Form S-1

(Name, address, including zip code, and telephone number, including area code, of agent for service)

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: ¨

If this Form is filed to registered additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company ¨

The registrant hereby amends this Registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. The prospectus is not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer and sale is not permitted.

This prospectus relates to shares of common stock offered by the selling shareholders named in this prospectus. We are not selling any shares of common stock under this prospectus. We will not receive any proceeds from the sale of our common stock by the selling shareholders.

Our common stock trades on The NASDAQ Global Market under the symbol “TNDM.” The last reported sales price of our common stock on March 11, 2008, was $20.53.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 9.

The selling shareholders have granted the underwriters the right to purchase up to an additional 675,000 shares of common stock, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover any over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on , 2008.

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospectus may have changed since that date.

We have not taken any action to permit a public offering of the shares of common stock outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including “Risk Factors” and our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. In this prospectus, “Neutral Tandem,” “the Company,” “we,” “us” and “our” refer to Neutral Tandem, Inc. and its subsidiaries.

In this prospectus we sometimes refer to various industry and other terms and abbreviations, which we have defined under “Glossary” on page 111 of this prospectus.

Our Company

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 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 was through the use of the incumbent local exchange carriers’, or ILECs, tandem switches. Under certain interpretations of the Telecommunications Act of 1996, ILECs are required to provide tandem switching to competitive carriers. For tandem transit services, ILECs generally set per minute rates and other charges according to mandated rate schedules (including varying rates) set by state public utility commissions. Our solution enables competitive carriers to exchange traffic between their networks without using an ILEC tandem.

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

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.

At December 31, 2007, we had 78 major competitive carriers and non-carriers connected to our network. We provide service to wireless carriers (59.7% of 2007 revenue), wireline carriers (21.3% of 2007 revenue), cable companies (14.5% of 2007 revenue) and non-carriers (4.5% of 2007 revenue). Our network currently carries approximately 4.1 billion minutes of traffic per month and is capable of terminating calls to an estimated 255 million assigned telephone numbers.

Since commencing service in February 2004, we have grown rapidly and operate in 64 markets as of December 31, 2007. For the year ended December 31, 2007, we increased revenue to $85.6 million, an increase of 61.8% compared to the year ended December 31, 2006, and our income from operations for the year ended December 31, 2007 was $17.7 million compared to $5.5 million for the year ended December 31, 2006. Net income was approximately $6.3 million compared to net income of $4.7 million for the year ended December 31, 2006.

Our Industry

According to the Local Exchange Routing Guide, an industry standard guide maintained by Telcordia that is used by carriers, there are approximately 1.4 billion telephone numbers assigned to carriers in North America. Our services are principally targeted to address the estimated 722 million, or 52% of the total 1.4 billion, telephone numbers assigned primarily to competitive carriers.

The following diagrams illustrate interconnecting via the ILEC tandem networks and an example of interconnecting via our managed tandem network.

LOGO

The second alternative for exchanging traffic, prior to us, was by directly connecting competitive carrier switches to each other. The capital and operating expense requirements, complexity and management challenges of establishing and maintaining direct connections generally makes them uneconomical for all but the highest traffic switch combinations and an impractical network-wide solution.

Our Services

Our services allow competitive carriers to exchange traffic between their networks without using an ILEC tandem or establishing direct connections. Each competitive carrier that connects to our network generally gains access to all other competitive carriers’ switches connected to our network.

Once connected to our network, carriers can route their traffic to other destinations (telephone numbers) that are addressable by our network. We charge on a per-minute basis for traffic switched by our network. We have an established system for monitoring and tracking customer traffic volumes, and have historically been able to predict these volumes with relative accuracy.

As a core component of our service offering, we actively manage network capacity between our tandem switches and customers’ switches.

Our managed tandem network includes technologically advanced Internet Protocol, or IP, and Time Division Multiplexing, or TDM, switching platforms linked together by an IP backbone. Our network is capable

of automatically switching IP-originated or conventional TDM traffic to terminating carriers using either protocol. We support IP-to-IP, IP-to-TDM, TDM-to-IP and TDM-to-TDM traffic with appropriate protocol conversion and gateway functionality.

Our network, as of December 31, 2007, connected 891 unique competitive carrier switches, creating up to 792,990 unique switch-to-switch routes serving an estimated 255 million telephone numbers assigned to these carriers. In the quarter ended December 31, 2007, our network carried approximately 4.1 billion minutes of traffic per month.

Our Strengths

We believe the following strengths differentiate us and position us for continued growth.

•

Market Leading Position. By being “first-to-market” in the metropolitan areas we serve, we have built significant scale for carrier interconnections and access to terminating telephone numbers.

•

Strong “Network Effect.” The value of our service offering increases with the number of carriers and non-carriers connected to our network. The addition of each new customer to our network allows the new customer to route traffic to all of our existing customers and allows all of our existing customers to route traffic to the new customer.

•

Network-Neutral Position. Unlike the ILECs, we are positioned as a neutral, third party tandem service provider and generally do not directly compete with our customers. Therefore, we do not have the traditional competitive tensions and conflicts of interest of an ILEC in providing tandem interconnection services.

•

Large and Growing Market. The continuing shift of telecommunications traffic away from conventional ILEC phone lines to the wireless, broadband, cable telephony and other wireline segments, provides opportunities for us to continue to expand our business. Our tandem network was designed to serve the interconnection needs of these rapidly growing segments of the communications market, and since the initiation of our service in 2004, we feel we have built strong relationships with a majority of the leading carriers in these segments, which we believe provides opportunities for us to grow with our customers.

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Adaptable Technology and Proprietary Software Tools. We believe the adaptability and flexibility of our technology enables us to provide more robust service offerings, to interconnect a wider range of traffic types and to adapt our service offerings more efficiently than the ILECs.

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Experienced Management Team. We have an experienced management team committed to further expanding our market position.

Our Strategy

Our strategy is focused on expanding our business by increasing the share of telecommunications traffic that our network can serve. Key elements of our expansion strategy include:

•

Broaden our geographic presence. Our managed tandem services, as of December 31, 2007, were available in 64 markets, serving an estimated 255 million assigned telephone numbers out of a potential addressable market of 432 million telephone numbers assigned to competitive carriers in these 64 markets. Telephone numbers assigned to a carrier may not necessarily be assigned to, and in use by, an end user, as described in “Glossary.” Our expected market expansion plan during the 12 months following December 31, 2007 includes 25 new markets. The new markets increase our potential addressable market coverage opportunity to an estimated 566 million assigned telephone numbers to competitive carriers.

•

Expand our customer base. As our network expands, our market opportunity will include additional competitive carriers (particularly regional wireless carriers and cable companies) and non-carriers that are not in the markets we currently serve. Many of these potential customers are among the fastest growing carriers in their service areas.

•

Grow customer traffic. Three factors principally drive traffic growth from customers: routing opportunities to new customers, routing opportunities in new markets and growth in our customers’ traffic volumes. As we add new customers to our network, we receive incremental revenue from the new customer and from all existing customers terminating traffic to the new customer. This “network effect,” our expansion strategy and focus on serving the fastest growing segments of the competitive telephony industry positions us well to grow customer traffic.

•

Increase the types of traffic we exchange. Our business originally connected only local traffic among carriers within a single metropolitan market. In 2006, we installed a national IP backbone network connecting our major local markets. As a result, our service offerings now include the capability of switching and carrying traffic between multiple markets and among different types of customers.

Company Information

We were incorporated in Delaware on April 19, 2001. We commenced operations in November 2003 and began generating revenue with the launch of our service in February 2004. On November 7, 2007, we completed our initial public offering of common stock in which we sold 7,247,489 shares of common stock (including 997,489 shares sold pursuant to the underwriter’s full exercise of their over-allotment option) and selling shareholders sold 399,928 shares of common stock, in each case, at an issue price of $14.00 per share. We raised a total of $101.5 million in gross proceeds from our initial public offering, or $91.3 million in net proceeds after deducting underwriting discounts and commissions of $7.1 million and other offering costs of $3.1 million. We did not receive any proceeds from the sale of common stock by the selling shareholders.

Our principal executive offices are located at One South Wacker Drive, Suite 200, Chicago, Illinois 60606. Our telephone number is (312) 384-8000. Our Web site address is http://www.neutraltandem.com. The information contained on our Web site is not to be considered a part of this prospectus.

THE OFFERING


Common stock offered by the selling shareholders		4,500,000 shares

Total common stock offered as a percentage of common stock outstanding		14.3%

Common stock to be outstanding immediately after this offering		31,366,419 shares

Use of proceeds		We will not receive any of the proceeds from the sale of shares of our common stock by the selling shareholders. See “Use of Proceeds.”

Risk Factors		See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

NASDAQ symbol		“TNDM”

Unless the context requires otherwise, the number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 2007 and includes the 356,921 shares of common stock issued on February 25, 2008 in full satisfaction of all outstanding warrants. The number of shares of our common stock to be outstanding after this offering does not take into account:

•

3,328,412 shares of common stock issuable upon the exercise of outstanding stock options as of December 31, 2007 at a weighted average exercise price of $1.98 per share; and

•

an aggregate of 2,855,613 shares of common stock reserved for future issuances under our 2007 Long-Term Incentive Plan as of the closing of this offering.

Unless otherwise noted, the information in this prospectus assumes that the underwriters do not exercise their over-allotment option granted by the selling shareholders.

SUMMARY CONDENSED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables summarize our historical consolidated financial information and other data for the periods presented. The condensed consolidated financial information presented for the fiscal years ended December 31, 2005, 2006 and 2007 was derived from our consolidated financial statements, which have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, and are included elsewhere in this prospectus. This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus.


	Year Ended December 31,
	2005			2006			2007
	(In thousands, except share data)
Statements of Operations
Revenue	$	27,962		$	52,866		$	85,555
Operating Expense:
Network and Facilities Expense (excluding depreciation and amortization shown separately below)		11,349			21,305			30,163
Operations		8,189			11,613			15,536
Sales and marketing		1,360			1,553			1,770
General and administrative		3,053			4,166			9,426
Depreciation and amortization		3,141			7,160			11,076
Impairment of fixed assets		—			1,234			—
Loss (gain) on disposal of fixed assets		—			333			(144	)

Total operating expense		27,092			47,364			67,827

Income From Operations		870			5,502			17,728

Other (Income Expense:
Interest expense		843			1,289			1,668
Interest income		(170	)		(778	)		(1,321	)
Change in fair value warrants		674			832			4,919
Other income		(11	)		—			—

Total other expense		1,336			1,343			5,266

Income (Loss) Before Income Taxes		(466	)		4,159			12,462
Provision (Benefit) For Income Taxes		—			(499	)		6,204

Net Income (Loss)	$	(466	)	$	4,658		$	6,258

Earnings (loss) per common share—basic⁽¹⁾	$	(0.08	)	$	0.88		$	0.68
Earnings (loss) per common share—diluted⁽¹⁾	$	(0.08	)	$	0.20		$	0.24
Weighted average common shares—outstanding—basic		5,628			5,293			9,248
Weighted average common shares—outstanding—diluted		5,628			23,481			26,378

Other Data:
Capital expenditures	$	13,977		$	17,098		$	20,149
Cash flows from operating activities	$	2,147		$	12,967		$	24,141
Cash flows from investing activities	$	(10,240	)	$	(12,719	)	$	(19,947	)
Cash flows from financing activities	$	9,185		$	18,545		$	87,742
EBITDA⁽²⁾	$	3,348		$	11,830		$	23,885
Adjusted EBITDA⁽²⁾	$	4,051		$	13,061		$	29,710
Minutes of use Billed (in millions)		10,428			24,749			41,003
Average Fee Per Billed Minute	$	0.0027		$	0.0021		$	0.0021
Switch Locations Connected		320			553			891


	As of December 31
	2005			2006			2007
Balance Sheet Data:
Cash and cash equivalents	$	1,291		$	20,084		$	112,020
Total current assets		10,566			31,525			127,382
Total assets		31,224			61,991			166,016
Total current liabilities		6,895			13,325			16,276
Total liabilities		11,833			25,356			22,094
Total preferred stock		26,000			38,000			—
Total shareholders’ equity (deficit)		(6,609	)		(1,365	)		143,922

(1)

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. The effect of preferred shares, stock options and warrants represents the only difference between the weighted average shares used for the basic earnings (loss) per share computation compared to the diluted earnings (loss) per share computation.

(2)

EBITDA is defined as net income (loss) before (a) interest expense, net (b) income tax expense and (c) depreciation and amortization. Adjusted EBITDA is defined as EBITDA as further adjusted to eliminate the change in the fair value of warrants and non-cash share-based compensation. We believe that the presentation of EBITDA and Adjusted EBITDA included in this prospectus provides useful information to investors regarding our results of operations because it assists in analyzing and benchmarking the performance and value of our business. We believe that EBITDA and Adjusted EBITDA facilitate company-to-company operating performance comparisons of companies within the same or similar industries by backing out differences caused by variations in capital structure, taxation and depreciation of facilities and equipment (affecting relative depreciation expense), which may vary for different companies for reasons unrelated to operating performance. These measures provide an assessment of controllable operating expenses and afford management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance. They provide an indicator for management to determine if adjustments to current spending decisions are needed. Furthermore, we believe that the presentation of EBITDA and Adjusted EBITDA has economic substance because it provides important insight into our profitability trends, as a component of net income, and allows management and investors to analyze operating results with and without the impact of depreciation and amortization, interest and income tax expense and the change in fair value or warrants and non-cash share-based compensation. Accordingly, these metrics measure our financial performance based on operational factors that management can impact in the short-term, namely the operational cost structure and expenses of our business. In addition, we believe EBITDA and Adjusted EBITDA are used by securities analysts, investors and other interested parties in evaluating companies, many of which present an EBITDA measure when reporting their results. Although we use EBITDA as a financial measure to assess the performance of our business, the use of EBITDA is limited because it does not include certain material costs, such as depreciation, amortization and interest, necessary to operate our business. We disclose the reconciliation between EBITDA and net income (loss) below to compensate for this limitation. While we use net income (loss) as a significant measure of profitability, we also believe that EBITDA, when presented along with net income (loss), provides balanced disclosure which, for the reasons set forth above, is useful to investors in evaluating our operating performance and profitability. EBITDA included in this prospectus should be considered in addition to, and not as a substitute for, net income (loss) as calculated in accordance with generally accepted accounting principles as a measure of performance.

The following is a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA:


	Year Ended December 31,
	2005			2006			2007
	(In thousands)

Net income (loss)	$	(466	)	$	4,658		$	6,258
Interest expense, net		673			511			347
Income tax (benefit) expense		—			(499	)		6,204
Depreciation and amortization		3,141			7,160			11,076

EBITDA	$	3,348			11,830			23,885
Non-cash share-based compensation		29			399			906
Change in fair value of warrants		674			832			4,919

Adjusted EBITDA	$	4,051		$	13,061		$	29,710

This offering involves a high degree of risk. You should consider carefully the risks and uncertainties described below and the other information in this prospectus, including the consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock. If any of the following risks or uncertainties actually occur, our business, prospects, financial condition and operating results would likely suffer, possibly materially. In that event, the market price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations.

Failures or interruptions of our tandem network or the loss of, or damage to, a tandem network switch site could materially harm our revenues and impair our ability to conduct our operations.

We provide telecommunications services that are critical to the operations of our customers. Notably, our tandem network service is essential to the orderly operation of our customers’ telecommunications system because it enables competitive carriers to ensure that telephone calls are routed to the appropriate destinations. Our tandem network architecture is integral to our ability to process a high volume of calls in a timely and effective manner. We could experience failures or interruptions of our tandem network and services, or other problems in connection with our operations, as a result of:

If we cannot adequately protect the ability of our tandem network to perform consistently at a high level or otherwise fail to meet our customers’ expectations:

Any of these consequences would adversely affect our business, prospects, financial condition and operating results.

We may not have sufficient redundant systems or back-up facilities to allow us to receive and process calls in the event of a loss of, or damage to, a tandem network switch site. We could lose, or suffer damage to, a site in the event of power loss, natural disasters such as fires, earthquakes, floods and tornadoes, telecommunications failures, such as transmission cable cuts, or other similar events that could adversely affect our customers’ ability to access our tandem network services. Any such loss or damage could interrupt our operations, materially harm our revenues and growth and require significant cash expenditures to correct the failures caused by such loss or damage.

The communications services industry is highly regulated by the federal government and the individual states. While the pricing of our services is generally not heavily regulated by the Federal Communications Commission, or FCC, or state utility agencies, these agencies have greater regulatory authority over the pricing of incumbent local exchange carriers, or ILECs’, transit services, which generally sets the benchmark for the prices of competitive services that we offer. To the extent that the ILEC transit rates are reduced, it could have an adverse impact on us.

For example, in Michigan, in 2005, the Michigan Public Service Commission revised the maximum allowable rate that AT&T Inc., or AT&T, could charge for transit service based on AT&T’s total element long run incremental cost, or TELRIC, which was significantly below the rate previously charged by AT&T (previously SBC Communications). This decision had a significant impact on the profitability of our service in Michigan.

