue is recorded each month based upon documented minutes of traffic switched for which service is provided and when collection is
probable. The Company provides service primarily to large, well-established competitive carriers, including wireless, wireline and cable and broadband telephony.

Earnings Per Share  Basic earnings per share is computed based on the weighted average number of shares of common
stock outstanding. Diluted earnings per share is computed based on the weighted average number of shares of common stock outstanding adjusted by the number of additional shares of common stock that would have been outstanding had the potentially
dilutive shares of common stock been issued. Potentially dilutive shares of common stock include stock options and non-vested shares. The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per
share of common stock:



|                                             |  |                             |        |      |   |       
|-------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                             |  | Three Months EndedMarch 31,
|(In thousands, except per share amounts)     |  | 2010                        |        | 2009
|Numerator:                                   |  |                             |        |      |   |       
|Net income applicable to common shareholders |  | $                           | 8,469  |      | $ | 9,044 
|Denominator:                                 |  |                             |        |      |   |       
|Weighted average common shares outstanding   |  |                             | 33,390 |      |   | 32,529
|Effect of dilutive securities:               |  |                             |        |      |   |       
|Stock options                                |  |                             | 462    |      |   | 1,004 
|Non-vested shares                            |  |                             |       |      |   |      
|                                             |  |                             |        |      |   |       
|Denominator for diluted earnings per share   |  |                             | 33,852 |      |   | 33,533
|                                             |  |                             |        |      |   |       
|Net earnings per share:                      |  |                             |        |      |   |       
|Basic  as reported                          |  | $                           | 0.25   |      | $ | 0.28  
|                                             |  |                             |        |      |   |       
|Diluted  as reported                        |  | $                           | 0.25   |      | $ | 0.27  
|                                             |  |                             |        |      |   |       



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Options to purchase 2,277,000 and 1,527,000 shares of common stock were outstanding during
the three months ended March 31, 2010 and March 31, 2009, respectively, but were not included in the computation of diluted earnings per share because the effect would have been antidilutive.

440,660 non-vested shares of common stock were issued and outstanding during the three months ended March 31, 2010, but were not
included in the computation of diluted earnings per share because the effect would have been antidilutive.

Accounting
for Stock-Based Compensation  The fair value of stock options is determined using the Black-Scholes valuation model. This model takes into account the exercise price of the stock option, the fair value of the common stock underlying
the stock option as measured on the date of grant and an estimation of the volatility of the common stock underlying the stock option. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight line
method. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Companys current estimates, such amounts will be recorded as a cumulative adjustment in
the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ from the
Companys current estimates.

The amount of share-based expense recorded in the three months ended March 31, 2010
and 2009, is $2.4 million and $0.9 million, respectively.

Compensation expense for non-vested shares is measured based upon
the quoted closing market price for the stock on the date of grant. The compensation cost is recognized on a straight-line basis over the vesting period. See Note 6, Stock Options and Non-vested Shares

Stock Repurchase  On February 16, 2010, we announced that our Board of Directors authorized the repurchase of up
to $25.0 million of our outstanding common stock as part of a stock repurchase program. In the three months ended March 31, 2010, we repurchased approximately 0.6 million shares for $9.6 million under the program at an average cost of
$15.78 per share. The stock repurchases are accounted for under the cost method whereby the entire cost of the repurchased and retired shares, net of par value, was recorded to additional paid-in capital.

Recent Accounting Pronouncements  In January 2010, the FASB issued accounting standard update 2010-06, Improving
Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of
financial instrument. For the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements should be presented separately. The standard is effective for interim and annual reporting periods
beginning after December 15, 2009, except for certain provisions related to Level 3 disclosures which are effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of this guidance did not have an
impact on the Companys condensed consolidated financial statements.

3. RESTRICTED CASH

The Company uses cash collateralized letters of credit issued by Bank of America, NA to secure certain facility leases and other
obligations. At March 31, 2010 there was $0.9 million of restricted cash used as collateral for $0.3 million in letters of credit outstanding.

4. LEGAL PROCEEDINGS

From time to time, the Company is a party to legal proceedings arising in the normal course of its business. Aside from the matter
discussed below, the Company does not believe that it is a party to any pending legal action that could reasonably be expected to have a material adverse effect on its business or operating results, financial position or cash flows.

Peerless Network, LLC. On June 12, 2008, The Company commenced a patent infringement
action against Peerless Network, LLC, Peerless Network of Illinois, LLC and John Barnicle, in the United States District Court for the Northern District of Illinois to enforce U.S. Patent No. 7,123,708 (Neutral Tandem, Inc. v Peerless
Network, LLC, Peerless Network of Illinois, LLC and John Barnicle, 08 CV 3402). On July 28, 2008, the defendants filed a response to the Companys complaint denying liability and asserting various affirmative defenses and
counterclaims. The defendants generally allege (i) that the Companys patent is invalid and unenforceable under a variety of theories, (ii) that assertion of the patent amounts to patent misuse and violation of certain monopolization
laws, and (iii) that certain conduct surrounding the litigation gave rise to tortious interference and business disparagement claims and Lanham Act violations. On December 4, 2008, the court granted the Companys motion to dismiss the
claims alleging business disparagement and Lanham Act violations but denied the Companys motion to dismiss the claims related to the alleged violation of certain monopolization laws. On January 27, 2010, the court issued an order
construing each of the disputed terms in the patent in the manner the Company had proposed. On March 30, 2010, the court issued an order denying the Companys motion dated August 25, 2009 for preliminary injunctive relief which sought
to enjoin Peerless Network from providing certain tandem transit services. Because the standards employed by the court differ at the preliminary injunction stage from the full trial on the merits, the ruling does not preclude the Company from
proceeding to trial in this patent infringement action.

On April 27, 2010, the court issued an order, denying without
prejudice, the motion of Peerless Network seeking leave to file a motion to stay the patent litigation. Peerless Network sought to stay the patent litigation pending the United States Patent and Trademark Offices (USPTO) inter
partes reexamination of the validity of the patent at issue, which is discussed below. The full trial in this action is currently scheduled to begin in September 2010. The parties are currently completing discovery on the Companys claims
and the defendants remaining counterclaims.



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In a separate proceeding, on January 28, 2010, Peerless Network filed a request with
the USPTO requesting that the USPTO reexamine the patent at issue. On March 26, 2010, the USPTO granted Peerless Networks reexamination request and issued an initial office action which rejected the patents 23 claims. The claims of
the patent at issue as originally issued by the USPTO remain valid and enforceable during the USPTO reexamination proceeding. Either party may reference the USPTO proceeding to support its position in matters before the court.