The FCC currently does not actively regulate the services we offer. If, however, the FCC determined, on its own motion or in response to a third party’s filing, that it should more actively regulate our services, the FCC could limit the rates we charge or require us to change other terms or conditions of our service offerings. For example, in 2001 the FCC initiated a proceeding to address intercarrier compensation issues, such as rules that require one carrier to make payments to another carrier for access to the other’s network. As part of that docket, on July 24, 2006, a group of large and rural local exchange carriers, or LECs, filed a proposal for intercarrier compensation reform at the FCC called the Missoula Plan, which includes provisions regarding tandem transit services. Under the Missoula Plan, tandem transit service would be provided at a rate not to exceed $0.0025 per minute of use for the first four years of the plan, and then increase with inflation. This rate is lower than the rates charged by the ILECs or by us in several of the markets in which we currently operate. The FCC currently is considering public comments on the Missoula Plan. Independent of or in combination with the Missoula Plan, the FCC could make significant changes in the pricing of transit traffic, including lowering the rate, freezing the rate or establishing uniform rates. In addition, from time to time, carriers that we connect with have requested that we pay them to terminate traffic, and this proceeding if completed will likely address those rights or obligations.

As communications technologies and the communications industry continue to evolve, the statutes governing the communications industry or the regulatory policies of the FCC, state legislatures or agencies or local authorities may change. If this were to occur, the demand and pricing for our tandem network services could change in ways that we cannot easily predict and our revenues could decline. These risks include the ability of the federal government, including Congress or the FCC, or state legislatures or agencies, or local authorities to:

We cannot predict when, or upon what terms and conditions, further regulation or deregulation might occur or the effect future regulation or deregulation may have on our business. Any of these government actions could have a material adverse effect on our business.

Consolidation in the industry, such as AT&T-BellSouth-Cingular, Verizon-MCI and SBC-AT&T, reduces the need for intercarrier transit services and may limit our growth opportunities.

Consolidation in the industry reduces the need for intercarrier transit services by reducing the number of carriers. As carriers merge, (i) the risks to our business of direct connections increases, see “—The market for our services is competitive and increased adoption of Internet Protocol, or IP, switching technologies could increase the competition we face from direct connections” below, (ii) traffic that was carrier-to-carrier becomes intra-carrier traffic not normally addressable by us and (iii) in the case of consolidations involving an ILEC, such as AT&T or Verizon Communications Inc., or Verizon, previous transit traffic between competitive carriers and the carrier acquired by the ILEC now potentially becomes ILEC reciprocal compensation traffic and not transit traffic, and thus potentially not addressable by us. For example, as a result of the SBC-AT&T combination, beginning in the second quarter of 2006, the combined SBC and AT&T entity began reducing the amount of minutes of use processed by us. During our 2006 fiscal year, we processed approximately 55% fewer minutes from AT&T and SBC, as a combined entity, compared to our 2005 fiscal year. We have experienced growth notwithstanding this consolidation, but our ability to grow in the future could be adversely affected by greater consolidation.

Additionally, in connection with the merger of BellSouth Corp., or BellSouth, and AT&T, AT&T agreed not to seek an increase in its current transit rates for existing transit customers for 42 months in the AT&T and BellSouth incumbent local exchange carrier service territories. While having no direct regulatory impact on us, this rate freeze potentially limits our ability to enter certain new markets in states where the terms offered by AT&T would not be attractive. Further consolidation in the industry could lead to similar agreements which would limit our ability to grow revenues and may materially affect our operating results.

Our top five customers represent, in the aggregate, a substantial portion of our revenue.

Our top five customers, in the aggregate, represented approximately 61% of our total revenues during the year ended December 31, 2007. Our two largest customers, Sprint Nextel and T-Mobile, accounted for 26% and 14%, respectively, of our total revenues during the year ended December 31, 2007. These customers could, at any time, solicit or receive proposals from other providers to provide services that are the same as or similar to ours. In addition, our contracts with these customers are non-exclusive, there are no volume or exclusivity commitments by customers under these contracts and any customer is able to discontinue the use of our services at any time.

We may lose business with any of these customers if we fail to meet our customers’ expectations, including for performance and other reasons, or if another provider offers to provide the same or similar services at a lower cost. In addition, competitive forces resulting from the possible entrance of a competitive provider could create significant pricing pressure, which could then cause us to reduce the selling price of our services in a manner that could have a material adverse effect on our business, prospects, financial condition and operating results.

We could experience material variances in our revenues due to events both under and outside of our control. For example, we could experience a material decline in the minutes of use that we process due to holidays or other seasonal variability, the timing of direct connects established between our customers, installation delays,

the implementation of routing changes and traffic outages. If one or more of these events occur, especially with respect to one or more of our larger customers, it would cause a material decrease in our revenues and have a material adverse effect on our business, prospects, financial condition and operating results.

We face competition from the traditional ILECs 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, LLC and its subsidiary Broadwing Communications, or Level 3, and expect to compete with new entrants to the tandem services market. We expect competition to intensify in the future, especially due to the adoption of IP-based switching by telecommunications carriers, which is likely to increase competition from direct connections. See “The market for our services is competitive and increased adoption of IP switching technologies could increase the competition we face from direct connections.” below. Some 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, many of our current and potential competitors have greater name recognition that they can use to their advantage. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can. In addition, ILECs could lower their rates or bundle other services with their transit services to compete with us. Furthermore, changes in switching technology have lowered the cost of entry into our business which could promote additional competition. Increased competition could result in fewer customer orders, reduced revenues, reduced gross margins and loss of market share, any of which could harm our business.

Moreover, competitors, such as Level 3 could threaten to disconnect direct interconnections or use other unforeseen tactics to compete with us. For example, in February 2007, Level 3 notified us that they were terminating two contracts under which we delivered transit traffic to Level 3. That same month, we began filing regulatory proceedings in eight states, asserting that we have the legal right to remain directly connected to Level 3 in order to terminate transit traffic to Level 3 on behalf of our third party carrier customers. Several recently decided regulatory rulings in connection with Level 3 were made in our favor. However, Level 3 has appealed the rulings in Illinois and Michigan and also filed federal complaints asserting that the state commissions that decided the cases in our favor in Illinois, New York and Georgia did not have the authority to do so. See “Business—Legal Proceedings.” Level 3 may also seek reconsideration of, appeal or otherwise challenge one or more of any other of the rulings made in our favor. Although we believe our position is meritorious and will continue to assert it vigorously in any such proceeding, there can be no assurance that we will prevail. Our efforts therefore in connection with these proceedings or responding to other actions could have an adverse impact on us if we do not prevail in one or more proceedings, or, even if we do prevail, because of legal costs, diversion of management resources and other factors. Level 3’s actions could also cause customers to use competing carriers’ services instead of our services, which could materially and adversely affect our operating results and our business. We currently terminate traffic to Level 3 in eight states. The traffic we terminated to Level 3 in these eight states accounted for approximately 9.2% of our total traffic during the 2007 calendar year.

The market for our services is competitive and increased adoption of IP switching technologies could increase the competition we face from direct connections.

The most natural form of competition we face is direct connection between our customers. When there is a significant amount of traffic between two switches, there is an economic incentive to directly connect and remove intermediate switching. As our customers grow, the amount of traffic exchanged between them grows, thus leading to the increased risk that they will direct connect switch paths that exchange significant traffic and remove that traffic from our tandems. The risk of direct connections is increased as more carriers move to an IP-based interface, because direct connecting between two IP-based carriers is less complex than establishing multiple direct connections between carriers’ switch pairs, thus enabling more direct connections. In addition, consolidation among telecommunications carriers can stimulate the risk of direct connections by increasing both the incentive and feasibility of executing direct connections. For example, we have noticed that certain competitive carriers established direct connections following completion of a business combination.

Our failure to achieve or sustain market acceptance at desired pricing levels could impact our ability to maintain profitability or positive cash flow.

Our competitors and customers may cause us to reduce the prices we charge for our services. The primary sources of pricing pressure include:

We may not be able to offset the effects of any price reductions by increasing the number of calls we handle or the number of customers we serve, by generating higher revenues from new or enhanced services or by reducing our costs.

We have a limited operating history as a company and as a tandem network for communications services providers. If we are unable to overcome the difficulties frequently encountered by early stage companies, our business could be materially harmed.

We began our commercial operations in November 2003. We have experienced, and expect to continue to experience, risks and difficulties frequently encountered by companies in an early stage of commercial development in new and rapidly evolving markets. In order to overcome these risks and difficulties, we must, among other things:

Our failure to overcome these risks and difficulties and the risks and difficulties frequently encountered by early stage companies could adversely affect our operating results which could impair our ability to raise capital, expand our business or continue our operations.

If we are unable to manage our growth or establish new tandem network switch sites, or do not adequately control expenses associated with the establishment of new sites, our operating results could be adversely affected.

Sustaining our growth has placed significant demands on our management as well as on our administrative, operational and financial resources. For us to continue to manage our growth, we must continue to improve our operational, financial and management information systems and expand, motivate and manage our workforce. As part of our growth strategy, we intend to establish new tandem network switch sites, particularly in new geographic markets. We will face various risks associated with identifying, obtaining and integrating attractive tandem network switch sites, cost estimation errors or overruns, interconnection delays, material delays or shortages, our inability to obtain necessary permits on a timely basis, if at all, and other factors, such as regulatory developments, many of which are beyond our control and all of which could delay the establishment of any new sites. We may not be able to establish and operate new tandem network switch sites on a timely or profitable basis. Establishment of new sites will increase our operating expenses, including lease expenses, expenses associated with hiring, training, retaining and managing new employees, purchasing new equipment, implementing new systems and incurring additional depreciation expense. If we are unable to successfully manage our growth without compromising our quality of service and our profit margins, or if new systems that we implement to assist in managing our growth do not produce the expected benefits, or if we are unable to control our costs as we establish additional tandem network switch sites and expand in geographically dispersed locations, our business, prospects, financial condition and operating results could be adversely affected.

During the year ended December 31, 2007, we delivered 57.4% of our terminating transit traffic to five carriers.

We generate revenue from our transit services by charging transit fees to the originating carrier of the call on a minute(s) of use basis. During the year ended December 31, 2007, we delivered 57.4% of this traffic to five carriers, including Level 3, with which we are currently involved in various disputes. See “Business—Legal Proceedings.” If for any reason we are unable to terminate transit traffic to any one of these five carriers or a material amount of terminating traffic to any other carrier(s), we would be unable to generate revenue from our customer originating the calls to such terminating carriers, which could have a material adverse effect on our operating results and financial condition.

Carriers may refuse to directly interconnect with us and consequently, we would be unable to terminate our customers’ transit traffic to them.

By operating as a common carrier, we benefit from certain legal rights established by federal and state statutes. We have used these rights to gain interconnection with the incumbent telephone companies. We have also used these rights to request interconnection with competitive carriers for the termination of transit traffic to carriers that decide for whatever reason not to utilize our transit service. If the FCC or a state takes the position that it does not have jurisdiction over such interconnection or over the regulation of competitive transit services generally, we may be unable to assert successfully a legal right to terminate transit traffic to a carrier that refuses to accept terminating traffic from us on reasonable or any terms. Such inability to terminate traffic may have a material adverse effect on our business. Furthermore, even if the FCC or a state asserts jurisdiction over interconnection or the regulation of competitive transit service, there can be no assurance that the FCC or the state will order a carrier to accept terminating traffic from us on commercially reasonable terms. While our experience has been that competitive carriers usually accommodate such requests, and often become users of our transit service as well, we are a party in multiple state regulatory proceedings pending against Level 3 related to their refusal to continue to accept such traffic. See “Business—Legal Proceedings.” Although the initial rulings in some of the Level 3 proceedings have generally been in our favor and we continue to terminate traffic to Level 3 in eight states, there can be no assurance regarding how, whether, or when each Level 3 matter will be finally resolved, including those matters for which Level 3 seeks reconsideration or appeals. In addition, other carriers in the future may similarly refuse to terminate traffic at all or on terms that are reasonable to us, or may claim rulings in our favor do not apply to them and refuse to interconnect with us. If under applicable law or otherwise

we are unable to terminate transit traffic to any carriers under reasonable terms, such a result could materially and adversely affect our business and the attractiveness of our service offerings. Moreover, even if we prevail in any legal or regulatory proceeding, our efforts could have an adverse impact on us because of legal costs, diversion of management resources and other factors.

Our ability to sell our services depends in part on the quality of our support and service offerings, and our failure to offer high quality support and services would have a material adverse effect on our sales and operating results.

Once our services are deployed, our customers depend on our support organization to resolve any issues. A high level of support is critical for the successful marketing and sale of our services. If we do not effectively assist carriers in deploying our services, succeed in helping carriers quickly resolve post-deployment issues and provide effective ongoing support, it will adversely affect our ability to sell our services. As a result, our failure to maintain high quality support and services would have a material adverse effect on our business, prospects, financial condition and operating results.

Security breaches could also adversely affect our business and our customers’ confidential information, which could result in us being subject to legal liability and our reputation could be harmed.

Our tandem network may be vulnerable to physical break-ins, computer viruses, attacks by computer hackers or similar disruptive problems. If unauthorized users gain access to our switch sites or our databases, a security or privacy breach could result in an interruption of service or reduced quality of service, which could cause harm to our business and reputation and could result in a loss of customers. Any breach of security relating to our customers’ confidential information could result in legal liability to us and a reduction in use of our services or cancellation of our services, either of which could materially harm our business. Our personnel often receive highly confidential information from our customers that is stored in our files and on our systems. Similarly, we receive sensitive pricing information that has historically been maintained as a matter of confidence with our customers.

We currently have practices, policies and procedures in place to ensure the confidentiality of our customers’ information. However, our practices, policies and procedures to protect against the risk of inadvertent disclosure or unintentional breaches of security might fail to adequately protect information that we are obligated to keep confidential. We may not be successful in adopting more effective systems for maintaining confidential information, so our exposure to the risk of disclosure of the confidential information of our customers may grow as we expand our business and increase the amount of information that we possess. If we fail to adequately maintain our customers’ confidential information, some of our customers could end their business relationships with us and we could be subject to legal liability.

The failure of the third-party software and equipment we use in our tandem network could cause interruptions or failures of our systems.

We incorporate hardware, software and equipment and license technologies developed by third-parties in our tandem network. Our third-party vendors include, among others, Nortel Networks Corp., or Nortel, and Sonus Networks, Inc., or Sonus, our switch vendors, Cisco Systems, Inc. and Oracle, for database systems and software, and various network services suppliers, such as AT&T, Verizon, Qwest, and Transaction Network Services Inc. and various competitive access providers for transport and Signaling System 7 services. As a result, our ability to provide tandem network services depends in part on the continued performance and support of the third-party services and products on which we rely and the respective vendors’ rights to license services and products to us, including without any third party claims for intellectual property infringement. In addition, we have only recently begun to use Sonus to supply switches and, therefore, our relationship and operating history with Sonus is limited. If these services or products are not provided to us or experience failures or have defects, or the third parties that supply the products fail to provide adequate support for any reason, this could result in or exacerbate an interruption or failure of our systems or services, which could harm our business and expose us to claims by customers.

Our business could be harmed by prolonged electrical power outages or shortages, increased costs of energy or general availability of electrical resources.

Our tandem network switch sites are susceptible to regional costs of power, electrical power shortages, planned or unplanned power outages caused by these shortages, such as those that occurred in the northeast region of the United States in 2003 and in the southeast region of the United States in 2005, and limitations of adequate power resources. We may not be able to pass on to our customers significant increases in the cost of power and power outages could disrupt the services we provide and reduce our revenues. Power outages, which last beyond our backup and alternative power arrangements, could harm our business and expose us to claims by customers.

A decline in the volume of traffic or transactions we handle could have a material adverse effect on our business, prospects, financial condition and results of operations.

We earn revenues for the vast majority of the services that we provide on a per minute of use or per transaction basis. 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. As a result, if our customers cease, or participants reduce, their usage of our services from their current levels, our revenues and results of operations will immediately suffer because there is no contractual requirement for the purchase of our services. For example, if competitive carriers develop internal systems to address their transit traffic needs, including direct connections, or if the cost of such transactions makes it impractical for a given carrier to use our services for these purposes, we may experience a reduction in transaction volumes. Finally, the trends that we believe will drive the future demand for our tandem network services, such as the growth of wireless services, and pressure on carriers to reduce costs, may not actually result in increased demand for our services, which would harm our future revenues and growth prospects.

We may be unable to complete suitable acquisitions, or we may undertake acquisitions that could increase our costs or liabilities or be disruptive to our business.

In the future, we may selectively pursue acquisitions to grow our business. We do not currently have any commitments, contracts or understandings to acquire any specific businesses or other material operations. We may not be able to locate suitable acquisition candidates at prices that we consider appropriate or to finance acquisitions on terms that are satisfactory to us. If we do identify an appropriate acquisition candidate, we may not be able to successfully negotiate the terms of an acquisition, finance the acquisition or, if the acquisition occurs, integrate the acquired business into our existing business. Acquisitions of businesses or other material operations may require additional debt or equity financing, resulting in additional leverage or dilution of ownership. Integration of acquired business operations could disrupt our business by diverting management away from day-to-day operations. The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating and retaining personnel with disparate business backgrounds and combining different corporate cultures. We also may not realize cost efficiencies or synergies or other benefits that we anticipated when selecting our acquisition candidates. In addition, we may need to record write downs from future impairments of intangible assets, which could reduce our future reported earnings. At times, acquisition candidates may have liabilities, neutrality-related risks or adverse operating issues that we fail to discover through due diligence prior to the acquisition. The failure to discover such issues prior to such acquisition could have a material adverse effect on our business, prospects, financial condition and operating results.

Failure to comply with neutrality positioning could result in loss of significant business.

We have positioned ourselves against ILECs as a neutral, third-party provider of tandem network services. Our failure to continue to adhere to this neutrality positioning (for example, by competing with any of our customers in any of their core businesses) may result in lost sales or non-renewal of contracts, any one of which could have a material adverse effect on our business, prospects, financial condition and operating results. For example, we have begun providing national transit services which can be viewed by some of our customers as being competitive with their wholesale transport services.

Our senior management is important to our customer relationships, and the loss of one or more of our senior managers could have a negative impact on our business.

We believe that our success depends in part on the continued contributions of our senior management. We rely on our executive officers and senior management to generate business and execute programs successfully. In addition, the relationships and reputation that members of our management team have established and maintain with our customers and our regulators contribute to our ability to maintain good customer relations and affect regulatory changes. The loss of one or more key members of senior management could impair our ability to identify and secure new contracts and otherwise to manage our business, any one of which could have a material adverse effect on our business, prospects, financial condition and operating results.

We believe that an integral part of our success is our ability to recruit and retain employees who have advanced skills in the tandem network services that we provide and who work well with our customers in the regulated environment in which we operate. In particular, we must hire and retain employees with the technical expertise and industry knowledge necessary to maintain and continue to develop our operations and must effectively manage our growing sales and marketing organization to ensure the growth of our operations. Our future success depends on the ability of our sales and marketing organization to establish direct sales and to develop new services. The employees with the skills we require are in great demand and are likely to remain a limited resource in the foreseeable future. If we are unable to recruit and retain a sufficient number of these employees at all levels, our ability to maintain and grow our business could be negatively impacted.

We have depended on equity financings and credit facilities to meet our cash requirements, which may not be available to us in the future on favorable terms, if at all. We may require substantial additional funds to execute our business plan and, if additional capital is not available, we may need to limit, scale-back or cease our operations.

We have depended upon equity financings, as well as borrowings under our credit facilities, to meet our cash requirements in each quarterly and annual period since we began our operations in November 2003. We expect to meet our cash requirements for the next 12 months through a combination of cash flow from operations, existing cash, cash equivalents and short-term investments. If our cash requirements vary materially from those currently planned, or if we fail to generate sufficient cash flow from our business, we may require additional financing sooner than anticipated. Additional equity or debt financing may result in the incurrence of additional leverage or dilution to our stockholders.

Our current credit facility with an affiliate of Western Technologies Investment matures in several installments beginning in May 2007 and ending in March 2010. We may default under this facility or may not be able to renew this credit facility upon expiration or on acceptable terms. In addition, we may seek additional funding in the future and intend to do so through public or private equity and debt financings. Additional funds may not be available to us on acceptable terms or at all. If we are unable to obtain funding on a timely basis, we may not be able to execute our business plan and could face the following or other risks:

As a result, our business, operating results and financial condition could be adversely affected and we may be required to significantly curtail or cease our operations.

If we do not maintain or generate significant revenues, we may not remain profitable.

Although we achieved net income of approximately $6.3 million for the year ended December 31, 2007, we expect to incur significant future expenses, particularly with respect to the development of new services, deployment of additional infrastructure, expansion in strategic markets and additional legal costs. To remain profitable, we must continue to increase the usage of our tandem network by our customers and attract new customers. We must also deliver superior service to our customers, mitigate the effects of consolidation and develop and commercialize new products and services. We may not succeed in these activities and may never generate revenues that are significant or large enough to sustain profitability on a quarterly or annual basis. A substantial portion of our revenues are derived from fees that we charge our customers on a per-minute basis. Therefore, a general market decline in the price for tandem network services may adversely affect the fees we charge our customers and could materially impact our future revenues and profits.

A substantial portion of our cash at December 31, 2007 was invested in one uninsured money market mutual fund.

As of December 31, 2007, we had $105.9 million invested in one uninsured money market mutual fund. Due to the short duration of the cash invested, we believe that we do not have any material exposure to changes in the fair value of our cash investments as a result of changes in interest rates. However, since the share price of a money market fund is typically $1; the interest rate paid on the investment or the yield, is typically the predominant measure of the return we receive. The yield may be affected by the default of any securities the fund invests in or changes in the value of investments caused by changes in interest rates; if these factors are severe, the share price of a fund could drop, which could materially and adversely affect our liquidity and ability to operate. The Securities and Exchange Commission, under the authority of the Investment Company Act of 1940, regulates money market funds to minimize these risks.

Our investments in adjustable rate securities are subject to risks which may cause losses and affect the liquidity of these investments.

At December 31, 2007, we had no auction rate securities. At February 15, 2008, we held approximately $25.2 million of municipal notes investments, classified as current assets, with an auction reset feature (“auction rate securities”) whose underlying assets are generally student loans which are substantially backed by the federal government. Auction rate securities are variable-rate instruments with longer stated maturities whose interest rates are reset at predetermined short-term intervals through a Dutch auction system. As of February 15, 2008 auctions failed for approximately $1.3 million of our auction rate securities and there is no assurance that currently successful auctions on the other auction rate securities in our investment portfolio will continue to succeed and as a result our ability to liquidate our investment and fully recover the carrying value of our investment in the near term may be limited or not exist. An auction failure means that the parties wishing to sell securities could not be matched with an adequate number of buyers. All of our auction rate securities, including those subject to the failure, are currently rated AAA, the highest rating, by a rating agency. If the issuers are unable to successfully close future auctions or their credit ratings deteriorate, we may in the future record an impairment charge on these investments. In addition, these types of developments could cause us to reclassify our investments in auction rate securities from a current asset to a long-term asset. We currently believe we will be able to liquidate our investment without significant loss within the next year and that these securities are not significantly impaired, primarily due to the government guarantee of the underlying securities, however, it could take until the final maturity of the underlying notes (up to 30 years) to realize our investments’ recorded value. Based on our expected operating cash flows, and our other sources of cash, we do not anticipate the potential lack of liquidity on these investments will affect our ability to execute our current business plan.

If we do not adapt to rapid technological change in the communications industry, we could lose customers or market share.

Our industry is characterized by rapid technological change and frequent new service offerings. Significant technological changes could make our technology and services obsolete, too costly or inefficient on a relative basis. We must adapt to our rapidly changing market by continually improving the features, functionality, reliability and responsiveness of our addressing, interoperability and infrastructure services, and by developing new features, services and applications to meet changing customer needs. We cannot ensure that we will be able to adapt to these challenges or respond successfully or in a cost-effective way. Our failure to do so would adversely affect our ability to compete and retain customers or market share. Although we currently provide our services primarily to traditional telecommunications companies, many existing and emerging companies are providing, or propose to provide, voice or similar services using new technologies. Our future revenues and profits will depend, in part, on our ability to provide new technologies to competitive carriers. We will need to spend significant amounts of capital to enhance and expand our services and continue to improve operating efficiencies. Failure to do so may materially harm our business.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect our proprietary technology, processes and methods, we rely in part on confidentiality agreements with our corporate partners, employees, consultants, advisors and others. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any rights against such party. Costly and time consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

If we are not able to obtain and enforce patent protection for our methods and technologies, 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.

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.

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.

Others may allege that we are infringing their intellectual property, forcing us to expend substantial resources in resulting litigation, the outcome of which would be uncertain. Any unfavorable outcome of such litigation could have a material adverse effect on our business, financial position and operating results.

If any parties successfully claim that our creation, offer for sale, sale, import or use of technologies infringes upon their intellectual property rights, we might be forced to incur expenses to litigate the claims, pay damages, potentially including treble damages, if we are found to have willfully infringed such parties’ patents or copyrights. In addition, if we are unsuccessful in litigation, a court could issue a permanent injunction preventing us from operating our network or commercializing our product and service candidates for the life of the patent that we have been deemed to have infringed. Litigation concerning patents and other forms of intellectual property and proprietary technologies, is becoming more widespread and can be protracted and expensive, and can distract management and other key personnel from performing their duties for us.

Any legal action against us claiming damages and seeking to enjoin commercial activities relating to the affected methods, processes, products and services could, in addition to subjecting us to potential liability for damages, require us to obtain a license in order to continue to operate our network or market the affected product and service candidates. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, some licenses may be nonexclusive, and therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to effectively operate our network or market some of our technology and products, which could limit our ability to generate revenues or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations.

From time to time we have received and we may in the future receive notices or inquiries from other companies regarding our services or the manner in which we operate our network suggesting that we may be infringing a pre-existing patent or we need to license use of their patents to avoid infringement. Such notices may, among other things, threaten litigation against us. As we have in the past, we will actively review the request and determine whether there is any validity to the request and seek to resolve the matter. Litigation over patent rights and other intellectual property rights is not uncommon with respect to network technologies, and sometimes involves patent holding companies or other adverse patent owners who have no relevant product revenues and against whom our own patents may therefore provide little or no deterrence. There can be no assurance that holders of patents will not pursue any claim against us in the future if they believe their patents are being infringed by our network or service offerings.

Our common stock has only traded since November 2, 2007 and our stock price is likely to be volatile.

Our common stock has only traded since November 2, 2007. The market prices for securities of telecommunications companies have historically been volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:

If any of these factors cause an adverse effect on our business, operating results or financial condition, the price of our common stock could fall.

In addition, public announcements by our competitors, among other things, their performance, strategy, accounting practices, or legal problems could cause the price of our common stock to decline regardless of our actual operating performance.

Two of our stockholders hold a significant block of our common stock and, as a result, have significant influence over us.

Representatives of New Enterprise Associates, or NEA, and Doll Capital Management, or DCM, significant shareholders of us, serve on our board of directors. As a result of their substantial ownership interest and representation on our board of directors, NEA and DCM may have the ability to significantly influence the outcome of a vote by our stockholders or our board of directors in respect of any matters requiring stockholder or board of directors’ approval and their interests could conflict with your interests.

If there are substantial sales of our common stock, our stock price could decline.

If our stockholders sell large numbers of shares of our common stock or the public market perceives that stockholders might sell shares of common stock, the market price of our common stock could decline significantly. Approximately 74% of our outstanding shares as of December 31, 2007 are currently restricted as a result of the application of securities laws, the Second Amended and Restated Registration Rights Agreement entered into by various of our stockholders or by virtue of lock-up agreements entered into with the underwriters in connection with our initial public offering. However, these shares will be able to be sold in the near future, subject in some instances to Rule 144 volume, manner of sale and other limitations.

Changes in our capital structure and level of indebtedness and the terms of such indebtedness could adversely affect our business and liquidity position.

Our level of indebtedness, including borrowings under our credit agreement, may increase from time to time for various reasons, including fluctuations in operating results, capital expenditures and possible acquisitions. Future consolidated indebtedness levels could materially affect our business because:

In addition, our credit agreement limits our ability to enter into various transactions and may further limit entering into various transactions following this offering. If we were to default on any of our indebtedness, or if we were unable to obtain necessary liquidity, our indebtedness would become due and payable immediately and our business could be adversely affected.

Anti-takeover provisions under Delaware law and in our amended and restated certificate of incorporation and bylaws could diminish the value of our common stock and could make a merger, tender offer or proxy contest difficult or could impede an attempt to replace or remove our directors.

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable or make it more difficult for stockholders to replace directors even if stockholders consider it beneficial to do so. Our amended and restated certificate of incorporation and bylaws:

In addition, Section 203 of the Delaware General Corporation Law may inhibit potential acquisition bids for us. Upon completion of this offering, we will be subject to Section 203, which regulates corporate acquisitions and limits the ability of a holder of 15% or more of our stock from acquiring the rest of our stock. Under Delaware law a corporation may opt out of the anti-takeover provisions, but we do not intend to do so.

These provisions may prevent a stockholder from receiving the benefit from any premium over the market price of our common stock offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

We incur increased costs as a public company, including as a result of recently enacted and proposed changes in laws and regulations.

As a publicly traded company, we are subject to U.S. securities laws and the listing requirements of The NASDAQ Stock Market. As such, we incur costs in connection with our preparation and filing of annual and quarterly reports, proxy statements and other information with the SEC and the furnishing of certain of this information to stockholders. Furthermore, recently enacted and proposed changes in the laws and regulations affecting public companies, including the Sarbanes-Oxley Act of 2002 and rules of the SEC, and the listing requirements of The NASDAQ Stock Market, are expected to further increase the costs of operating as a public company. The new rules could also make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical fact, included in this prospectus regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “expects,” “estimates,” “projects,” “plans,” “intends,” “may,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we make. We do not assume any obligation to update any forward-looking statements.

Market data and certain industry data and forecasts used throughout this prospectus were obtained from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We have not independently verified any of the data from third-party sources, nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable based upon our management’s knowledge of the industry, have not been independently verified. While we are not aware of any material misstatements regarding our industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus.

We will not receive any of the proceeds from the sale of shares of our common stock by the selling shareholders, including any proceeds they receive if the underwriters exercise the over-allotment option. We will pay estimated transaction expenses of approximately $0.7 million in connection with this offering.

We have never paid a cash dividend on our common stock. We currently are prohibited from paying dividends under our existing bank credit agreement. The payment of future dividends will depend on our earnings, cash needs, terms of debt agreements, and other factors that our board of directors deems relevant from time to time.

Our common stock has been listed on the NASDAQ Global Market under the symbol “TNDM” since November 2, 2007. Prior to that time, there was no public market for our common stock. The initial public offering price of our common stock was $14.00 per share, and the initial public offering closed on November 7, 2007. The closing sale price of our common stock on the NASDAQ Global Market was $20.53 per share on March 11, 2008. From November 2, 2007 through December 31, 2007, the range of the high and low closing sale prices of our common stock was $20.28 to $17.42 per share. From January 1, 2008 through March 11, 2008, the range of high and low closing sale prices of our common stock was $22.90 to $17.29 per share. As of March 11, 2008, there were approximately 1,200 holders of record of our common stock.

The following table sets forth our consolidated capitalization as of December 31, 2007.

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

The following table sets forth our selected historical consolidated financial information and other data for the periods presented. The consolidated financial information presented as of December 31, 2003, 2004 and 2005 and for the fiscal years ended December 31, 2003 and 2004 was derived from our consolidated financial statements, which have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, which are not included in this prospectus. The consolidated financial information presented as of December 31, 2006 and 2007 and for the fiscal years ended December 31, 2005, December 31, 2006 and December 31, 2007, was derived from our consolidated financial statements, which have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, and are included elsewhere in this prospectus. This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with our audited and unaudited consolidated financial statements, including the notes thereto, and the other financial information appearing elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties, including information with respect to our plans, intentions and strategies for our business. See “Cautionary Note Regarding Forward-Looking Statements.” For additional information regarding some of the risks and uncertainties that affect our business and the industries in which we operate and that apply to an investment in our common stock, please read “Risk Factors.” Our actual results may differ materially from those estimated or projected in any of these forward-looking statements.

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 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 was through the use of the ILECs’ tandem switches. Under certain interpretations of the Telecommunications Act of 1996, or the Telecommunications Act, ILECs are required to provide tandem switching to competitive carriers. For tandem transit services, ILECs generally set per minute rates and other charges according to mandated rate schedules (including varying rates) set by state public utility commissions. Our solution enables competitive carriers to exchange traffic between their networks without using an ILEC tandem.

We have signed agreements with major competitive carriers and non-carriers and we operate in 64 markets as of December 31, 2007. During 2007 our network carried approximately 41 billion minutes of traffic. As of December 31, 2007, our network was capable of connecting calls to an estimated 255 million telephone numbers assigned to carriers. As the telecommunications market share continues to shift from traditional ILEC access lines to competitive carriers, we believe that we will have access to an expanding market. We believe that our neutral tandem network and its size and scale will provide us with opportunities to enter new markets, increase market share with current customers and attract new customers.

We generate revenue from the sale of our neutral tandem interconnection services. Revenue is recorded each month on an accrual basis 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 years ended December 31, 2005, 2006 and 2007.

Minutes of use increase as we increase our number of customers, enter new markets and increase the penetration of existing markets, either with new customers or with existing customers. The minutes of use decrease due to direct connection between existing customers and consolidation between customers.