Under the USPTOs rules, the Company was not allowed to respond to Peerless Networks request prior to the USPTOs initial
determination. The Companys response in the USPTO is presently due in late May 2010. After the USPTO reviews the Companys submission, as well as any subsequent response made by Peerless Network, the USPTO may allow the claims to issue in
their current form, require further amendments to the claim, or reject the claims. At that point, there may be further proceedings at the USPTO. According to statistics provided by the USPTO, the average time to completion of a reexamination
proceeding is approximately 36 months. The USPTO has not yet ruled on Peerless Networks request, although the USPTO typically accepts reexamination requests. If the USPTO grants Peerless Networks request, the reexamination proceeding
could result in the USPTO determining that some or all of the claims in the reexamined patent remain patentable over the prior art without requiring any amendment, that some or all of the claims must be amended to distinguish over the prior art, or
that some or all of the claims are not patentable over the prior art.

5. INCOME TAXES

Income taxes were computed using an effective tax rate, which is subject to ongoing review and evaluation by the Company. The
Companys estimated effective income tax rate was 40.8% for the three months ended March 31, 2010, compared to 36.8% for the same period last year. The increase in the tax rate was primarily due to the establishment of a $0.6 million
valuation allowance against the Illinois EDGE credit deferred tax asset in the first quarter of 2010. The Companys estimated effective income tax rate varies from the statutory federal income tax rate of 35% primarily due to the impact of
state income taxes, Illinois EDGE credit tax benefit, Illinois EDGE credit valuation allowance, and tax exempt municipal interest.

The Company files income tax returns in the U.S. federal jurisdiction and various states and local jurisdictions. With a few exceptions,
the Company is no longer subject to U.S. federal, state or local examinations for years before 2006. The State of Illinois concluded an examination of Illinois state income tax returns the Company filed for the years 2006 and 2007 in the first
quarter of 2010. The audit resulted in no significant changes. At March 31, 2010 and December 31, 2009, the Company did not have any income tax liability due to uncertain tax positions.

The Companys state income tax credit carry forward, primarily the Illinois EDGE credit, can be carried forward five years and will
begin to expire in 2010. The Company has recorded a partial valuation allowance of $0.6 million against the credit as the Company believes it is more likely then not that future taxable income will not be sufficient to realize the full benefit of
the credit. The Company evaluates its deferred income taxes quarterly to determine if a valuation allowance is required or should be adjusted. The Company assesses whether a valuation allowance should be established against our deferred tax assets
based upon consideration of all available evidence, both positive and negative, using a more likely than not standard. This assessment considers, among other matters, forecasts of future profitability, the duration of statutory carryforward periods,
the Companys experience with tax attributes expiring unused and tax planning alternatives. In making such judgments, significant weight is given to evidence that can be objectively verified.

6. STOCK OPTIONS AND NON-VESTED SHARES

The Company established the 2003 Stock Option and Stock Incentive Plan (2003 Plan), which provided for the issuance of up to 4,650,000
options and restricted stock to eligible employees, officers, and independent contractors of the Company. In 2007 the Company adopted the Neutral Tandem, Inc. 2007 Long-Term Equity Incentive Plan (2007 Plan) and ceased awarding equity grants under
the 2003 Plan. As of March 31, 2010, the Company had granted a total of 877,978 options that remained outstanding under the 2003 Plan.

At March 31, 2010, the Company had granted a total of 2,287,500 options and 440,660 non-vested shares under the 2007 Plan. Awards
for 1,774,081 shares, representing approximately 5.4% of the Companys outstanding common stock as of March 31, 2010, remained available for additional grants under the 2007 Plan.

The Company currently records stock-based compensation expense in connection with any grant of options and non-vested shares to its
employees and independent contractors. The Company calculates the expense associated with its stock options and non-vested shares by determining the fair value of the options and non-vested shares.



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Options

All options granted under the 2003 Plan and the 2007 Plan have an exercise price equal to the market value of the underlying common stock
on the date of the grant. The following table shows the exercise price of one share of the Companys common stock on each stock option grant date during the year ended December 31, 2009 and through the first quarter of fiscal 2010:



|                    |  |                               |  |                                                            |      
|------------------- |  | ----------------------------- |  | ---------------------------------------------------------- | -----
|Grant Date          |  | Number of StockOptions Issued |  | Weighted AverageExercise
Price of OneShare of Common Stock
|First Quarter 2009  |  | 23,000                        |  | $                                                          | 19.50
|Second Quarter 2009 |  | 13,000                        |  | $                                                          | 28.90
|Third Quarter 2009  |  | 812,000                       |  | $                                                          | 26.06
|Fourth Quarter 2009 |  | 34,000                        |  | $                                                          | 23.17
|First Quarter 2010  |  | 35,000                        |  | $                                                          | 17.67
|                    |  |                               |  |                                                            |      
|Total               |  | 917,000                       |  |                                                            |      
|                    |  |                               |  |                                                            |      

The fair value of each option granted is estimated on the date of grant using the Black-Scholes
option-pricing model. The following table summarizes the assumptions used for estimating the fair value of options for the three months ended March 31, 2010 and March 31, 2009:



|                              |  |               |   |  |               |  
|----------------------------- |  | ------------- | - |  | ------------- | -
|                              |  | March 31,2010 |   |  | March 31,2009 |  
|Expected life                 |  | 7.1 years     |   |  | 6.3 years     |  
|Risk-free interest rate range |  | 3.0  3.1     | % |  | 2.1           | %
|Expected dividends            |  |              |   |  |              |  
|Volatility                    |  | 52.6          | % |  | 54.3          | %

Beginning in
November 2007, the Company elected to use the simplified method to estimate the expected term for the valuation of stock options, as permitted by Securities and Exchange Commission (SEC) under ASC 718-10, Compensation  Stock Compensation
(formerly SEC Staff Accounting Bulletin 107 (SAB 107)), due to the unknown effect on option holder behavior of the increased liquidity of the underlying options following the Companys initial public offering. The Company used the simplified
method in 2008 and the first quarter of 2009. During the second quarter of 2009, the Company determined that sufficient historical data exists regarding the actual term that employees hold their options and began to utilize its own expected term.
The Companys calculated term was used during the first quarter 2010 was approximately 7.1 years. The Company began calculating and utilizing its own volatility for estimating the fair value of options in 2009.

The weighted-average fair value of options granted, as determined by using the Black-Scholes valuation model, during the period was
$10.06 and $10.06 for the three months ended March 31, 2010 and 2009, respectively. The total grant date fair value of options that vested during the three months ended March 31, 2010 and 2009 was approximately $0.6 million and $0.2
million, respectively.