The average fee per minute varies depending on market forces and type of service. The market rate in each market is based upon competitive conditions along with the 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 ten new markets that we added in 2005, the 20 additional markets we added in 2006 and the 30 new markets added in 2007 as financially attractive, the rates we charge in those markets are generally lower than the rates we charge in the markets we initially opened in 2004. We expect the average fee per billed minute to continue to decrease as we add new markets with lower fees per minute than our current average. Although we expect that the total number of minutes switched by our network will increase as we enter new markets, our revenues would decrease if our average fee per minute were to continue to decline and we were unable to increase the total number of minutes switched by our network.

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

While generally not seasonal in nature, our revenues are affected by certain events such as holidays, the unpredictable timing of direct connects between our customers, and installation and implementation delays. These factors can cause our revenue to both increase or decrease unexpectedly. See “Risk Factors—Risks Factors Related to Our Business—We could experience material variances in our revenues.”

Our revenues could also be affected as a result of disputes with Level 3. See “Business—Legal Proceedings.”

Operating expenses consist of network and facilities expense, operations expenses, sales and marketing expenses, general and administrative expenses, depreciation and amortization, impairment of fixed assets and the gain or loss on the disposal of fixed assets. Personnel-related costs are the most significant component as we grew from 58 employees at December 31, 2004 to 126 employees at December 31, 2007.

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

Network transport costs typically occur on a repeating monthly basis, which we refer to as recurring transport costs, or on a one-time basis, which we refer to as non-recurring transport costs. Recurring transport costs primarily include monthly usage charges from telecommunication carriers, related to the circuits utilized by us to interconnect our customers. As our traffic increases, we must provide 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 April 2018. Additionally, we pay the cost of all the utilities for all of our switch locations.

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

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

Sales and Marketing Expense. Sales and marketing expenses represent the smallest component of our operating expenses and primarily include personnel costs, sales bonuses, marketing programs and other costs related to travel and customer meetings.

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

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.

Impairment of Fixed 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 operation. 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. Typically, the fair value of the asset is determined by discounting the estimated future cash flows associated with the asset.

Loss (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.

Change in Fair Value of Warrants. Freestanding warrants related to preferred shares that are conditionally redeemable were classified as liabilities on the consolidated balance sheet. The warrants were subject to re-measurement at each balance sheet date and any change in fair value was recognized as a component of other income (expense), net. Upon the closing of our initial public offering in November 2007, warrants to purchase shares of our convertible preferred stock became warrants to purchase shares of our common stock and, as a result, are no longer subject to Financial Accounting Standards Board Staff Position (FSP) No. 150-5, “Issuers Accounting under Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable “ (FSP 150-5). The then-current aggregate fair value of these warrants of $6.9 million was reclassified from current liabilities to warrants, a component of stockholders’ equity (deficit), and we has ceased to record any further periodic fair value adjustments.

Other 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. See “—Debt and Credit Facilities” below. We record accrued interest each month associated with a final payment for each loan equal to a range of 8.1% to 9.6% of the original principal loan amount. Interest expense also includes an amount related to the amortization of the value of debt discount associated with warrants issued to an affiliate of Western Technology Investment in accordance with the terms of our agreement. Interest income is earned primarily on our cash, cash equivalents and short-term investments.

Income Taxes Income tax provision includes U.S. federal, state, and local income taxes and is based on pre-tax income or loss. 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.

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP, in the United States of America. The preparation of these financial statements in accordance with GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the financial statements and the reported amounts of revenue and expense during a fiscal period. The SEC considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. We have discussed the selection and development of the critical accounting policies with the audit committee of our board of directors, and the audit committee has reviewed our related disclosures in this prospectus. Although we believe that our judgments and estimates are appropriate and correct, actual results may differ from those estimates.

We believe the following to be our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that are uncertain. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operation for future periods could be materially affected.

We generate revenue from sales of our neutral tandem interconnection services. We maintain executed service agreements with each of our customers in which specific fees and rates are determined. Revenue is recorded each month on an accrual basis based upon documented minutes of traffic switched for which service is provided, when collection is probable. We provide service primarily to large, well-established competitive carriers, including wireless, wireline, cable and broadband telephony.

We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are recorded at differing rates, based upon the age of the receivable. In determining these percentages, we analyze our historical collection experience and current economic trends. If the historical data we use to calculate the allowance for doubtful accounts does not reflect our future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and future results of operations could be materially affected. At December 31, 2007, we do not have any allowance for doubtful accounts. We wrote-off $0.1 million of customer receivables during 2007 related to a customer who filed for Chapter 11 bankruptcy protection.

The preparation of our consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect our reported amount of accrued liabilities at the date of the financial statements and the reported amount of expenses during the period.

Significant estimates may be required to determine the amount, if any, of charges for transport, signaling and other facility related expenses that may have been incurred but not yet invoiced. We have cutoff processes and controls in place to identify accrual amounts where invoices have been received after the period end. Where we believe products or services have been received, but no invoice has been received, we develop accrual estimates.

We may also develop, and report, significant estimates when our transport vendors invoice us for amounts that we dispute where (i) it is probable that the dispute will ultimately result in a payment by us and (ii) an amount can be reasonably estimated. At December 31, 2007, our disputed charges accrual was approximately $1.9 million. Of this amount, $0.4 million was related to one dispute. In addition, we anticipate this disputed charges accrual could materially increase over time in connection with other disputes. For more information, see “Business—Legal Proceedings.”

Deferred income tax assets and liabilities are recognized for future income tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases and for net operating loss carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a

change in income tax rates is recorded in earnings in the period of enactment. A valuation allowance is provided for deferred income tax assets whenever it is more likely than not that future tax benefits will not be realized. Deferred income tax assets are reviewed on a quarterly basis to determine if a valuation allowance is necessary based on current and historical performance, along with other relevant factors.

Income tax provision includes U.S. federal, state, and local income taxes and is based on pre-tax income or loss. The interim period provision or benefit 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.

In June 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109 (Accounting for Income Taxes). FIN 48 is effective for fiscal years beginning after December 15, 2006, and was adopted by us on January 1, 2007. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of the benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Our policy is to recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statement of operations. The adoption of FIN 48 did not have an effect on our consolidated results of operations or financial condition upon adoption and for the twelve months ended December 31, 2007.

We established the 2003 Stock Option and Stock Incentive Plan, or the 2003 Stock Incentive Plan, which provides for issuance of options and restricted stock for up to 1,600,000 shares under incentive stock option and nonqualified stock option agreements to our eligible employees, officers and independent contractors. We authorized an additional 700,000, 350,000 and 2,000,000 options and restricted stock within the 2003 Stock Incentive Plan in February 2006, May 2006 and July 2006, respectively. Prior to completing our initial public offering, we adopted the Neutral Tandem, Inc. 2007 Long-Term Equity Incentive Plan discussed below and ceased awarding equity grants under the 2003 Stock Incentive Plan. As of December 31, 2007, there were 3,310,412 shares reserved for issuance under the 2003 Stock Incentive Plan in respect of awards made prior to our initial public offering. Under the 2003 Stock Incentive Plan, employees, officers and directors have been granted options to acquire shares of our common stock. The number of shares, exercise price of the shares, and vesting conditions are determined by the Compensation Committee of our board of directors. Under the 2003 Stock Incentive Plan, options generally vest ratably over four years and have a maximum term of 10 years as long as the option holder remains an employee of ours.

In October 2007, we approved the adoption of the Neutral Tandem, Inc. 2007 Long-Term Equity Incentive Plan, which became effective immediately prior to the consummation of our initial public offering. The 2007 Long-Term Equity Incentive Plan provides for grants of incentive or non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units, performance awards or any combination of the foregoing to directors, officers, employees and other individuals performing services for, or to whom an offer of employment has been extended, by us or our subsidiaries. We have reserved a total of 2,873,613 shares of common stock for issuance pursuant to the 2007 Long-Term Equity Incentive Plan. Unless terminated sooner, the 2007 Long-Term Equity Incentive Plan will terminate automatically on November 2, 2017.

As of February 15, 2008, there were awards for 18,000 shares issued under the 2007 Long-Term Equity Incentive Plan and 2,855,613 shares, representing approximately 9.2% of our outstanding common stock as of February 15, 2008, available for issuance under the 2007 Long-Term Equity Incentive Plan.

We currently record stock-based compensation expense in connection with any grant of options to our employees and independent contractors. We record stock-based compensation expense associated with our stock options in accordance with SFAS No. 123(R) Share-Based Payment, which requires us to calculate the expense associated with our stock options by determining the fair value of the options.

The fair value of stock options is determined using the Black-Scholes valuation model, which 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 accelerated method under SFAS 123(R). The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from current estimates.

As of January 1, 2005, we adopted SFAS No. 123(R) using the modified retrospective method. The modified retrospective method requires the prior period financial statements to be restated to recognize compensation cost in the amounts previously reported in the pro forma footnotes.

We follow the fair-value method of accounting for stock options under SFAS No. 123(R) to account for the 2003 Stock Incentive Plan. Stock-based employee compensation is reflected in the statement of operations. All options granted under the 2003 Stock Incentive Plan have an exercise price equal to the market value of the underlying common stock on the date of the grant. In 2007, we issued 10,000 stock options to contractors. The following table shows the fair value of one share of our common stock on each stock option grant date during the years ended December 31, 2005, 2006 and 2007:

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model for the years ended December 31, 2005, 2006 and 2007 with the following assumptions:

During the timeframe leading up to 2006, our volatility assumption was updated quarterly based upon historical prices of the Fidelity Select Telecommunications “FSTCX” index fund. In 2006, a new method for estimating volatility was adopted. This method focuses specifically on the simple average volatility of three telecommunication companies that share similar business characteristics. The simple average volatility of the three companies selected range from 34.4% at the beginning of 2006 to 40.1% at December 31, 2007.

The weighted-average fair value of options granted during the period was $0.24, $1.30 and $3.88 for the years ended December 31, 2005, 2006 and 2007, respectively. The total grant date fair value of options that vested during years ended December 31, 2005, 2006 and 2007 was approximately $0.0 million, $0.1 million and $1.0 million, respectively.

We are currently involved in various claims and legal proceedings including our dispute with Level 3. See “Business—Legal Proceedings.” We review the status of each significant matter quarterly and assess our financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.

See “Risk Factors” for certain matters that may bear on our future results of operations.

The following table sets forth our results of operations for the years ended December 31, 2005, 2006 and 2007:

Revenue. Revenue increased $32.7 million, or 61.8%, from $52.9 million for the year ended December 31, 2006 to $85.6 million for the year ended December 31, 2007. Minutes of use billed increased by 16.3 billion minutes, or 66%, from 24.7 billion minutes processed in the year ended December 31, 2006 to 41 billion minutes processed for the year ended December 31, 2007.

The number of markets in which we operate increased from 34 at December 31, 2006 to 64 at December 31, 2007. The average fee per minute for the years ended December 31, 2006 and 2007 remained constant at $0.0021.

If we are unsuccessful in resolving our various disputes with Level 3 our revenue going forward could be affected. In connection with certain of these proceedings, we elected not to maintain our right to direct

interconnections with Level 3 in a number of states. These interconnection accounted for approximately 1.9% of our total traffic during the first six months of 2007. In addition, we have ongoing disputes with Level 3 in a number additional of states regarding our direct interconnection rights, which accounted for approximately 9.2% of our total traffic during 2007. See “Business–Legal Proceedings.”

Operating Expenses. Operating expenses of $47.4 million for the year ended December 31, 2006 increased $20.4 million to $67.8 million for the year ended December 31, 2007, or 89.6% and 79.2% of revenue, respectively. The components making up operating expenses are discussed further below.

Network and Facilities Expenses. Network and facilities expenses of $21.3 million for the year ended December 31, 2006, or 40.3% of revenue increased to $30.2 million for the year ended December 31, 2007, or 35.3% of revenue. Network and facilities expenses increased due to an increase in the number of switch locations we connect, increasing by 338 switch locations from 553 switch locations at December 31, 2006 to 891 switch locations at December 31, 2007. In addition, our switch related costs, primarily made up of facility rent and utilities costs, increased as our number of locations at the end of December 31, 2006 grew from 18 to 24 locations at December 31, 2007.

Operations Expenses. Operations expenses of $11.6 million for the year ended December 31, 2006, or 21.9% of revenue increased $3.9 million to $15.5 million for the year ended December 31, 2007, or 18.1% 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 of $1.6 million for the year ended December 31, 2006, or 3% of revenue, increased slightly to $1.8 million for the year ended December 31, 2007, or 2.1% of revenue. We have successfully increased revenues while maintaining the same size of the sales and marketing force.

General and Administrative Expense. General and administrative expense of $4.2 million for the year ended December 31, 2006, or 7.9% of revenue increased to $9.4 million for the year ended December 31, 2007, or 11% of revenue. The increase in our general and administrative expense is primarily due to higher professional fees related to regulatory proceedings with Level 3 Communications, LLC. See “Business—Legal Proceedings.”

Depreciation and Amortization Expense. Depreciation and amortization expense of $7.2 million for the year ended December 31, 2006, or 13.6% of revenue increased to $11.1 million for the year ended December 31, 2007, or 13.0% of revenue. The increase in our depreciation and amortization expense resulted from capital expenditures primarily related to the expansion of switch capacity in existing markets and the installation of switch capacity in new markets along with accelerated depreciation of $2.1 million which was related to our conversion to new switch equipment in our Atlanta, Miami and New York locations.

Impairment of Fixed Assets. There was $1.2 million of impairment of fixed assets for the year ended December 31, 2006 compared to no impairment of fixed assets for the year ended December 31, 2007. In October 2006, we decided to invest in new switch equipment in our Atlanta and Miami locations. As a result of this decision, a significant portion of the old switch equipment in Atlanta and Miami was no longer utilized. In 2006, we recorded asset impairment of $1.2 million related to the installation of new switch equipment in its Atlanta and Miami locations.

Loss (gain) on Disposal of Fixed Assets. We sold equipment in 2007 in which we received a total of approximately $0.2 million. The equipment did not have any carrying value at the time of sale. During the year we also disposed of equipment that resulted in a total loss of approximately $0.1 million.

Other (Income) Expense. Other expense of $1.3 million for the year ended December 31, 2006 increased to $5.3 million in the year ended December 31, 2007. The change in fair value of warrants of $0.8 million for the year ended December 31, 2006 increased $4.1 million to $4.9 million for the year ended December 31, 2007.

Provision for Income Taxes. We recorded a benefit for income taxes of $0.5 million for the year ended December 31, 2006 compared to a tax provision of $6.2 million for the year ended December 31, 2007. The effective tax rate at December 31, 2006 was 12%. The effective tax rate at December 31, 2007 was 49.8%, which was higher than the statutory rate primarily due to the non-deductibility of our expense related to the change in fair value of warrants.

Revenue. Revenue increased from $28.0 million in the year ended December 31, 2005 to $52.9 million in the year ended December 31, 2006, or an increase of 89.1%. The increase in revenue was due to a net increase of minutes of use from 10.4 billion minutes processed in the year ended December 31, 2005 to 24.7 billion minutes processed in the year ended December 31, 2006, an increase of 137.5%, which was partially offset by lower rates in new markets.

The number of markets in which we operate increased from 14 at December 31, 2005 to 34 at December 31, 2006. The average fee per minute decreased from $0.0027 in the year ended December 31, 2005 to $0.0021 in the year ended December 31, 2006, a decrease of 22.2%. The decrease resulted from us entering 20 new markets where the market rates offered by the ILECs were lower than our then average market rate, causing us to enter into contracts with our customers at competitively lower rates than in markets where we had already been in operation.

As a result of the SBC-AT&T combination, beginning in the second quarter of 2006, the combined SBC and AT&T entity began reducing the amount of minutes of use that we processed. During our 2006 fiscal year, we processed approximately 55% fewer minutes from AT&T and SBC, as a combined entity, compared to our 2005 fiscal year, resulting in reduced billings of approximately $1.6 million.

Operating Expenses. Operating expenses increased from $27.1 million in the year ended December 31, 2005 to $47.4 million in the year ended December 31, 2006, or 96.8% and 89.6% of revenue, respectively. The components making up operating expenses are discussed further below.

Network and Facilities Expenses. Network and facilities expenses increased from $11.3 million in the year ended December 31, 2005, or 40.4% of revenue, to $21.3 million in the year ended December 31, 2006, or 40.3% of revenue. The increase in our network and facilities expenses, resulted from an increase of $9.4 million in recurring network costs, due to the increase in the number of switch locations we connect, from 320 switch locations at December 31, 2005 to 553 switch locations at December 31, 2006, and an increase of $0.1 million in non-recurring costs. Network and facilities expenses also increased due to an increase of $0.5 million in our switch related costs primarily made up of increased facility rent and utilities costs in our 18 locations at the end of December 31, 2006 compared to 14 locations at December 31, 2005.