The following summarizes activity under the Companys stock option plan for the three months
ended March 31, 2010:



|                                          |  |             |   |  |                               |       |                               |   |                                     |  |    
|----------------------------------------- |  | ----------- | - |  | ----------------------------- | ----- | ----------------------------- | - | ----------------------------------- |  | ---
|                                          |  | Shares(000) |   |  | Weighted-AverageExercisePrice |       | AggregateIntrinsicValue($000) |   | Weighted-AverageRemainingTerm (yrs)
|Options outstanding  January 1, 2010     |  | 3,139       |   |  | $                             | 15.87 |                               |   |                                     |  |    
|Granted                                   |  | 35          |   |  |                               | 17.67 |                               |   |                                     |  |    
|Exercised                                 |  | (9          | ) |  |                               | 1.67  |                               |   |                                     |  |    
|Cancelled                                 |  |            |   |  |                               |      |                               |   |                                     |  |    
|                                          |  |             |   |  |                               |       |                               |   |                                     |  |    
|Options outstanding  March 31, 2010      |  | 3,165       |   |  | $                             | 15.93 |                               | $ | 11,540                              |  | 8.0
|                                          |  |             |   |  |                               |       |                               |   |                                     |  |    
|Vested or expected to vest-March 31, 2010 |  | 3,015       |   |  | $                             | 15.65 |                               | $ | 11,468                              |  | 7.9
|                                          |  |             |   |  |                               |       |                               |   |                                     |  |    
|Exercisable-March 31, 2010                |  | 1,058       |   |  | $                             | 8.83  |                               | $ | 8,425                               |  | 6.9
|                                          |  |             |   |  |                               |       |                               |   |                                     |  |    

The unrecognized compensation cost associated with options outstanding at March 31, 2010 and
December 31, 2009 was $17.6 million and $19.0 million, respectively. The weighted average remaining term that the compensation will be recorded is 2.8 years and 3.0 years as of March 31, 2010 and December 31, 2009, respectively.

Non-vested Shares

During 2009, the Companys Board of Directors granted approximately 0.4 million non-vested
shares to members of the Companys executive management team as well as various employees within the Company. During the three months ended March 31, 2010, the Companys Board of Directors granted approximately 0.1 million
non-vested shares. The non-vested shares were issued as part of the 2007 plan. The shares typically vest over a four year period. The fair value of the non-vested shares is determined using the Companys closing stock price on the grant
date. Compensation cost, measured using the grant date fair value, is recognized over the requisite service period on a straight-line basis.



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A summary of the Companys non-vested share activity and related information for the
three months ended March 31, 2010 is as follows:



|                              |  |             |  |                               |       |                                |   |       
|----------------------------- |  | ----------- |  | ----------------------------- | ----- | ------------------------------ | - | ------
|                              |  | Shares(000) |  | Weighted-AverageExercisePrice |       | AggregateIntrinsicValue ($000)
|Non-vested at January 1, 2010 |  | 356         |  | $                             | 25.65 |                                | $ | 9,131 
|Granted                       |  | 85          |  | $                             | 15.13 |                                | $ | 1,285 
|                              |  |             |  |                               |       |                                |   |       
|Non-vested at March 31, 2010  |  | 441         |  | $                             | 23.62 |                                | $ | 10,416
|                              |  |             |  |                               |       |                                |   |       

The unrecognized compensation cost associated with
non-vested shares at March 31, 2010, is $9.0 million. The weighted average remaining term that the compensation will be recorded is 3.3 years.

7. INVESTMENTS AND FAIR VALUE MEASUREMENTS

Investments

The following is a summary of investments as of March 31, 2010 and December 31, 2009 (in thousands):



|                         |  |                   |        |                      |   |                       |  |   |                     |   |  |   |       
|------------------------ |  | ----------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | ------
|                         |  | March 31, 2010   
|                         |  | AmortizedCost     |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|ARS  trading securities |  | $                 | 13,775 |                      | $ |                      |  | $ | (858                | ) |  | $ | 12,917
|ARS rights               |  | $                 |       |                      | $ | 772                   |  | $ |                    |   |  | $ | 772   
|                         | 
|                         |  | December 31, 2009
|                         |  | AmortizedCost     |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|ARS  trading securities |  | $                 | 17,125 |                      | $ |                      |  | $ | (923                | ) |  | $ | 16,202
|ARS rights               |  | $                 |       |                      | $ | 712                   |  | $ |                    |   |  | $ | 712   

The following is a
summary of the carrying values and balance sheet classification as of March 31, 2010 and December 31, 2009:



|                            |  |                |         |                  |   |        
|--------------------------- |  | -------------- | ------- | ---------------- | - | -------
|                            |  | March 31,2010  |         | December 31,2009
|                            |  | (In thousands)
|Cash in banks               |  | $              | 5,286   |                  | $ | 3,978  
|Money market mutual funds   |  |                | 165,820 |                  |   | 157,433
|ARS  trading securities    |  |                | 12,917  |                  |   | 16,202 
|ARS rights                  |  |                | 772     |                  |   | 712    
|Restricted cash             |  |                | 903     |                  |   | 440    
|                            |  |                |         |                  |   |        
|Total                       |  | $              | 185,698 |                  | $ | 178,765
|                            |  |                |         |                  |   |        
|Reported as:                |  |                |         |                  |   |        
|Cash and cash equivalents   |  | $              | 171,106 |                  | $ | 161,411
|Other current assets        |  |                | 13,689  |                  |   | 16,914 
|Non-current restricted cash |  |                | 903     |                  |   | 440    
|                            |  |                |         |                  |   |        
|Total                       |  | $              | 185,698 |                  | $ | 178,765
|                            |  |                |         |                  |   |        

At March 31, 2010 and December 31, 2009, the
Company held approximately $13.8 million (par value) and $17.1 million (par value), respectively, of auction rate securities (ARS) investments in municipal notes. These investments are classified as trading securities. Accordingly, they were valued
at fair value as of March 31, 2010 and December 31, 2009. The Companys ARS had an auction reset feature whose underlying assets are generally student loans which are insured in part by the federal government under the Federal Family
Education Loan Programs (FFELP). In February 2008, auctions began to fail for these securities and each auction since then has failed. The Company has since been able to liquidate $11.4 million of the securities at par value through issuer
redemptions.

The ARS securities are valued using a discounted cash flow model that takes into consideration the following
factors among others:



| |  |  | the anticipated coupon rate for the securities;
| | - |  | -----------------------------------------------



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| |  |  | a market-based discount rate;
| | - |  | -----------------------------



| |  |  | an illiquidity premium; and
| | - |  | ---------------------------



| |  |  | an anticipated workout period, or the likely timeframe to redemption or liquidation in the open market.
| | - |  | -------------------------------------------------------------------------------------------------------

In the fourth quarter 2008, the Company entered into a settlement with UBS related to the ARS, pursuant to which the Company elected to
participate in a rights offering that provides it with certain rights (ARS Rights) to sell $18.8 million (par value) of the ARS, back to UBS at par value, at any time during a two-year sale period beginning June 30, 2010. By electing to
participate in the settlement and receive the ARS Rights, the Company granted UBS the right, exercisable at any time prior to June 30, 2010 or during the two-year sale period, to purchase or cause the sale of the Companys ARS. The ARS
Rights have value in that they provide the Company with the ability to limit the length of the workout period to 18 months from the date of agreement, absent redemptions by the issuer or liquidation in the open market. The ARS Rights were valued by
analyzing the value of the underlying ARS on a stand-alone basis compared to their value along with the ARS Rights. The additional value of the ARS with the ARS Rights over the calculated value of the ARS on a stand-alone basis represents the value
of the ARS Rights.

The Companys ARS Rights are required to be recognized as a free-standing asset, separate from the
Companys ARS. The Company has elected to treat its ARS and related ARS Rights as trading securities and to measure the ARS Rights at fair value in order to match the changes in the fair value of the ARS. In the first quarter of 2010,
the Company recorded a gain of $0.1 million related to the ARS Rights and a gain of $0.1 million on the Companys ARS portfolio related to the change in fair value during the three months ended March 31, 2010. In the first quarter of 2009,
the Company recorded a loss of $0.2 million related to the ARS Rights and a gain of $0.4 million on the Companys ARS portfolio related to the change in fair value during the three months ended March 31, 2009. The ARS Rights and the ARS,
which are classified as trading securities, are recorded in current other assets in the accompanying condensed consolidated balance sheets as of March 31, 2010 and December 31, 2009.

The Company does not intend to hold these securities until final maturity in accordance with the ARS Rights which allow the Company to
sell its ARS back to UBS beginning June 30, 2010, which is consistent with the Companys investment intent. The ARS and the ARS Rights will be revalued to fair market value on a quarterly basis until the sale of these securities has been
completed.

Fair Value Measurement

ASC section 820-10-30, Fair Value Measurements and Disclosures: Initial Measurement (formerly SFAS No. 157), notes that fair value is
an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC section 820-10-35 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair
value as follows: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level III) unobservable inputs in which
there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair
value. On a recurring basis, the Company measures its ARS and ARS Rights at fair value.

The Companys ARS and ARS Rights
are valued based on unobservable inputs in which there is little or no market data. As a result of auction failures related to the auction rate securities during the year ended 2009 and the three months ended March 31, 2010, market inputs were
not available as of March 31, 2010 and December 31, 2009. A discounted cash flow model has therefore been used to determine the estimated fair value of the Companys investment in ARS as of March 31, 2010 and December 31,
2009. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, discount rates and timing and amounts of cash flows, including assumptions about the expected holding periods of these securities. Such
instruments are generally classified as Level III of the fair value hierarchy.

The Companys ARS Rights were valued by
determining the value of the underlying auction rate securities on a stand-alone basis compared to their value along with the ARS Rights. The Company utilized the same factors that were used to value its investment in ARS.

The Company does not have liabilities to measure at fair value on a recurring basis. The following table summarizes the Companys
assets that are measured at fair value on a recurring basis:



|                                    |  |                 |   |          |   |           |  |       |        |  |   |       
|----------------------------------- |  | --------------- | - | -------- | - | --------- |  | ----- | ------ |  | - | ------
|                                    |  | March 31, 2010 
|                                    |  | Level I         |   | Level II |   | Level III |  | Total
|                                    |  | ( In thousands)
|ARS  trading securities            |  | $               |  |          | $ |          |  | $     | 12,917 |  | $ | 12,917
|ARS Rights                          |  |                 |  |          |   |          |  |       | 772    |  |   | 772   
|                                    |  |                 |   |          |   |           |  |       |        |  |   |       
|Total assets measured at fair value |  | $               |  |          | $ |          |  | $     | 13,689 |  | $ | 13,689
|                                    |  |                 |   |          |   |           |  |       |        |  |   |       

Unrealized gains and losses associated with Level III
financial instruments were recorded in the Companys condensed consolidated statement of income as other (income) expense. The unrealized gain associated with ARS-trading securities was approximately $0.1million for the three months ended
March 31, 2010 and the unrealized gain was approximately $0.4 million for the three months ended March 31, 2009. The unrealized gain associated with the ARS Rights was approximately $0.1 million for the three months ended March 31,
2010 and the unrealized loss was approximately $0.2 million for the three months ended March 31, 2009.



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The following table summarizes the change in balance sheet carrying value associated with
Level III financial instruments carried at fair value during the period ended March 31, 2010 (in thousands):



|                         |  |                  |        |                               |   |        |                       |  |                |   |               |   |   |  |   |     |  |   |       
|------------------------ |  | ---------------- | ------ | ----------------------------- | - | ------ | --------------------- |  | -------------- | - | ------------- | - | - |  | - | --- |  | - | ------
|                         |  | December 31,2009 |        | Payment,Purchases(Sales), Net |   |        | TransfersIn (Out),Net |  | Gains (Losses) |   | March 31,2010
|                         |  |                  |        |                               |   |        |                       |  | Realized       |   | Unrealized    |   |  
|ARS  trading securities |  | $                | 16,202 |                               | $ | (3,350 | )                     |  | $              |  |               | $ |  |  | $ | 65  |  | $ | 12,917
|ARS rights               |  |                  | 712    |                               |   |       |                       |  |                |  |               |   |  |  |   | 60  |  |   | 772   
|                         |  |                  |        |                               |   |        |                       |  |                |   |               |   |   |  |   |     |  |   |       
|Total                    |  | $                | 16,914 |                               | $ | (3,350 | )                     |  | $              |  |               | $ |  |  | $ | 125 |  | $ | 13,689
|                         |  |                  |        |                               |   |        |                       |  |                |   |               |   |   |  |   |     |  |   |       

8. SEGMENT AND GEOGRAPHIC INFORMATION

ASC 280, Segment Reporting (formerly SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information) establishes
standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing performance.