Operations Expenses. Operations expenses increased from $8.2 million in the year ended December 31, 2005, or 29.3% of revenue, to $11.6 million in the year ended December 31, 2006, or 21.9% of revenue. The increase in our operations expenses resulted from an increase in payroll and benefits of $1.8 million, 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 and an increase of $1.6 million related to property tax, insurance, maintenance and supplies for the new switch locations.

Sales and Marketing Expense. Sales and marketing expense increased from $1.4 million in the year ended December 31, 2005, or 4.9% of revenue, to $1.6 million in the year ended December 31, 2006, or 3.0% of revenue. We have successfully increased revenues while maintaining the same size of the sales and marketing force as 2005.

General and Administrative Expense. General and administrative expense increased from $3.1 million in the year ended December 31, 2005, or 11.1% of revenue, to $4.2 million in the year ended December 31, 2006, or 7.9% of revenue. The increase in our general and administrative expense is primarily due to an increase in salaries and benefits resulting from hiring additional employees.

Depreciation and Amortization Expense. Depreciation and amortization expense increased from $3.1 million in the year ended December 31, 2005, or 11.1% of revenue, to $7.2 million in the year ended December 31, 2006, or 13.6% of revenue. The increase in our depreciation and amortization expense resulted from capital expenditures of $17.1 million in 2006 compared to $14.0 million in 2005, which primarily related to the expansion of switch capacity in existing markets and the installation of switch capacity in new markets.

Impairment of Fixed Assets. In October 2006, we decided to invest in new switch equipment in our Atlanta and Miami locations. The new equipment has been installed and became operational in February 2007 and March 2007 for Atlanta and Miami, respectively. As a result of this decision, a significant portion of the old switch equipment in Atlanta and Miami will no longer be utilized. We assumed no salvage value for disposal of the old Atlanta and Miami switch equipment. The carrying value of the equipment to be disposed of in Atlanta and Miami was approximately $1.2 million and $2.4 million, respectively, at October 1, 2006. In 2006, we recorded asset impairment of $1.2 million related to the installation of new switch equipment in its Atlanta and Miami locations.

Loss (gain) on Disposal of Fixed Assets. In November 2006, we disposed of certain switch equipment at our Los Angeles facility that resulted in a total loss of approximately $0.3 million.

Other (Income) Expense. Other expense was $1.3 million in the years ended December 31, 2005 and 2006, or 4.6% and 2.5% of revenue, respectively. A $0.5 million increase in our interest expense related to our increase in borrowings under our credit facility, was off-set by an increase of $0.6 million in interest income from higher average balances invested. In addition, the change in fair value of warrants increased by $0.1 million.

Provision for Income Taxes. Provision of income taxes increased from zero in the year ended December 31, 2005 to a tax benefit of $0.5 million in the year ended December 31, 2006, or 0.9% of revenue, as a result of releasing our prior valuation allowance offsetting deferred tax assets primarily related to our net operating loss carryforward.

Our primary sources of liquidity have been cash provided by operations, the sale and issuance of preferred shares and equity, borrowings under our credit facility and our initial public offering completed in November 2007. Our principal uses of cash have been capital expenditures for switch equipment, working capital and debt service requirements. We anticipate that our principal uses of cash in the future will be for facility expansion, capital expenditures for switch equipment and working capital.

Cash and cash equivalents of $112 million at December 31, 2007 increased $91.9 million from $20.1 million at December 31, 2006. The increase in cash and cash equivalents at December 31, 2007 is due to the completion of our initial public offering in November 2007 in which we received $91.3 million of net proceeds. At December 31, 2007 the entire amount of the net proceeds was invested in one money market mutual fund.

Working capital at December 31, 2007 was $111.1 million compared to $18.2 million at December 31, 2006. We received $91.3 million of net proceeds upon completion of our initial public offering in November 2007.

Our capital expenditures of $20.1 million, $17.1 million and $14.0 million in the years ended December 31, 2007, 2006 and 2005, respectively, related primarily to the installation of switching equipment in existing and new locations. Capital expenditures for 2008 are expected to be between $23.0 million and $25.0 million.

We believe that cash flow from operating activities, in addition to cash currently on-hand, will be sufficient to fund our operations, including our anticipated growth plans, for the foreseeable future and in any event for at least the next 12 to 18 months. We regularly review acquisitions and additional strategic opportunities, which may require additional debt or equity financing. We currently do not have any pending agreements or understandings with respect to any acquisitions or strategic opportunities. We do not have any available borrowing capacity under our credit agreement.

The following table sets forth components of our cash flow for the following periods:

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

Cash provided by operations for the year ended December 31, 2007 of $24.1 million was attributable to net income of $6.3 million plus non-cash charges, primarily amortization and depreciation and change in fair value of warrants of $17.4 million, and $5.3 million due to an increase in accrued liabilities, less $4.9 million due to an increase in accounts receivable and a decrease in accounts payable. Cash provided by operations for the year ended December 31, 2006 of $13.0 million was attributable to net income of $4.7 million, plus non-cash charges, primarily amortization and depreciation, equipment loss and impairment of $9.4 million related to our decommissioning of several circuit switches and an increase in accounts payable, accrued liabilities and deferred tax liabilities of $3.1 million, which was partially offset by an increase in accounts receivable and other current and non-current assets of $4.2 million. Cash provided by operations for the year ended December 31, 2005 of $2.1 million was attributable to a net loss of $0.5 million, plus non-cash charges, primarily amortization and depreciation, of $3.9 million, and an increase in accounts payable and accrued liabilities of $2.3 million, which was partially offset by an increase in accounts receivable of $3.6 million.

The changes in cash flows from investing activities primarily relate to purchases of switch equipment and the timing of purchases and maturities of short-term investments. We also use cash to support letters of credit required by certain facility landlords and other vendors.

Cash used in investing activities for the year ended December 31, 2007 was $19.9 million. We invested $20.1 million in the purchase of switch equipment, partially offset by proceeds from sale of equipment of $0.2 million. Cash used in investing activities for the year ended December 31, 2006 was $12.7 million. We invested $17.1 million in the purchase of switch equipment, offset by a decrease in short-term investments of $4.5 million. Cash used in investing activities for the year ended December 31, 2005 was $10.2 million. We invested $14.0 million in the purchase of switch equipment, offset by a decrease in short-term investments of $3.8 million.

The changes in cash flows from financing activities primarily relate to equity financing, borrowings and payments under our debt obligations.

We generated cash flow from financing activities for the year ended December 31, 2007 of $87.7 million primarily as a result of $93.2 million in net proceeds from the issuance of common shares and our initial public offering. These net proceeds were partially offset by our repayment of $5.5 million of principal on our outstanding debt. We generated cash flow from financing activities for the year ended December 31, 2006 of $18.5 million primarily as a result of $11.9 million in net proceeds from the issuance of preferred shares, $10.0 million in borrowing under our credit facility from an affiliate of Western Technology Investment and $0.3 million in proceeds from the exercise of stock options. These proceeds were partially offset by our repayment of $3.6 million of principal on our outstanding debt. We generated cash flow from financing activities in the year ended December 31, 2005 of $9.2 million primarily as a result of $8.4 million in net proceeds from the issuance of preferred shares and $2.8 million in borrowing under our credit facility. These proceeds were partially offset by our repayment of $2.0 million of principal on our outstanding debt.

The following table represents a summary of our estimated future payments under contractual cash obligations as of December 31, 2007. Changes in our business needs, cancellation provisions, changing interest rates and other factors may result in actual payments differing from these estimates. We cannot provide certainty regarding the timing and amounts of payments. There have been no significant developments with respect to our contractual cash obligations since December 31, 2007.

We have an equipment loan and security agreement with an affiliate of Western Technology Investment, which initially provided us with up to $19.5 million in available credit. This credit facility matures in several installments, beginning in May 2007 and ending in March 2010. As of December 31, 2007 we had approximately $7.7 million outstanding under this credit facility and no available capacity for future borrowings. Loans bear interest at prime plus between 1.25% and 3.005% and there is a terminal payment of between 8.14% and 9.6% of the original amount borrowed. The average interest rate of this credit facility, including all balloon payments, was 11.7%, 12.9% and 12.9% for the years ended December 31, 2005, 2006 and 2007, respectively. Our obligations under the credit facility are secured by a lien on substantially all of our assets and specified equipment.

Under the terms of the credit facility, we must comply with certain negative covenants that limit our ability to declare or pay dividends, incur additional indebtedness, incur liens, dispose of significant assets, make acquisitions or significantly change the nature of our business without the permission of the lender. As of December 31, 2007, we were in compliance with all of the covenants under the agreement.

Additionally, in accordance with the terms of the credit facility, we issued warrants to the note holders to purchase shares of our preferred stock. In 2004, we issued 200,000 warrants, 92,812 warrants and 21,885 warrants with an exercise price of $1.00, $1.48 and $6.28 each, respectively. In 2006, we issued 87,539 warrants with an exercise price of $6.28 each. The warrants are exercisable at any time up to eight years after their issuance. On February 21, 2008 the note holders elected to exercise all of the outstanding warrants. Pursuant to the terms of the warrants the note holders elected to exercise the warrants on a net basis based upon the average closing price of our common stock during the three days prior to such exercise. Based upon the closing prices of our common stock on February 20, 2008, February 19, 2008 and February 15, 2008 we issued a total of 356,921 shares of common stock on February 25, 2008 in full satisfaction of all outstanding warrants.

The fair value of the warrants at the time of issuance, as calculated using the Black-Scholes method, was estimated at $206,000, $495,000 and $495,000 cumulatively at December 31, 2005, 2006 and 2007, respectively, and has been reflected as a reduction of the carrying amount of the note and is being accreted over the term of the note. The charges to interest expense related to the amortization of the debt discount for the years ended December 31, 2005, 2006 and 2007 were $68,000, $124,000 and $139,000 respectively.

We use cash collateralized letters of credit issued by LaSalle Bank N.A. to secure certain facility leases and other obligations. At December 31, 2007 there was $419,000 of restricted cash used as collateral for $374,000 in letters of credit outstanding.

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 during the years ended December 31, 2005, 2006 and 2007.

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No . 109 (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. FIN 48 is effective for fiscal years beginning after December 15, 2006, and was adopted by us on January 1, 2007. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of the benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Our policy is to recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statement of operations. The adoption of FIN 48 did not have an effect on our consolidated results of operations and financial condition at adoption or for the year ended and as of December 31, 2007.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . The standard provides guidance for using fair value to measure assets and liabilities. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS

157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS No. 157 will not have a material impact upon our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115 . SFAS 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We have determined that we are not electing to adopt this standard.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS 141R retains the fundamental requirements in previously issued Statement 141 that the acquisition method of accounting (the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date at the fair values as of that date. This replaces the Statement 141’s cost allocation process which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based upon their estimated fair values. We will adopt this standard for acquisitions consummated after the effective date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before this statement was issued, limited guidance existed for reporting noncontrolling interest. We will adopt this standard for acquisitions consummated after the effective date.

We invest our excess cash in money market mutual funds whose carrying values approximate market. We do not enter into investments for trading or speculative purposes. As of December 31, 2007, we had $105.9 million in cash and cash equivalents invested in one money market mutual fund. Due to the short duration of the cash invested, we believe that we do not have any material exposure to changes in the fair value of our cash investments as a result of changes in interest rates.

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 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 was through the use of the ILEC’s tandem switches. Under certain interpretations of the Telecommunications Act, ILECs are required to provide tandem switching to competitive carriers. For tandem transit services, ILECs generally set per minute rates and other charges according to mandated rate schedules (including varying rates) set by state public utility commissions. Our solution enables competitive carriers to exchange traffic between their networks without using an ILEC tandem.

As of December 31, 2007 we had 78 major competitive carriers and non-carriers connected to our network. We provide service to several competitive carriers and non-carriers in the United States, including wireless carriers such as Sprint Nextel Corp., T-Mobile USA, Inc., MetroPCS Wireless Inc., U.S. Cellular Corporation, and AT&T Mobility LLC (these wireless carriers represented 56.4% of our total 2007 fiscal year revenues); wireline carriers such as Paetec Communications, McLeodUSA Inc., MCI/Verizon Business, AT&T, and Sprint Communications, L.P. (these wireline carriers represented 9.5% of our total 2007 fiscal year revenues); cable companies such as Comcast Cable Communications, Inc., Cablevision Systems Corporation, RCN Corporation and Cox Communications Inc. (these cable carriers represented 14.5% of our total 2007 fiscal year revenues); and non-carriers such as Vonage Holdings Corp., Broadvox Carrier Services, LLC, Intelepeer, Inc., Teleblend Resources and Unipoint (these non-carriers represented 4.2% of our total 2007 fiscal year revenues). We believe the foregoing customers are representative of our customer base. Revenues for our 2007 fiscal year were allocated among these categories of customers as follows: wireless carriers (59.7%), wireline carriers (21.3%), cable companies (14.5%) and non-carriers (4.5%). Our network currently carries approximately 4.1 billion minutes of traffic per month and is capable of terminating calls to an estimated 255 million assigned telephone numbers. As the telecommunications market share continues to shift from traditional ILEC access lines to competitive carriers, we believe that we will have access to an expanding market. We believe that our neutral tandem network and its size and scale will provide us with opportunities to enter new markets, increase market share with current customers and attract new customers.

In recent years, a wide array of new services and technologies has emerged as competitive alternatives to ILEC services for consumer and enterprise telephony. The increasingly diverse market now includes wireless, wireline and cable and broadband telephony companies. As these competitive carriers have expanded their customer base, the amount of traffic exchanged between them has also increased and is expected to grow in the future. For example:

Prior to the introduction of our services, competitive carriers had two alternatives for exchanging traffic between their networks. The two alternatives were interconnecting to the ILEC tandems or directly connecting individual switches, commonly referred to as “direct connects.” Given the cost and complexity of establishing direct connects, competitive carriers resorted to utilizing the ILEC tandem as the primary method of exchanging traffic. The ILECs often required competitive carriers to interconnect to multiple ILEC tandems with each tandem serving a restricted geographic area. In addition, as the competitive telecommunications market grew, the process of establishing interconnections at multiple ILEC tandems became increasingly difficult to manage and maintain, causing delays and inhibiting competitive carrier growth and the purchase of ILEC tandem services became an increasingly significant component of a competitive carrier’s costs.

Growth in intercarrier traffic switched through ILEC tandems has created switch capacity shortages known in the industry as ILEC “tandem exhaust,” where overloaded ILEC tandems become a bottleneck for competitive carriers. This has increased call blocking and given rise to service quality issues for competitive carriers. With the introduction of our services, we believe we became the first carrier to provide alternative tandem services capable of alleviating the ILEC tandem exhaust problem.

The following diagrams illustrate interconnecting via the ILEC tandem networks and an example of interconnecting via our managed tandem network.

The second alternative for exchanging traffic, prior to us, was by directly connecting competitive carrier switches to each other. Implementing direct switch-to-switch network connections between all competitive switches in a market is very challenging. For example, in order to completely bypass the ILEC tandem network, a market with 100 competitive switches would require 9,900 direct one-way switch-to-switch connections. The capital and operating expense requirements, complexity and management challenges of establishing and maintaining direct connections generally makes them uneconomical for all but the highest traffic switch combinations and an impractical network-wide solution.

Competitive carriers are also interested in ways to reduce the risk of network failure. The Recommendations of the Independent Panel Reviewing the Impact of Hurricane Katrina on Communications Networks, which was prepared for the FCC, noted the need for tandem diversity. The panel highlighted that the impact of an ILEC tandem failure due to the failure of routing paths into tandems in New Orleans in August 2005 led to the inability of local carriers to exchange and complete calls and the inability of long distance calls to enter or leave areas served by the tandem.

Our solutions potentially help minimize these network failures and interconnection problems by offering physically diverse tandem switching facilities and transmission paths that increase network reliability. We also simplify the ordering, provisioning and capacity management requirements of our customers, and seek to leverage our extensive interconnection network and proprietary technology to capitalize on the growth of intercarrier traffic.

As a core component of our service offering, we actively manage network capacity between our tandem switches and customers’ switches, which results in improved network quality and reduced call blocking.

By constantly monitoring traffic levels and projecting anticipated growth in traffic, we are generally able to provide on a timely basis additional circuits between customer switches and our network to meet increased demand. This feature saves competitive carriers substantial time and effort in managing their interconnection network, improves their customers’ experience, reduces trouble tickets and allows them to focus more on their core business. We are not aware of any other company that provides a managed tandem service which includes active management of capacity to and from the tandem.

We use proprietary software tools (one of which is patent-pending) to manage and track routing combinations associated with hundreds of millions of telephone numbers. Our services include ongoing customer notification of new routing options that become available as we add new customers to our network or enter new markets. We also provide our customers with invoices, management reports and call detail records in paper and electronic formats along with monthly savings summary reports. ILECs do not currently provide customers with many of these value-added services.

Our managed tandem network includes technologically advanced IP and Time Division Multiplexing, or TDM, switching platforms linked together by an IP backbone. Our network is capable of automatically switching IP-originated or conventional TDM traffic to terminating carriers using either protocol. We support IP-to-IP, IP-to-TDM, TDM-to-IP and TDM-to-TDM traffic with appropriate protocol conversion and gateway functionality.

We believe the following strengths differentiate us and position us for continued growth.

According to Metcalf’s law, the “value” or “power” of a network increases in proportion to the square of the number of nodes (interconnected switches) on the network. For example, we currently interconnect 891 competitive switches, which provides a possible 792,990 revenue opportunities for us and savings opportunities for our customers. The 892nd interconnection will potentially add up to 1,782 new revenue opportunities for us and savings opportunities for our existing customers.

In addition, patent-pending proprietary software tools help us to manage the complicated routing scenarios required to terminate traffic to hundreds of millions of telephone numbers and support our network. The software allows us to quickly identify new routing opportunities between carriers and to help optimize our customers’ interconnection costs, which leads to improved customer service.

We believe the adaptability and flexibility of our technology enables us to provide more robust service offerings, to interconnect a wider range of traffic types and to adapt our service offerings more efficiently than the ILECs, which predominantly employ legacy Class 4 TDM-only circuit switching technology for tandem switching.

Our strategy is focused on expanding our business by increasing the share of telecommunications traffic that our network can serve. Expanding our share of telecommunications traffic increases the value of our network to our customers and enables us to capture a larger share of total telecommunications revenue. Key elements of our expansion strategy include:

We principally serve competitive carriers, which represented approximately 95.5% of our revenues for our 2007 fiscal year, with non-carriers accounting for the remaining 4.5%. As of December 31, 2007, we have 72 carriers originating traffic and 78 carriers connected to our network. Our contracts with our top five customers represented approximately 61% of our total revenue through December 31, 2007. Our two largest customers, Sprint Nextel and T-Mobile, accounted for 26% and 14%, respectively, of our total revenues for the year ended December 31, 2007. Our contracts with customers do not contain volume commitments, are not exclusive, and could be terminated or modified in ways that are not favorable to us. However, while we have lost customers’ traffic in specific routes, since initiating service we have not had any significant customer cease using our services completely. We generate revenue for our managed tandem services by charging tandem transit fees to the originating carrier of the call on a minute of use basis. For the year ended December 31, 2007, wireless and cable companies represent approximately 21% of our customer base and account for approximately 74.2% of our revenue.

Since our carrier customers typically interconnect with us in all of their markets where we have a presence, by entering new markets, we have the ability to increase our revenues. In addition, we expect to broaden our customer base by targeting competitive carriers that are not current customers or that operate in markets that we do not yet serve. Approximately 47% of our 72 originating carriers currently use our services in more than one market.

Our managed tandem services are currently available in the following 64 markets:

Our expected market expansion plan during the 12 month period following December 31, 2007 includes 25 new markets. The new markets increase our potential addressable market coverage opportunity to an estimated 566 million assigned telephone numbers to competitive carriers.

Our sales and marketing organization divides accounts by wireless, cable, wireline and non-carriers and seeks to develop solutions for our customers. Dividing customers in this way allows us to develop industry knowledge about each carrier and a more value-added sales force. Our sales team works closely with our customers to identify and address their needs. We seek to expand the use of our service offerings by our current customers through account managers who are dedicated to specific customer accounts. The sales team conducts weekly meetings to discuss customer activity, best practices and industry trends. In addition to a base salary, the compensation package for the members of our sales team includes incentive arrangements, including quarterly target incentives based on our performance and the individual’s performance, tiered payment structures and negative incentives. The members of our sales organization have an average of 20 years of sales experience and in-depth knowledge of the telecommunications industry.

Our marketing team works closely with the sales team to deliver comprehensive services, develop a clear and consistent corporate image and offer a full range of product offerings. Our marketing efforts are designed to drive awareness of our service offerings. Our marketing activities include direct sales programs, website programs and targeted public relations. We are also engaged in an on-going effort to maintain relationships with key communications industry analysts.

Our ordering and provisioning groups form the core of our customer support team. Each group works closely with the different vendor and customer organizations responsible for establishing service. We assign an implementation manager to each account that is responsible for the end-to-end delivery of our services. These managers make daily contact with their customer and help coordinate our local operations teams during implementation. This process helps to improve customer satisfaction, increase customer implementation and promote our revenue realization.

Our network operations center monitors and supports our tandem network 24 hours a day, 365 days a year. The network operations center is responsible for troubleshooting any potential network problems.

Our primary competitors today are the traditional ILECs (primarily AT&T, Verizon and Qwest) who, according to certain interpretations of the Telecommunications Act, are generally required to provide tandem switching services. For tandem transit services, ILECs generally set per minute rates and other charges according to mandated rate schedules (with some varying rates) set by state public utility commissions.

We also expect to face direct competition from other competitive carriers, including Level 3. Level 3 has entered the tandem switching services market, and, as described below under “Legal Proceedings,” has sought to refuse to accept tandem transit traffic we desire to terminate to Level 3.

We also face indirect competition from carriers that directly connect their switches. When there is a significant amount of traffic between two switches, there is an economic incentive to establish such direct connection to remove intermediate switching. As our customers grow, the amount of traffic exchanged between them grows, thus leading to the increased risk that they will direct connect switches exchanging significant traffic and remove that traffic from our tandems. The risk of direct connections is increased 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. Maintaining and coordinating direct connects, however, can be expensive, difficult to manage and time consuming.

We are unable to provide accurate market share information, since no regulatory body or industry association requires carriers to identify amounts of traffic to other carrier types. Traffic in most instances is reported on aggregate levels.

Additionally, other companies may be focusing resources on developing and marketing services that may compete with our services.

The ILECs that provide tandem switching services, as well as many competitive providers, including Level 3, have significantly more employees and greater financial, technical, marketing and other resources than we have. Our ability to compete successfully with them and other potential entrants depends on numerous factors, both inside and outside our control, including:

As of December 31, 2007, we had 126 full-time employees, including 104 in Operations, seven in Sales and Marketing and 15 in General and Administrative functions. The number of employees increased by 15% during 2007, up from 110 on December 31, 2006. We expect to further increase our headcount in 2008 as we continue to expand both existing and new markets. Of our employees, 80 were located at our corporate office in Chicago, Illinois. The remaining 26 employees are located throughout the country at our switch locations. No labor union represents our employees. We have not experienced any work stoppages and consider our relations with our employees to be good.

Our communications services business is subject to varying degrees of federal and state regulation. We have chosen to operate as a common carrier and therefore are voluntarily subject to the jurisdiction of both federal and state regulatory agencies, which have the authority to review our prices, terms and conditions of service. We operate as a facilities-based carrier in most states and have received all necessary state and FCC authorizations to do so. The regulatory agencies exercise minimal control over our prices and services, but do impose various obligations such as reporting, payment of fees and compliance with consumer protection and public safety requirements.

By operating as a common carrier, we also benefit from certain legal rights established by federal legislation, especially the Telecommunications Act, which gives us and other competitive entrants the right to interconnect to the networks of incumbent telephone companies and access to their networks. We have used these rights to gain interconnection with the incumbent telephone companies and to purchase selected services at wholesale prices that complement our ability to terminate traffic. We have also used these rights to request interconnection with competitive carriers for the termination of transit traffic to carriers when such carriers decide for whatever reason not to utilize our transit service. While our experience has been that competitive carriers usually accommodate such requests, and indeed frequently becomes users of our transit service as well, we are engaged in multiple state regulatory proceedings against Level 3 related to its threat to disconnect existing direct connections between us. See “Legal Proceedings.”

The FCC and state regulators are considering a variety of issues that may result in changes in the regulatory environment in which we operate our business. Most importantly, many state and federal proceedings have considered issues related to the ILECs’ pricing of services that compete with our service. To the extent that the regulatory commissions maintain or impose pricing restrictions on the transit rates charged by the ILEC, then the price we compete with is likely to be lower. The trend has generally been to remove pricing restrictions on the ILECs’ rates, thus allowing the prices we compete against to reach a market level, which is often higher than the previous regulated price, but there can be no guarantee that the trend will continue. In addition, the FCC is conducting an extensive proceeding involving intercarrier compensation. One of the issues in the proceeding

involves the pricing and regulation of ILEC tandem services, with which we compete. To the extent that the FCC limits or regulates the rates the ILECs’ charge for tandem services, it could have a materially adverse impact on our rates and operations.

Although the nature and effects of governmental regulation are not predictable with certainty, we believe that the FCC is unlikely to enact rules that extinguish our basic right or ability to compete in telecommunications markets. The following sections describe in more detail the regulatory developments described above and other regulatory matters that may affect our business. While many of the regulatory developments do not directly affect our operations, to the extent that they limit our customers’ ability to compete effectively against the ILEC, we are indirectly impacted.

The Telecommunications Act, which substantially revised the Communications Act of 1934, established the regulatory framework for the introduction of competition for local communications services throughout the United States by new competitive entrants such as us. Before the passage of the Telecommunications Act, states typically granted an exclusive franchise in each local service area to a single dominant carrier, often a former subsidiary of AT&T known as a Regional Bell Operating Company, or RBOC, which owned the entire local exchange network and operated a virtual monopoly in the provision of most local exchange services in most locations in the United States. The RBOCs, following some recent consolidation, now consist of Verizon, Qwest Communications and AT&T.

Among other things, the Telecommunications Act preempts state and local governments from prohibiting any entity from providing communications service, which has the effect of eliminating prohibitions on entry that existed in almost half of the states at the time the Telecommunications Act was enacted. Nonetheless, the Telecommunications Act preserved state and local jurisdiction over many aspects of local telephone service and, as a result, we are subject to varying degrees of federal, state and local regulation.

We believe that the Telecommunications Act provided the opportunity to accelerate the development of competition at the local level by, among other things, requiring the incumbent carriers to cooperate with competitors’ entry into the local exchange market. To that end, incumbent local exchange carriers are required to allow interconnection of their network with competitive networks. Incumbent local exchange carriers are further required by the Telecommunications Act to provide access to certain elements of their network to competitive local exchange carriers. These rules have helped the development of competitive telecommunications carriers, many of which have become our customers.

We have developed our business, including being designated as a common carrier, and designed and constructed our networks to take advantage of the features of the Telecommunications Act. There have been numerous attempts to revise or eliminate the basic framework for competition in the local exchange services market through a combination of federal legislation, adoption of new rules by the FCC, and challenges to existing and proposed regulations by the incumbent carriers. We anticipate that Congress will consider a range of proposals to modify the Telecommunications Act over the next few years, including some proposals that could restrict or eliminate our access to elements of the incumbent local exchange carriers’ network. Although we consider it unlikely, based on statements of both telecommunications analysts and Congressional leaders, that Congress would reverse the fundamental policy of encouraging competition in communications markets, we cannot predict whether future legislation may adversely affect our business in other ways.

The FCC regulates interstate and international communications services, including access to local communications networks for the origination and termination of these services. We provide services on a

common carrier basis and the FCC has jurisdiction over our services to the extent they are used as part of the origination or termination of interstate or international calls. However, the FCC only has limited jurisdiction over transit services that we provide for delivery of local and intra-state calls.

The FCC imposes extensive economic regulations on incumbent local exchange carriers due to their ability to exercise market power. The FCC imposes less regulation on common carriers without market power including, to date, competitive local exchange carriers. Unlike incumbent carriers, we are not currently subject to price cap or rate of return regulation, but we are subject to the general federal guidelines that our charges for interstate and international services be just, reasonable and non-discriminatory. The rates we can charge for interstate access, unlike our transit services, are limited by FCC rules. We are also required to file periodic reports, to pay regulatory fees based on our interstate revenues, and to comply with FCC regulations concerning the content and format of our bills, the process for changing a customer’s subscribed carrier, and other consumer protection matters. Because we do not directly serve consumers, many of these regulations have no practical effect on our business. The FCC has authority to impose monetary forfeitures and to condition or revoke a carrier’s operating authority for violations of its requirements. Our operating costs are increased by the need to assure compliance with regulatory obligations.

The Telecommunications Act is intended to increase competition. Specifically, the Telecommunications Act opens the local services market by (i) requiring incumbent local exchange carriers to permit interconnection to their networks, (ii) by establishing incumbent local exchange carrier obligations with respect to interconnection with the networks of other carriers, (iii) provision of services for resale, (iv) unbundled access to elements of the local network, (v) arrangements for local traffic exchange between both incumbent and competitive carriers, (vi) number portability, (vii) access to phone numbers, (viii) access to rights-of-way, (ix) dialing parity and (x) collocation of communications equipment in incumbent central offices. Incumbent local exchange carriers are required to negotiate in good faith with carriers requesting any or all of these arrangements. If the negotiating carriers cannot reach agreement within a prescribed time, either carrier may request binding arbitration of the disputed issues by the state regulatory commission. Where an agreement has not been reached, incumbent local exchange carriers remain subject to interconnection obligations established by the FCC and state communications regulatory commissions.

The Telecommunications Act also eliminated provisions of prior law restricting the RBOCs from providing long distance services and engaging in communications equipment manufacturing. The Telecommunications Act permitted the RBOCs to provide long distance service to customers outside of states in which the RBOC provides local telephone service, immediately upon its enactment. It also permitted a RBOC to enter the long distance market within its local telephone service area upon showing that certain statutory conditions have been met and obtaining FCC approval. The FCC has approved RBOC petitions for in-region long-distance for every state in which these companies operate, and each RBOC is now permitted to offer long-distance service to its local telephone customers. This development has led to increased concentration in the telecommunications industry, which may affect our addressable market. See “Risk Factors—Consolidation in the industry, such as AT&T-BellSouth-Cingular, Verizon-MCI and SBC-AT&T, reduces the need for intercarrier transit service and may limit our growth opportunities”. RBOCs have recently petitioned the FCC to remove some of the conditions they had to meet to obtain long-distance approval, including in particular conditions that impose obligations to provide access to RBOC broadband network elements.

Triennial Review Order and Appeals. As discussed above, the Telecommunications Act requires the incumbent local exchange carriers to provide competitors access to elements of their local network on an unbundled basis, known as UNEs. The Telecommunications Act requires that the FCC consider whether competing carriers would be impaired in their ability to offer telecommunications services without access to particular UNEs. If the FCC requires access to particular UNEs, the incumbent local exchange carriers are required to make available access to these network elements at prices based on TELRIC computed in accordance with FCC guidelines. If the FCC finds that UNE access is not required, the incumbent LEC may still be required to offer access to the element, but not at TELRIC-based prices.

The FCC’s Triennial Review Order of August 2003, substantially revised its rules interpreting and enforcing these requirements. However, a March 2004 court decision required the FCC to reconsider portions of its Triennial Review Order, and as a result the FCC further revised the rules in a Remand Order adopted in late 2004, effective March 11, 2005. The Triennial Review Order denied competitors access to incumbent local exchange carrier packet switching capabilities provided over some fiber loop facilities and severely restricted their access to fiber loops to homes and other “primarily residential” locations such as apartment buildings. The Remand Order stated that incumbent local exchange carriers will no longer be required to provide access to unbundled circuit switching capabilities, which previously allowed carriers the opportunity to resell ILEC services or UNE-P, at incremental cost-based rates. These resale carriers have had to either convert their customers to other arrangements, which may include contractual resale arrangements with the incumbent local exchange carriers, or discontinue serving them.

The FCC Remand Order also required that incumbent local exchange carriers continue to make access available to competitors for high capacity loop and transport UNEs. However, the new rules placed new conditions and limitations on the incumbent local exchange carriers’ obligation to unbundle these elements.

Incumbent local exchange carriers no longer have to provide T-1 and DS-3 UNE transport circuits on routes connecting certain high-traffic central offices. For T-1 transport (including transport as a component of a T-1 EEL), the exception applies if both central offices serve at least 38,000 business lines or have four or more fiber-based colocators. For DS-3 transport, the exception applies if both central offices serve at least 24,000 business access lines or have three or more colocators. There is also a cap of 12 DS-3 transport circuits available on an unbundled basis from an incumbent local exchange carrier on any given route, even where the high-traffic exception does not apply. Similarly, incumbent local exchange carriers no longer have to provide T-1 or DS-3 UNE loops to premises served by certain high-traffic central offices.

These changes in the FCC rules have had several effects on the competitive telecommunications carriers who are our prospective customers. First, the elimination of UNE-P has reduced the market share of resellers and led some former resellers to convert to facilities-based service. This development is positive for us because resellers generally are not potential users of our transit services. Second, the restrictions on the availability of loop and transport UNEs may have contributed to accelerated consolidation among competitive carriers, such as the recent acquisitions of TelCove and Broadwing by Level 3, the acquisition of US LEC by PaeTec, and the merger of CTC Communications, Choice One Communications and Conversent Communications to form One Communications. This development may have a negative impact on us because our business model is based on the existence of many independent carriers who need to exchange traffic with each other. It is difficult to predict the overall effect of these countervailing trends on our future business opportunities.