The Companys chief operating
decision maker is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis. The Company operates in one industry segment, which is to provide tandem interconnection services to
competitive carriers, including wireless, wireline, cable and broadband telephony providers. Therefore, the Company has concluded that it has only one operating segment. Although the Company services different customer groups, it does not maintain
separate product lines. All of the Companys revenues are generated within the United States.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

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; the effects of competition, including direct connects; the ability to develop and provide new services; technological developments; 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,
2009 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.



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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 146 markets as of March 31, 2010.

Over the past year, we have faced increasing direct competition from other competitive carriers. We also face indirect competition from
carriers that directly connect their switches. When there is a significant amount of traffic between two switches, carriers have an economic incentive to establish direct connections to remove intermediate switching. We believe that our customers
are currently frequently direct connecting their networks, even for lower traffic switch pair combinations, for various reasons, including in order to avoid paying a transit fee. As our customers grow, the amount of traffic exchanged between them
grows, thus leading to the risk that they will increase the number of direct connections between their switches and remove traffic from our tandems. The risk of direct connections will increase as more carriers move to an IP-based interface, because
direct connecting between two IP-based carriers is less complex, thus enabling more direct connections.

For the three months
ended March 31, 2010, we increased revenue to $44.8 million, an increase of 17.2% compared to the three months ended March 31, 2009. The increase in revenue was primarily due to an increase of minutes of use to 24.7 billion minutes
processed in the three months ended March 31, 2010 from 19.7 billion minutes processed in the three months ended March 31, 2009, an increase of 25.7%. Our income from operations for the three months ended March 31, 2010 was $14.1
million compared to $13.9 million for the three month ended March 31, 2009. Net income for the three months ended March 31, 2010, was approximately $8.5 million compared to net income of $9.0 million for the three months ended
March 31, 2009.

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 ended March 31, 2010 and 2009.



|                                    |  |                             |        |      |   |       
|----------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                    |  | Three Months EndedMarch 31,
|                                    |  | 2010                        |        | 2009
|Revenue (in thousands)              |  | $                           | 44,829 |      | $ | 38,249
|Minutes of Use Billed (in millions) |  |                             | 24,725 |      |   | 19,669
|Average fee per billed minute       |  | $                           | 0.0018 |      | $ | 0.0019

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 9 additional markets we added during the first three months of 2010 and the 37 additional markets added in 2009 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 earlier.

Our
service solution incorporates other components beyond switching. In addition to switching, we generally 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 150 employees at March 31, 2010 from 138 employees at March 31, 2009.



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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 February 2025. 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.

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 and
adjustments to the fair value of the ARS Rights.

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, 2009, which we filed with the Securities and Exchange Commission on
February 19, 2010, 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 2010.



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Results of Operations

The following table sets forth our results of operations for the three months ended March 31, 2010 and 2009:



|                                                                         |  |                             |        |   |      |   |        |  
|------------------------------------------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                         |  | Three Months EndedMarch 31, |       
|(Dollars in thousands)                                                   |  | 2010                        |        |   | 2009 |  
|                                                                         |  |                             |        |   |      |   |        |  
|Revenue                                                                  |  | $                           | 44,829 |   |      | $ | 38,249 |  
|Operating expense:                                                       |  |                             |        |   |      |   |        |  
|Network and facilities expense (excluding depreciation and amortization) |  |                             | 14,361 |   |      |   | 11,462 |  
|Operations                                                               |  |                             | 5,521  |   |      |   | 4,955  |  
|Sales and marketing                                                      |  |                             | 510    |   |      |   | 524    |  
|General and administrative                                               |  |                             | 6,400  |   |      |   | 3,389  |  
|Depreciation and amortization                                            |  |                             | 3,948  |   |      |   | 4,041  |  
|Gain on disposal of fixed assets                                         |  |                             | (45    | ) |      |   | (25    | )
|                                                                         |  |                             |        |   |      |   |        |  
|Total operating expense                                                  |  |                             | 30,695 |   |      |   | 24,346 |  
|                                                                         |  |                             |        |   |      |   |        |  
|Income from operations                                                   |  |                             | 14,134 |   |      |   | 13,903 |  
|                                                                         |  |                             |        |   |      |   |        |  
|Other (income) expense:                                                  |  |                             |        |   |      |   |        |  
|Interest expense, including debt discount of $0, and $22, respectively   |  |                             | 4      |   |      |   | 133    |  
|Interest income                                                          |  |                             | (54    | ) |      |   | (291   | )
|Other income                                                             |  |                             | (125   | ) |      |   | (242   | )
|                                                                         |  |                             |        |   |      |   |        |  
|Total other income                                                       |  |                             | (175   | ) |      |   | (400   | )
|                                                                         |  |                             |        |   |      |   |        |  
|Income before income taxes                                               |  |                             | 14,309 |   |      |   | 14,303 |  
|Provision for income taxes                                               |  |                             | 5,840  |   |      |   | 5,259  |  
|                                                                         |  |                             |        |   |      |   |        |  
|Net income                                                               |  | $                           | 8,469  |   |      | $ | 9,044  |  
|                                                                         |  |                             |        |   |      |   |        |  

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Revenue. Revenue increased to $44.8 million in the three months ended March 31, 2010 from $38.2 million in the three months
ended March 31, 2009, an increase of 17.2%. The increase in revenue was primarily due to an increase of minutes of use to 24.7 billion minutes processed in the three months ended March 31, 2010 from 19.7 billion minutes processed in the
three months ended March 31, 2009, an increase of 25.7%. The increase in the number of minutes processed by the network was a result of further penetration of current markets and customers, as well as the entry into 37 new markets since
March 31, 2009.

Operating Expenses . Operating expenses for the three months ended March 31, 2010 of
$30.7 million increased $6.4 million, or 26.1%, from $24.3 million for the three months ended March 31, 2009. The components making up operating expenses are discussed further below.

Network and Facilities Expenses. Network and facilities expenses increased to $14.4 million in the three months ended
March 31, 2010, or 32.0% of revenue, from $11.5 million in the three months ended March 31, 2009, or 30.1% of revenue. Network and facilities expenses increased due to greater traffic volumes carried over our network and an increase in the
number of markets in which we operate.

Operations Expenses. Operations expenses increased to $5.5 million in
the three months ended March 31, 2010, or 12.3% of revenue, from $5.0 million in the three months ended March 31, 2009, or 13.1% 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, 2010, or 1.1% of revenue, compared to $0.5 million in the three months ended March 31, 2009, or 1.3% of revenue. We have successfully increased revenues while maintaining the same approximate size of the sales and marketing force
at March 31, 2010.