The availability of UNEs to competitive telecommunications carriers may also be affected by FCC forbearance proceedings. Under Section 10 of the Telecommunications Act, the FCC may forbear from enforcing any provision of the Telecommunications Act if it finds that the provision is no longer necessary to ensure just and reasonable pricing of telecommunications services or to protect consumers, and that forbearance is in the public interest. To date, the FCC has forborne from requiring provision of UNEs at cost-based prices in portions of two metropolitan areas (Omaha, Nebraska, and Anchorage, Alaska), at the request of incumbent LECs, based upon findings of significant competitive provision of telecommunications services by cable television companies in those markets. In both cases, the FCC ruled that the incumbent LEC had to continue providing access to its loop and transport facilities at “just and reasonable” prices, but not necessarily at TELRIC-based prices. In December 2007, the FCC denied similar requests for forbearance by Verizon (for the Boston, Providence, New York, Pittsburgh, Philadelphia, and Virginia Beach-Norfolk metropolitan areas), based on the level of competition existing in those markets at the time Verizon filed its petition in September 2006. Verizon has appealed this decision. The FCC is currently considering a forbearance request by Qwest (for Seattle, Minneapolis-St. Paul, Denver, and Phoenix). If the FCC approves additional forbearance petitions petitions, it could force some competitive carriers to reduce or eliminate their operations in affected metropolitan areas, which may negatively affect our business opportunities. We cannot predict the results of future regulatory or court rulings, or any changes in the availability of UNEs as the result of future legislative changes.

TELRIC Proceeding. In late 2003, the FCC initiated a proceeding to address the methodology used to price UNEs and to determine whether the current methodology, TELRIC, should be modified. Specifically, the FCC is evaluating whether adjustments should be made to permit incumbent local exchange carriers to recover their actual embedded costs and whether to change the time horizon used to project the forward looking costs. The FCC has taken no action in this proceeding during the past four years and is unlikely to adopt any changes to its rules within the next year, but we cannot be certain as to either the timing or the result of the agency’s action.

Intercarrier Compensation. In 2001, the FCC initiated a proceeding to address rules that require one carrier to make payment to another carrier for access to the other’s network, or intercarrier compensation. In its notice of proposed rulemaking, the FCC sought comment on some possible advantages of moving from the current rules to a bill and keep structure for all traffic types in which carriers would recover costs primarily from their own customers, not from other carriers. In February 2005, the FCC requested further comments on these issues and on several specific proposed plans for restructuring intercarrier compensation. In addition, from time to time, carriers that we connect with have requested that we pay them to terminate traffic, and this proceeding will likely address those rights or obligations. As part of that docket, on July 24, 2006, a group of large and rural ILECs filed a proposal for intercarrier compensation reform at the FCC called the Missoula Plan, which primarily benefits the ILECs. The Missoula Plan includes provisions regarding tandem transit services. Under the Missoula Plan a carrier may satisfy its transport obligations by a direct interconnection (by using its owns facilities or facilities obtained from another carrier) or by indirect interconnection through a third party tandem transit service. Under the Missoula Plan, tandem transit service would be provided at a rate not to exceed $0.0025 per minute of use for non-access traffic with exceptions for high-volume interconnections and premium or enhanced services. The FCC currently is considering public comments on the Missoula Plan. Independently or in combination with the Missoula Plan, the FCC could make significant changes in the ILEC’s pricing of transit traffic, including lowering the rate, freezing the rate or establishing uniform rates.

We currently generally have no revenue exposure associated with reciprocal compensation for local traffic because our customers are primarily carrier customers, who are responsible for any compensation. We do, however, collect revenue for transit and access charges relating to the termination of local and long distance traffic with other carriers. If the FCC were to reduce what the ILEC can charge for the transiting of local traffic, our revenues would be reduced. We cannot predict either the timing or the result of this FCC rulemaking.

Regulatory Treatment of VoIP. In February 2004, the FCC initiated a proceeding to address the appropriate regulatory framework for VoIP providers. Currently, the status of VoIP providers is not clear, although a report issued by the FCC in 1998 suggests that some forms of VoIP may constitute “telecommunications services” that are subject to regulation as common carriers under federal law. The 1998 report also suggested, however, that this regulatory treatment would not apply until after the FCC determined which specific services were subject to regulation. The new FCC proceeding will attempt to determine what, if any, regulation is appropriate for VoIP providers and whether the traffic carried by these providers will be subject to access charges. The principal focus of this rulemaking is on whether VoIP providers should be subject to some or all of the regulatory obligations of common carriers.

The FCC is continuing to consider whether to impose various obligations on VoIP providers. It recently voted to impose requirements to provide access to 911 emergency services, to permit duly authorized law enforcement officials to monitor communications, to require VoIP providers to contribute to the cost of the FCC’s universal service program and to require VoIP providers to comply with the same customer privacy rules as telecommunications carriers. These obligations are likely to increase the cost of providing VoIP service and slow the growth of VoIP providers. Because VoIP providers are potential users of our services, this trend may affect demand for our services.

State agencies exercise jurisdiction over intrastate telecommunications services, including local telephone service and in-state toll calls. To date, we are authorized to provide intrastate local telephone and long-distance

telephone services in thirty-seven states. As a condition to providing intrastate telecommunications services, we are required, among other things, to:

Generally, state regulatory authorities can condition, modify, cancel, terminate or revoke certificates of authority to operate in a state for failure to comply with state laws or the rules, regulations and policies of the state regulatory authority. Fines and other penalties may also be imposed for such violations.

In addition, states have authority under the Telecommunications Act to approve or (in limited circumstances) reject agreements for the interconnection of telecommunications carriers’ facilities with those of the incumbent local exchange carrier, to arbitrate disputes arising in negotiations for interconnection and to interpret and enforce interconnection agreements. In exercising this authority, the states determine the rates, terms and conditions under which we can obtain collocation in ILEC central offices and interconnection trunks for termination of local traffic to ILEC customers, under the FCC rules. The states may re-examine these rates, terms and conditions from time to time.

Some state governments and their regulatory authorities assert jurisdiction over the provision of transit services, particularly the ILECs’ provision of the service. Various state regulatory authorities have initiated proceedings to examine the regulatory status of transit services. Some states have taken the position that transit service is an element of the “transport and termination of traffic” services that incumbent ILECs are required to provide at TELRIC rates under the Telecommunications Act, while other states have ruled that the Telecommunications Act does not apply to these services. For example, the Public Utilities Commission of Ohio has an open rulemaking proceeding addressing, among other items, applying TELRIC pricing for transit. While we cannot predict whether or how such pricing rules may finally be adopted or implemented, the rulemaking allows for waivers of pricing rules, which based on the existence of competition, we would pursue if necessary. To date, the FCC has not resolved this dispute over interpretation of the Telecommunications Act, resulting in disparate pricing of these services among the states. The trend has been to reduce the state regulation of transit service, although there are exceptions and there can be no assurance that the trend will continue. Many states also have jurisdiction over interconnections between competitive carriers. Our success in securing interconnections with competitive carriers may be affected by the degree of jurisdiction states exert over such interconnections. See “Legal Proceedings.” If a state takes the position that it does not have jurisdiction over such interconnection or over the regulation of competitive transit services generally, we may be unable to assert successfully a legal right to terminate transit traffic to a carrier that refuses to accept terminating traffic from us on reasonable or any terms. Such an inability may have a material adverse effect on our business.

Our success is dependent in part upon our proprietary technology. We rely principally upon trade secret and copyright law to protect our technology, including our software, network design, and subject matter expertise. We enter into confidentiality or license agreements with our employees, distributors, customers and potential customers and limit access to and distribution of our software, documentation and other proprietary information. We believe, however, that because of the rapid pace of technological change in the communications industry, the legal protections for our services are less significant factors in our success than the knowledge, ability and experience of our employees and the timeliness and quality of our services.

We have been granted one patent and have two additional patents pending with the U.S. Patent and Trademark Office. The granted patent addresses our core business, the operation of a neutral tandem network. One of the pending patents addresses a series of traffic routing designs developed by us to assist our customers in reducing their internal network operating costs. The second pending patent covers a set of proprietary operating systems and software developed by us to manage our network. There can be no assurance regarding how, whether or when these additional patents may be granted.

Our headquarters is located at One South Wacker Drive, Suite 200, Chicago, Illinois, where we lease approximately 15,000 square feet of office space. Our leased properties are described below:

We believe our existing facilities are adequate for our current needs in our existing markets and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed.

From time to time, we are a party to legal or regulatory proceedings arising in the normal course of our business. Aside from the matters 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.

In February 2007, Level 3 notified us that they were terminating two contracts under which we delivered transit traffic to Level 3 in a number of states. That same month, we began filing regulatory proceedings in eight states, asserting that we have the legal right to remain directly connected to Level 3 in order to terminate transit traffic to Level 3 on behalf of our third party carrier customers. We have also asserted in these proceedings that we have the right to terminate this traffic to Level 3 on non-discriminatory terms, including without the payment to Level 3 of a per minute of use or similar charge. We currently continue to terminate traffic to Level 3 in these eight states. The traffic we terminated to Level 3 in these eight states accounted for approximately 9.2% of our total traffic during the 2007 calendar year. The following summarizes the status of these proceedings:

Illinois. On July 10, 2007, the Illinois Commerce Commission, or the Illinois Commission, issued an order requiring that Level 3 remain directly connected with us and finding that we should not be required to pay Level 3 any fee or compensation for transit traffic delivered to Level 3. The decision by the Illinois Commission also directs the parties to negotiate an interconnection agreement consistent with the decision’s conditions and finds that, absent such an agreement, Level 3 must continue to directly interconnect with us under the operational interconnection terms in effect between the parties as of January 30, 2007. The decision also ordered Level 3 to pay 80% of our attorney’s fees and costs and 90% of the Illinois Commission’s costs. On August 15, 2007, the Illinois Commission denied Level 3’s petition for rehearing, and on September 10, 2007, Level 3 filed a notice of appeal of the Illinois Commission’s July 10 order with the Appellate Court of Illinois, First District. Level 3 filed its opening brief with the Illinois Appellate Court on December 14, 2007. The Illinois Commission filed a motion with the Illinois Appellate Court requesting that response briefs be due on March 13, 2008. As of March 3, 2008, the Illinois Appellate Court has not ruled on that motion. If that motion is granted, Level 3’s reply brief will be due on March 27, 2008.

On February 22, 2008, Level 3 filed a petition with the Illinois Commission requesting that the Illinois Commission reopen the state proceeding to permit Level 3 to discontinue its direct connection to us. On February 29, 2008, we filed our opposition to Level 3’s petition to reopen the proceedings before the Illinois Commission.

On November 29, 2007, Level 3 filed a complaint for declaratory and injunctive relief in the United States District Court for the Northern District of Illinois against the commissioners of the Illinois Commission, in their official capacity, challenging the Commission’s July 10 order. Among the relief Level 3 seeks in its federal court complaint is a ruling that the federal Telecommunications Act preempts the Commission’s July 10 order and an injunction permanently barring the Illinois Commission from enforcing its July 10 order. Although Level 3 did not name us as a defendant in its federal court action, on February 6, 2008, we filed an unopposed motion to intervene in the proceeding. The Court granted our motion to intervene on February 11, 2008. On February 19, 2008, we filed a motion to stay or dismiss Level 3’s federal complaint. On February 19, 2008, the Illinois Commission commissioners similarly filed a motion to stay or dismiss Level 3’s federal complaint. Level 3’s responses to our motion and the Illinois Commission’s motion to stay or dismiss are due on March 21, 2008. Our reply and the Illinois Commission’s reply in support of our respective motions are due on April 4, 2008. A status hearing and/or ruling on our motion and the Illinois Commission’s motion is set for June 6, 2008.

On February 22, 2008, Level 3 filed a Petition with the Illinois Commerce Commission requesting that the Illinois Commission reopen the state proceeding to permit Level 3 to discontinue its direct connection to us. We plan to respond to this Petition shortly.

On August 13, 2007, we filed a petition in the Circuit Court of Cook County, Illinois seeking enforcement of that part of the Illinois Commission’s July 10 decision requiring Level 3 to pay 80% of our attorneys’ fees and costs. We also sought an award of punitive damages against Level 3. On October 1, 2007, the Circuit Court of Cook County ordered us to file a motion to enforce the Illinois Commission’s attorneys’ fee award on or before October 10, 2007. The Circuit Court ordered Level 3 to file any response to our motion to enforce on or before November 7, 2007 and ordered us to file any reply on or before November 21, 2007. On December 3, 2007, the court held a hearing on our motion to enforce. On February 6, 2008, the Circuit Court of Cook County issued an

order finding that the Illinois Commission’s attorneys’ fees order did not constitute an enforceable judgment and suggesting that we proceed before the Illinois Commission for a determination of the specific amount of attorneys’ fees that Level 3 is required to pay to us. On February 19, 2008, we filed with the Illinois Commission a motion for approval of attorneys’ fees and costs.

On February 29, 2008, simultaneous with the filing of our opposition to Level 3’s petition to reopen the proceedings before the Illinois Commission, we filed a notice of withdrawal, without prejudice, of our motion for approval of attorneys’ fees. Our opposition to Level 3’s petition to reopen the proceedings before the Illinois Commission indicated that if the Illinois Commission reopens the parties’ proceeding, we will ask the commission to address our request for approval of attorneys’ fees as part of the reopened proceeding. Our opposition to Level 3’s petition to reopen also stated that if the Illinois Commission does not reopen the parties’ proceeding, we will raise our request for attorneys’ fees through a subsequent procedurally appropriate submission.

Georgia. On June 19, 2007, the Georgia Public Service Commission, or the Georgia Commission, adopted the recommended findings of the staff of the Georgia Commission, which the staff had issued on June 12, 2007. On August 27, 2007, the Georgia Commission issued an Order Mandating Direct Interconnection and finding, among other things, that: (i) Level 3 must remain directly connected with us, (ii) we should not be required to pay reciprocal compensation or any other additional fee to Level 3 as a condition of such direct interconnection, (iii) we must pay all reasonable costs of direct interconnection and (iv) it is unreasonably discriminatory for Level 3 to require that we pay reciprocal compensation, or some other fee, or collect reciprocal compensation payments from its carrier customers to pass on to Level 3, as a condition of direct interconnection. On September 6, 2007, Level 3 filed with the Georgia Commission a petition for rehearing and reconsideration of the August 27 order. On September 21, 2007, we filed an opposition to Level 3’s petition for reconsideration. On November 20, 2007, the Georgia Commission orally denied Level 3’s petition for rehearing and reconsideration and on December 20, 2007, the Georgia Commission issued a written order confirming its denial of Level 3’s petition.

On January 22, 2008, Level 3 filed a complaint for declaratory and injunctive relief in the United States District Court for the Northern District of Georgia against us and the commissioners of the Georgia Commission, in their official capacity, challenging the Commission’s August 27, 2007 order. Among the relief Level 3 seeks in its federal court complaint is a ruling that the federal Telecommunications Act preempts the Commission’s August 27 order and an injunction permanently barring the Georgia Commission from enforcing its August 27 order. Our response to Level 3’s federal complaint in Georgia is due to be filed on March 24, 2008.

New York. On June 22, 2007, the New York Public Service Commission, or the NYPSC, determined that Level 3 must remain directly connected with us to receive terminating transit traffic. The NYPSC also found that if the parties do not first resolve the dispute, the NYPSC will hold further proceedings to investigate the rates, rules and regulations related to the termination services at issue. On September 24, 2007, the NYPSC issued an order denying Level 3’s petition for rehearing and/or clarification of the NYPSC’s June 22 order. In the order denying the petition for rehearing, the NYPSC stated that it would initiate a rate proceeding in November 2007. Pending the rate proceeding, the NYPSC ordered the parties to continue performing their respective obligations as if the canceled termination agreements remained in effect. On November 9, 2007, the NYPSC issued an order initiating a proceeding to investigate the rates, rules and regulations related to the termination services at issue. On January 30, 2008, Level 3 filed with the NYPSC a petition to stay and/or suspend the rate proceeding. On February 8, 2008, we filed our opposition to Level 3’s petition to stay and/or suspend the NYPSC rate proceeding.

On January 25, 2008, Level 3 filed a complaint for declaratory and injunctive relief in the United States District Court for the Northern District of New York against the commissioners of the NYPSC, in their official capacity, challenging the Commission’s June 22 order. Among the relief Level 3 seeks in its federal court complaint is a ruling that the federal Telecommunications Act preempts the NYPSC’s June 22 order and an injunction permanently barring the NYPSC from enforcing its June 22 order. Although Level 3 did not name us as a defendant in its federal court action, Level 3 does not oppose us intervening in the matter. We anticipate filing a motion to intervene in March 2008. In addition, our response to Level 3’s federal complaint in New York is due to be filed on March 25, 2008.