General and Administrative Expense. General and administrative expense increased to $6.4
million in the three months ended March 31, 2010, or 14.3% of revenue, compared with $3.4 million in the three months ended March 31, 2009, or 8.9% of revenue. The increase in our general and administrative expense is primarily due to an
increase of $1.7 million in payroll and benefits, and $1.3 million in professional fees.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased to $3.9 million in the three months ended March 31, 2010, or 8.8% of revenue, compared to $4.0 million in the three months ended March 31,
2009, or 10.5% of revenue. Accelerated depreciation of $0.8 million was recorded in the three months ended March 31, 2009, related to the conversion of new switch equipment in our Illinois, Minnesota and Indiana locations. Excluding the
accelerated depreciation recorded in 2009, 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.



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Provision for Income Taxes. Provision for income taxes of $5.8 million for the
three months ended March 31, 2010 increased by $0.5 million compared to $5.3 million for the three months ended March 31, 2009. The effective tax rate for the three months ended March 31, 2010 and 2009 was 40.8% and 36.8%,
respectively. The increase in the tax rate was primarily due to the establishment of a $0.6 million valuation allowance against a portion of our Illinois EDGE credit deferred tax asset in the first quarter of 2010.

Liquidity and Capital Resources

At December 31, 2009, we had $161.4 million in cash and cash equivalents, $16.2 million in auction rate securities and $0.4 million
in restricted cash. In comparison, at March 31, 2010, we had $171.1 million in cash and cash equivalents, $12.9 million in auction rate securities and $0.9 million in restricted cash. Cash and cash equivalents consist of highly liquid money
market mutual funds. The restricted cash balance is pledged as collateral for certain commercial letters of credit.



|                                         |  |                    |        |   |                |   |        |  
|---------------------------------------- |  | ------------------ | ------ | - | -------------- | - | ------ | -
|                                         |  | Three Months Ended |       
|                                         |  | March 31, 2010     |        |   | March 31, 2009 |  
|Net cash flows from operating activities |  | $                  | 19,040 |   |                | $ | 16,880 |  
|Net cash flows from investing activities |  |                    | 378    |   |                |   | (973   | )
|Net cash flows from financing activities |  |                    | (9,722 | ) |                |   | 2,315  |  

Cash flows from
operating activities

Net cash provided by operating activities was $19.0 million for the three months ended March 31,
2010, compared to $16.9 million for the same period last year. Operating cash inflows are largely attributable to payments from customers which are generally received between 35 to 45 days following the end of the billing month. Operating cash
outflows are largely attributable to personnel related expenditures, and facility and switch maintenance costs. The increase in operating cash flow reflects the increase in revenue during the three months ended March 31, 2010, resulting in an
increase in cash collections of our accounts receivable balance, partially offset by an increase in income taxes paid for the three months ended March 31, 2010.

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.

Cash flows from investing activities

Net cash provided by investing activities was $0.4 million for the first three months of 2010, compared to net cash used
for investing activities of $1.0 million for the same period last year. Investing cash flows are primarily related to purchases of switch equipment and the purchase and sale of investments. The increase in investing cash flow is the result of
proceeds received from the partial redemption of ARS during the first quarter 2010, partially offset by the purchases of switch equipment and the increase in our restricted cash balance.

In the next twelve months, capital expenditures are expected to be in the range of approximately $18.0 to $22.0 million, primarily for
the expansion into new locations and the expansion and upgrades of current locations.

Cash flows from financing activities

Net cash used for financing activities was $9.7 million for the first three months of 2010, compared to net cash provided
by financing activities of $2.3 million for the same period last year. The changes in cash flows from financing activities primarily relate to the exercise of stock options, stock repurchase and payments under our debt obligations. The decrease in
financing activities is primarily the result of the stock repurchase during the first quarter 2010, partially offset by a decrease in principal repayments of long-term debt.

We regularly review acquisitions and additional strategic opportunities, which may require additional debt or equity financing.

Investments

We held approximately $13.8 million (par value) and $17.1 million (par value) of ARS at March 31, 2010 and December 31, 2009,
respectively. These investments were valued at fair value as of March 31, 2010. As such, in the first quarter of 2010 we recorded a gain of $0.1 million for three months ended March 31, 2010, related to investments in auction rate
securities. Our auction rate securities had an auction reset feature whose underlying assets are generally student loans which are insured in part by the federal government under the Federal Family Education Loan Programs (FFELP). Our ARS Rights are
required to be recognized as a free-standing asset, separate from our ARS. As such, we recorded a gain of approximately $0.1 million for the three months ended March 31, 2010, related to the ARS Rights.

We also invest our excess cash in money market mutual funds which are carried at market value. As of March 31, 2010, we had $165.8
million in cash and cash equivalents invested in two money market mutual funds.

For further discussion of these investments
see footnote 7 to the condensed consolidated financial statements  Investments and Fair Value Measurements included elsewhere herein.



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Effect of Inflation

Inflation generally affects us by increasing our cost of labor and equipment. We do not believe that inflation had any material effect on
our results of operations for the three month periods ended March 31, 2010 and 2009.



|Item 3. | Qualitative and Quantitative Disclosure about Market Risk
|------- | ---------------------------------------------------------

Interest rate exposure

We had cash, cash equivalents, short-term investments and restricted cash totaling $185.7 million at March 31, 2010. This amount was
allocated primarily in money market mutual funds, ARS and associated ARS Rights. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for speculative purposes. At March 31, 2009, we
had $147.6 million in cash, cash equivalents, long-term investments and restricted cash. For further discussion of these investments see footnote 7 to the condensed consolidated financial statements  Investments and Fair Value
Measurements.

Based upon our overall interest rate exposure at March 31, 2010, we do not believe that a
hypothetical 10 percent change in interest rates over a one year period would have a material impact on our earnings, fair values or cash flows from interest rate risk sensitive instruments discussed above.



|Item 4. | Controls and Procedures
|------- | -----------------------

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Companys
reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

Evaluation

We carried out an evaluation, under the supervision, and with the participation, of our management, including our Chief Executive Officer
and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2010. Based on the foregoing, our Chief Executive Officer and principal financial officers concluded that our disclosure controls
and procedures were effective as of March 31, 2010 at the reasonable assurance level.

There have been no changes during
the three months ended March 31, 2010 covered by this report in our internal control over financial reporting or in other factors that could materially affect or are reasonably likely to materially affect internal control over financial
reporting.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

From
time to time, we are a party to legal proceedings arising in the normal course of our business. Aside from the matter discussed below, we do not believe that we are party to any pending legal action that could reasonably be expected to have a
material adverse effect on our business or operating results.

Peerless Network, LLC . On June 12, 2008, we
commenced a patent infringement action against Peerless Network, LLC, Peerless Network of Illinois, LLC and John Barnicle, in the United States District Court for the Northern District of Illinois to enforce U.S. Patent No. 7,123,708 (
Neutral Tandem, Inc. v Peerless Network, LLC, Peerless Network of Illinois, LLC and John Barnicle, 08 CV 3402) . On July 28, 2008, the defendants filed a response to our complaint denying liability and asserting various affirmative
defenses and counterclaims. The defendants generally allege (i) that our patent is invalid and unenforceable under a variety of theories, (ii) that assertion of the patent amounts to patent misuse and violation of certain monopolization
laws, and (iii) that certain conduct surrounding the litigation gave rise to tortious interference and business disparagement claims and Lanham Act violations. On December 4, 2008, the court granted our motion to dismiss the claims
alleging business disparagement and Lanham Act violations but denied our motion to dismiss the claims related to the alleged violation of certain monopolization laws. On January 27, 2010, the court issued an order construing each of the
disputed terms in the patent in the manner we had proposed. On March 30, 2010, the court issued an order denying our motion dated August 25, 2009 for preliminary injunctive relief which sought to enjoin Peerless Network from providing
certain tandem transit services. Because the standards employed by the court differ at the preliminary injunction stage from the full trial on the merits, the ruling does not preclude us from proceeding to trial in this patent infringement action.

On April 27, 2010, the court issued an order denying without prejudice the motion of Peerless Network seeking leave to
file a motion to stay the patent litigation. Peerless Network sought to stay the patent litigation pending the USPTOs inter partes reexamination of the validity of the patent at issue, which is discussed below. The full trial in this
action is currently scheduled to begin in September 2010. The parties are currently completing discovery on our claims and the defendants remaining counterclaims.



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In a separate proceeding, on January 28, 2010, Peerless Network filed a request with
the USPTO requesting that the USPTO reexamine the patent at issue. On March 26, 2010, the USPTO granted Peerless Networks reexamination request and issued an initial office action which rejected the patents 23 claims. The claims of
the patent at issue as originally issued by the USPTO remain valid and enforceable during the USPTO reexamination proceeding. Either party may reference the USPTO proceeding to support its position in matters before the court.

Under the USPTOs rules, we were not allowed to respond to Peerless Networks request prior to the USPTOs initial
determination. Our response in the USPTO is presently due in late May 2010. After the USPTO reviews our submission, as well as any subsequent response made by Peerless Network, the USPTO may allow the claims to issue in their current form, require
further amendments to the claim, or reject the claims. At that point, there may be further proceedings at the USPTO. According to statistics provided by the USPTO, the average time to completion of a reexamination proceeding is approximately 36
months. The USPTO has not yet ruled on Peerless Networks request, although the USPTO typically accepts reexamination requests. If the USPTO grants Peerless Networks request, the reexamination proceeding could result in the USPTO
determining that some or all of the claims in the reexamined patent remain patentable over the prior art without requiring any amendment, that some or all of the claims must be amended to distinguish over the prior art, or that some or all of the
claims are not patentable over the prior art.



|Item 1A. | Risk Factors
|-------- | ------------

Our 2009
Annual Report on Form 10-K includes a detailed discussion of our risk factors. The information presented below amends, updates and should be read in conjunction with the risk factors and information disclosed in that Form 10-K.

We face competition from the traditional ILECs and increasing competition from certain other providers such as Level 3 Communications, Peerless
Network and Hypercube and expect to compete with new entrants to the tandem services market.

We face competition from
the traditional ILECs, certain other providers such as Level 3 Communications, Peerless Network and Hypercube, and expect to compete with new entrants to the tandem services market. Please see Item 1. Legal Proceedings in Part II of this
quarterly report on Form 10-Q for a further description of this matter. Competition has recently intensified, especially with Peerless Network, causing us to lose some traffic as well as reduce certain rates we charge our customers in various
markets, including with respect to our major customers in our largest markets. We expect competition to intensify in the future, including as a result of the adoption of IP-based switching by telecommunications carriers, which is likely to increase
competition from direct connections. See Risk Factors  The market for our services is competitive and increased adoption of IP switching technologies could increase the competition we face from direct connections under Item 1A
in our 2009 Annual Report on Form 10-K. Certain of our current and potential competitors have significantly more employees and greater financial, technical, marketing, research and development, intellectual property development and protection and
other resources than us. Also, some of our current and potential competitors have greater name recognition that they can use to their advantage. Our competitors have charged rates that are below the rates we charge, at times substantially, and may
continue to do so in the future. In addition, our competitors could bundle other services with their transit or access services to compete with us or be able to respond more quickly to new or emerging technologies and changes in customer
requirements than we can. Furthermore, changes in switching technology have lowered the cost of entry into our business which could promote additional competition. Existing or increased competition as described above could result in fewer customer
orders, reduced revenues, reduced gross margins and loss of market share, any of which could have a material and adverse effect on our business, prospects, financial condition and operating results.

If we are not able to obtain and enforce patent protection for our methods and technologies, or prevail in our pending patent infringement action
against Peerless Network, competitors may be more easily able to compete with us, our ability to successfully operate our network may be disrupted and our ability to operate our business profitably may be harmed.

Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under the patent and other
intellectual property laws of the United States, so that we can prevent others from using our inventions and proprietary information. However, we may not hold proprietary rights to some of our current or future methods and technologies. Because
patent applications in the United States are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in industry-related literature lag behind actual discoveries, we cannot be
certain that we were the first to make the inventions claimed in issued patents or pending patent applications, or that we were the first to file for protection of the inventions set forth in our patent applications. As a result, we may not be able
to obtain adequate patent protection and competitors would be more easily able to compete with us. Moreover, we may even be required to obtain licenses under third-party patents. If licenses are not available to us on acceptable terms, or at all, we
will not be able to operate our network and competitors would be more easily able to compete with us.

The process of obtaining patent protection is expensive and time consuming, and we may not be able to
file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Despite our efforts to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as
proprietary. The issuance of a patent does not guarantee that it is valid or enforceable, so even if we obtain patents, they may not be valid or enforceable against third parties. In addition, the issuance of a patent does not guarantee that we have
the right to practice the patented invention. Third parties may have blocking patents that could be used to prevent us from marketing our own patented product and practicing our own patented technology.



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Our pending patent applications may not result in issued patents. The patent position of
technology-oriented companies, including ours, is generally uncertain and involves complex legal and factual considerations. The standards which the United States Patent and Trademark Office use to grant patents are not always applied predictably or
uniformly and can change. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth of claims allowed in any patents issued to us or to others. The allowance of broader claims may increase the incidence
and cost of patent interference proceedings and/or opposition proceedings and the risk of such claims being invalidated by infringement litigation. On the other hand, the allowance of narrower claims may limit the value of our proprietary rights.
Our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products, or provide us with any competitive advantage. Moreover, once any patents have been issued, our patents and any
patent for which we have licensed or may license rights may be challenged, narrowed, invalidated or circumvented. If our patents are invalidated or otherwise limited, other companies will be better able to develop products that compete with ours,
which could adversely affect our competitive business position, business prospects and financial condition. On June 12, 2008, we commenced a patent infringement action against Peerless Network, LLC and John Barnicle in the United States
District Court for the Northern District of Illinois to enforce our rights under U.S. Patent No. 7,123,708 (Neutral Tandem, Inc. v Peerless Network, LLC, Peerless Network of Illinois, LLC and John Barnicle, 08 CV 3402). See Item 1.
Legal Proceedings in Part II of this quarterly report on Form 10-Q for a further description of this matter. If we do not prevail in this matter, it could result in continued or increased competition, either of which could adversely affect our
business and financial condition.

We also rely on trade secrets, know-how and technology, which are not protected by patents,
to maintain our competitive position. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially and
adversely affected.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

Stock repurchase activity during the three months ended March 31, 2010 was as follows:



|                                     |  |                                     |  |                             |       |                                                                         |   |                                                                        |   |       
|------------------------------------ |  | ----------------------------------- |  | --------------------------- | ----- | ----------------------------------------------------------------------- | - | ---------------------------------------------------------------------- | - | ------
|Period                               |  | Total Numberof
SharesPurchased(000) |  | Average PricePaid per Share |       | Total Number ofSharesPurchased
asPart of
PubliclyAnnouncedPrograms(000) |   | MaximumDollar Valuethat 
May Yet bePurchasedunder
thePrograms(1)($000)
|January 1, 2010 - January 31, 2010   |  |                                    |  | $                           |      |                                                                         |  |                                                                        | $ |      
|February 1, 2010 - February 28, 2010 |  | 490                                 |  | $                           | 15.59 |                                                                         |  |                                                                        | $ | 17,356
|March 1, 2010 - March 31- 2010       |  | 115                                 |  | $                           | 16.60 |                                                                         |  |                                                                        | $ | 15,444
|                                     |  |                                     |  |                             |       |                                                                         |   |                                                                        |   |       
|Total                                |  | 605                                 |  | $                           | 15.78 |                                                                         |   |                                                                        |   |       



|(1) | In February 2009, our Board approved the repurchase of up to $25.0 million of our outstanding common stock as part of a stock repurchase program. We may repurchase
shares through open market, negotiated or block transactions. Our stock repurchase activities are conducted in compliance with the safe harbor provisions of Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The stock repurchase program
does not obligate us to repurchase any dollar amount or number of shares of our common stock, and the program may be extended, modified, suspended or discontinued at any time. As of March 31, 2010, $15.4 million remained available for further
purchases under this repurchase program.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 5. Other Information

On May 4, 2010, the Company entered into the Third Amendment to the Sprint Interconnection Agreement (the Third Amendment), by
and between the Company, on the one hand, and Sprint PCS, Nextel, Nextel Partners, iPCS and Sprint Communications (together with various other affiliates and entities, Sprint), on the other hand, effective April 25, 2010. Pursuant
to the Third Amendment, the parties have agreed to preferred terms in Sprints routing tables for intraMTA or intraLATA traffic that originates from Sprint and terminates to NPA-NXXs provided by the Company. The Third Amendment does not contain
any requirement that Sprint use the Companys services in any specified amount or at all and can be terminated by Sprint. See There are no minimum revenue requirements in our contracts, which means that there is no limit to the potential
adverse effect on our revenues from a decrease in the volume of traffic we handle in the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. A copy of the Third Amendment is attached hereto as
Exhibit 10.1 and incorporated herein by reference.

On May 4, 2010, the Companys Board of Directors approved the
accelerated vesting of 6,364 shares of Dr. Dolls non-vested shares, effective May 25, 2010, in recognition of Dr. Dolls service on the Board. Dr. Dolls remaining 8,347 shares of non-vested shares will be forfeited to the Company.
Dr. Dolls term on the Board will expire at the annual meeting of stockholders to be held on May 25, 2010. The expiration of Dr. Dolls term on the Board is not a result of Dr. Dolls refusal to stand for reelection or any
disagreement which Dr. Doll has expressed to the Board.

Item 6. Exhibits

(a) Exhibits



|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.1 |  | Third Amendment to the Sprint Interconnection Agreement, dated May 4, 2010, by and between Sprint Spectrum L.P., acting in its authority as agent on behalf of and for the
benefit of APC PCS, LLC., PhillieCo, L.P., SprintCom, Inc., Sprint PCS License, LLC and WirelessCo, L.P., Nextel Operations, Inc, acting in its authority as agent for the benefit of Nextel of California, Inc., Nextel Communications of the
MidAtlantic, Inc., Nextel of New York, Inc., Nextel South Corp., Nextel of Texas, Inc., and Nextel West Corp., NPCR, Inc., iPCS, Inc. (comprised of iPCS Wireless, Inc,, Horizon Personal Communications, Inc. and Bright Personal Communications
Services, LLC), Sprint Communications Company L.P. and Neutral Tandem, Inc.*



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|             |  |                                                                                                                               
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit 31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                           
|             | 
|Exhibit 31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                           
|             | 
|Exhibit 32.1 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



|* | Confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission under a confidential treatment request pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SIGNATURES

Pursuant to the requirements 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.



|                  |  |  |  |                      |  |                                                                                       
|----------------- |  |  |  | -------------------- |  | --------------------------------------------------------------------------------------
|                  |  |  |  | NEUTRAL TANDEM, INC.
|                  |  |  | 
|Date: May 7, 2010 |  |  |  | By:                  |  | /S/    RIAN
WREN                                                                      
|                  |  |  |  |                      |  | Rian Wren,
Chief Executive Officer
(Principal Executive Officer)                      
|                  |  |  | 
|Date: May 7, 2010 |  |  |  | By:                  |  | /S/    ROBERT
JUNKROSKI                                                               
|                  |  |  |  |                      |  | Robert Junkroski,
Chief Financial Officer
(Principal Financial and Accounting Officer)



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