Connecticut. On June 20, 2007, the Connecticut Department of Public Utility Control, or the CDPUC, held that the evidentiary record developed to date did not warrant CDPUC intervention at this time, but ordered the parties to make a good-faith effort to resolve their dispute pursuant to a settlement that produces a nondiscriminatory commercial agreement governing the delivery of tandem transit traffic by us to Level 3. The CDPUC also stated that it retained jurisdiction over the dispute and, if the parties were unable to arrive at a commercial agreement by November 1, 2007, the parties were required to report the details of their negotiations to the CDPUC no later than November 15, 2007. On November 6, 2007, Level 3 filed with the CDPUC a purported “Report on Negotiations For A Commercial Traffic Exchange Agreement and Request For Final Decision” (“Report”). On November 15, 2007, we filed a motion to strike Level 3’s Report. In our November 15 motion, we also requested that the CDPUC convene an in-person technical meeting to establish an appropriate procedural schedule for the Connecticut proceeding. On November 28, 2007, Level 3 responded to our motion to strike and request for a technical meeting.

On January 18, 2008, a “Draft Decision” was issued, finding, among other things, that the CDPUC “lacks the necessary statutory authority to decide” the issues raised by the parties’ disputes and lacks authority to resolve CLEC-to-CLEC interconnection disputes of the type at issue in the proceeding. The Draft Decision stated further, however, that “the Department is of the opinion that the optimum resolution of this issue is through the commercial agreement process.” On January 30, 2008, Neutral Tandem and the Connecticut Office of Consumer Counsel filed exceptions to the Draft Decision. In its exceptions, we argued, among other things, that the CDPUC has authority under Connecticut law to address the merits of our petition and that our petition implicated significant public policy concerns. The Connecticut Office of Consumer Counsel argued, among other things, that the CDPUC has jurisdiction to resolve the parties’ disputes and that removing our services from the Connecticut market would “be devastating to network integrity and the economics of the Connecticut competitive market.” The CDPUC will hold oral argument on Neutral Tandem’s and the Office of Consumer Counsel’s exceptions on March 17, 2008 and is scheduled to issue its final decision on the exceptions on March 26, 2008.

Florida. On February 26, 2007, we filed a petition against Level 3 before the Florida Public Service Commission, or the Florida Commission. On June 27, 2007, the staff of the Florida Commission issued a proposed recommendation regarding whether our case should proceed to a hearing on the merits. In its recommended ruling, the staff found that the Florida Commission had jurisdiction over the dispute and that our service benefits competition. The staff of the Florida Commission also suggested that we did not make an adequate demonstration of standing to pursue the matter. On July 9, 2007, we voluntarily withdrew our petition and on July 11, 2007, we filed a revised petition with the Florida Commission. Our revised petition includes additional legal arguments and information we hope will demonstrate that we have standing. On July 25, 2007, Level 3 filed a motion to dismiss our revised petition. On August 3, 2007, we filed our opposition to Level 3’s motion to dismiss our revised petition. On September 21, 2007, the Florida Commission issued an order directing the parties to file supplemental briefs to address issues related to Level 3’s motion to dismiss our revised petition. The parties filed their supplemental briefs on October 5, 2007. On November 20, 2007, the staff of the Florida Commission issued a proposed recommendation regarding whether our revised petition should proceed to a hearing on the merits. In its recommended ruling, the staff again found that the Florida Commission had jurisdiction over our petition and that our service benefits competition. The staff of the Florida Commission also suggested, however, that we did not have standing to pursue the matter.

the January 8 agenda conference, the Commission also deemed “moot,” for purposes of Level 3’s motion to dismiss our petition, staff’s recommendation that we do not have standing to pursue this matter. The Commission did not make an express finding with respect to our standing to pursue this matter. On January 30, 2008, the Commission issued an order denying Level 3’s motion to dismiss our petition and ordering that the docket of the matter remain open to conduct an administrative hearing.

California. On March 2, 2007, we filed a complaint with the California Public Utility Commission, or the CPUC, seeking an order requiring Level 3 to maintain its direct interconnection with us and to receive terminating transit traffic from us on non-discriminatory terms and conditions. On June 4 and 5, 2007, hearings were held before a California Commission Administrative Law Judge. There is no date certain by which the Administrative Law Judge must issue a ruling.

Minnesota. On March 6, 2007, we filed a complaint with the Minnesota Public Utilities Commission, or the MPUC, seeking an order requiring Level 3 to maintain its direct interconnection with us and to receive terminating transit traffic from us on non-discriminatory terms and conditions. On July 31 and August 1, 2007, hearings were held before a MPUC Administrative Law Judge. On November 7, 2007, the Administrative Law Judge issued his “Findings of Fact, Conclusions, and Recommendation,” recommending, among other things, that (1) the MPUC has authority to grant us the relief we seek in the Minnesota proceeding; (2) the record established that the public convenience requires the continuation of the direct physical connection between us and Level 3; (3) Minnesota law prohibits Level 3 from attempting to impose a discriminatory termination charge on us and not on the only other tandem transit service provider in the State; (4) Level 3’s effort to impose a termination fee on us is inconsistent with well-established reciprocal compensation principles; and (5) the relevant provisions of Minnesota law are not preempted by federal law. On November 27, 2007, Level 3 filed its exceptions to the Administrative Law Judge’s findings and on December 7, 2007, we filed our reply to Level 3’s exceptions. On February 28, 2008, the MPUC held a hearing on Level 3’s exceptions to the Administrative Law Judge’s findings. Following argument, the MPUC adopted the Administrative Law Judge’s findings with respect to the recommendations described above.

Michigan. On March 2, 2007, we filed a complaint with the Michigan Public Service Commission, or the Michigan Commission, seeking an order requiring Level 3 to maintain its direct interconnection with us and to receive terminating transit traffic from us on non-discriminatory terms and conditions. On August 8 through August 10, 2007 hearings were held before a Michigan Commission Administrative Law Judge. On November 26, 2007, the Michigan Commission issued an order finding, among other things, that: (1) Level 3 must remain directly connected with us; (2) Level 3 shall not require us to pay any fee or other compensation to recover termination costs recoverable as reciprocal compensation from originating carriers, or to impose on us a market-based rate that is not based on Level 3’s costs to maintain direct interconnection with us; (3) the relevant provisions of Michigan law are not preempted by federal law; and (4) the parties should negotiate non-discriminatory rates and conditions for their continued direct interconnection. On December 21, 2007, Level 3 filed its Claim of Appeal with the Michigan Court of Appeals, indicating Level 3’s intent to appeal the Michigan Commission’s November 26, 2007 order. Level 3’s opening brief with the Michigan Court of Appeals currently is due to be filed on March 14, 2008.

In December 2007, we filed with the Michigan Commission a motion seeking an order approving our request that Level 3 reimburse us for the attorneys’ fees and costs that we incurred in connection with the Michigan proceeding. In January 2008, Level 3 responded to our request for attorneys’ fees and we filed a reply in support of its request.

As a result of rulings in the Illinois, Connecticut New York, and Michigan proceedings, we have attempted to negotiate new interconnection agreements with Level 3 for each such state. Future rulings in additional states may also require that we negotiate one or more agreements for each such state. It is possible that disputes may arise during these negotiations that may cause us or Level 3 to seek additional regulatory or judicial relief. As described above, Level 3 also has appealed the Illinois Commission’s and the Michigan Commission’s decision

and filed federal complaints for declaratory and injunctive relief in connection with the decisions in Illinois, Georgia and New York. Level 3 may also seek reconsideration, appeal or otherwise challenge one or more of any other existing or prospective ruling described above. Although we believe our position is meritorious, and we will continue to assert it vigorously in any such additional proceeding, there can be no assurance that we will prevail. In any event, our efforts could have a material adverse effects on our results of operations and financial condition because of, among other things, legal costs, diversion of management resources and other factors.

Additional State Proceedings. After we commenced the state proceedings described above, Level 3 initiated regulatory proceedings in additional states. In these proceedings, Level 3 requested orders from the relevant state regulatory bodies directing us to notify our customers that we would not be able to terminate transit traffic directly to Level 3 and/or allowing Level 3 to disconnect the interconnection facility. In some states, Level 3 also sought to institute a per minute charge of $0.001 per minute of use. We believe that under applicable law, we would have prevailed in these actions if the matter had proceeded to a hearing on the merits. After filing submissions to prevent Level 3 from disconnecting existing direct interconnections in some of the additional states, we elected not to pursue further our right to maintain direct interconnection to Level 3 in these additional states and moved to dismiss the proceedings in those states. We no longer directly terminate traffic to Level 3 in these additional states. The traffic we terminated to Level 3 in these additional states accounted for approximately 1.9% of our revenue during the first six months of 2007. In September and October 2007, Level 3 voluntarily withdrew its petitions for disconnection in each of the states in which it had initiated regulatory proceedings against us.

Level 3 Billing Disputes. We are also engaged in various billing disputes with Level 3 regarding amounts Level 3 claims we owe it. Although there can be no assurance as to the ultimate resolution of these disputes, we do not believe they will have a material adverse effect on our business, results of operations or financial condition.

In July 2006, Verizon Wireless notified us that it wished to terminate its existing Master Service Agreement. In response to the notification, in August 2006, we filed a petition for interconnection with the FCC. On January 14, 2008, we entered into a Direct Connection Agreement under which we may terminate traffic to Verizon Wireless and we dismissed without prejudice the petition for interconnection we filed at the FCC.

We are considering initiating an arbitration proceeding against Verizon regarding a billing dispute of approximately $1.8 million. The dispute originates from an invoice which we feel is not owed under the Verizon tariff. There can be no assurance regarding how, whether or when this matter will be resolved.

The names, ages and positions of our executive officers and directors, as of February 29, 2008, are set forth below:

Rian J. Wren. Mr. Wren joined us in February 2006 and has served as our President, Chief Executive Officer and Director since that time. Prior to joining us, Mr. Wren was Senior Vice President and General Manager of Telephony for Comcast Cable from November 1999 to August 2005. Mr. Wren joined Comcast in 1999 and was named CEO of Broadnet, Comcast’s international wireless company located in Brussels, Belgium in 2000. After returning to the United States, he served as the Senior Vice President and General Manager of Telephony for Comcast Cable Division. Prior to joining Comcast, Mr. Wren held several senior management positions at AT&T from 1978 to 1999, including President of the Southwest Region, and worked in the Consumer, Business, Network Services, and Network Systems Manufacturing divisions for more than 20 years. Mr. Wren holds a B.S. degree in Electrical Engineering from the New Jersey Institute of Technology and an M.S. in Management from Stanford University where he attended as a Sloan Fellow.

Robert Junkroski. Mr. Junkroski has been with the Company since it commenced services, and has served as our Chief Financial Officer and Executive Vice President since that time. Prior to joining us, Mr. Junkroski held the position of Vice President of Finance with Focal Communications Corporation, or Focal (now part of Level 3 Communications Inc.), from 1999 to 2002. Mr. Junkroski previously served as Focal’s Treasurer and Controller from 1997 to 2001. Before joining Focal, Mr. Junkroski was Controller for Brambles Equipment Services, Inc. and Focus Leasing Corporation. Mr. Junkroski holds a B.B.A. degree in Accounting and Economics from University of Dubuque and an M.B.A. concentrating in Finance and Accounting from Roosevelt University, and is a Certified Public Accountant in Illinois.

Surendra Saboo. Dr. Saboo joined us in May 2006 as our Chief Operating Officer and Executive Vice President. Prior to joining us, Dr. Saboo was the Vice President of Product Development and Operations for Voice Services at Comcast Corporation from January 2002 to March 2006. From June 2000 to December 2001, Dr. Saboo served as Executive Vice President and Chief Operating Officer of Broadnet Europe, SPRL, a pan-European subsidiary of Comcast Corporation. Prior to joining Comcast Corporation, Dr. Saboo was the Chairman, Chief Executive Officer and founder of Teledigm, an e-CRM software product company in Dallas, Texas. Prior to starting Teledigm, Dr. Saboo spent 14 years at AT&T in a variety of operating areas including research and development, engineering, product management, strategy, systems development and operations. Dr. Saboo began his career with AT&T in 1986 as a Member of Technical Staff at Bell Laboratories in Holmdel, NJ. Dr. Saboo holds a B.S.M.E. degree from Birla Institute of Technology, India as well as M.S. and Ph.D. degrees in Operations Research from Ohio State University.

Richard Monto. Mr. Monto has been with the Company since 2007, and has served as our General Counsel and Corporate Secretary since February 5, 2008. Mr. Monto has over 10 years of diversified telecommunications experience. From 2001 to 2005, Mr. Monto held senior positions, including General Counsel, with Universal Access Global Holdings, Inc. In addition to three years in private practice with the law firm of Sonnenschein, Nath and Rosenthal, Mr. Monto held senior legal positions with MCI between 1995 and 2000. Mr. Monto holds a B.A. degree from the University of Michigan in Russian and Eastern European Studies and a J.D. from Boston University School of Law.

David Lopez. Mr. Lopez joined us in 2003 and has served as our Senior Vice President of Sales since that time. For nearly 20 years, Mr. Lopez has held national account and sales management positions at Centel, Sprint, and Focal Communications Corporation. In his most recent position, Mr. Lopez provided sales management for Focal’s largest and most successful market from 1997 to 2003. During his tenures at Centel and Sprint from 1992 to 1997, Mr. Lopez held national account positions with responsibility for local service, Centrex, and PBX equipment to Fortune 500 companies. Mr. Lopez holds a B.S. in Marketing from Illinois State University.

James P. Hynes. Mr. Hynes co-founded the Company in 2001, and served as Chief Executive Officer until February 2006, after which he became Executive Chairman. In December 2006 Mr. Hynes stepped down as Executive Chairman and assumed the title of Chairman of the Board, a position he holds today. Active in the industry for 30 years, Mr. Hynes personally directed the establishment of COLT Telecommunications in Europe as their first CEO in 1992. As Chairman of the Board, he led COLT’s initial public offering in 1996. Mr. Hynes established MetroRED Telecom in South America and Mexico, as well as KVH Telecom in Tokyo. Concurrent with taking on these operating roles, he was Group Managing Director at Fidelity Capital for 10 years. His career has included senior positions with Chase Manhattan, Continental Corporation, Bache & Co. and New York Telephone. Mr. Hynes is a Vice Chairman of the Board of Trustees of Iona College and is also on the North American Board of the SMURFIT Graduate School of Business, University College Dublin in Ireland.

Dixon R. Doll. Dr. Doll has served as a Director of ours since 2003. Dr. Doll is the co-founder and general partner of DCM, an early stage technology venture capital firm which currently has more than $1.5 billion under management, headquartered in Menlo Park, California. In the mid-1980’s, Dr. Doll co-founded the venture capital industry’s first fund focused exclusively on telecommunications opportunities. He is the Chairman of the Board of Network Equipment Technologies and numerous private companies. Since 2004, he has been a director of the U.S. National Venture Capital Association in Washington D.C. where he also serves on the Executive Committee, and is Chairman-elect. Additionally, he also serves on the Stanford Institute for Economic Policy Research Advisory Board and the Hoover Institution Board of Overseers at Stanford. He is also the Chairman of the San Francisco Asian Art Museum Board. Dr. Doll received his B.S.E.E. degree (cum laude) from Kansas State University as well as M.S. and Ph.D. degrees in Electrical Engineering from the University of Michigan, where he was a National Science Foundation scholar.

Peter J. Barris. Mr. Barris has served as a Director since 2003. Mr. Barris is currently the Managing General Partner of NEA where he specializes in information technology investing. Mr. Barris has been with NEA since 1992, and he serves as either an executive officer or general partner of various NEA entities. From 1988 to 1990, Mr. Barris was President and Chief Operating Officer at LEGENT Corporation. From 1986 to 1988, Mr. Barris served as Senior Vice President and General Manager of the Systems Software Division and from 1985-1985 as the Vice President of Corporate Development at UCCEL Corporation. Prior to that, Mr. Barris also held various management positions between 1977 and 1985 at the General Electric Company, including Vice President and General Manager at GE Information Services, Inc. Mr. Barris serves or has served as a member of the Boards of Directors of InnerWorkings, Inc., where he also served as a member of the audit, compensation and corporate governance committees, Vonage Holdings Corp., where he also served as a member of the compensation committee, ProtoStar, Boingo Wireless and Hillcrest, as well as several other private companies in the NEA portfolio. Mr. Barris serves on the Executive Committee of the National Venture Capital Association and is a member of the Board of Trustees of Northwestern University and the Board of Overseers of Tuck School at Dartmouth College.

Robert C. Hawk. Mr. Hawk has served as a Director since January 2004. Mr. Hawk has served as President of Hawk Communications since 1996 and is a Venture Partner of DCM. Prior to this, Mr. Hawk served as President and Chief Executive Officer of US West Multimedia Communications, Inc. From 1986 until 1995, Mr. Hawk was President of the Carrier Division of US West Communications, Inc. Prior to such position, Mr. Hawk was Vice President, Marketing and Strategic Planning for CXC Corporation, and Director of Advanced Systems Development for American Bell. From 1997 to 2002, Mr. Hawk served as a Special Limited Partner of Crosspoint Venture Partners. During that time he served on the boards of directors or advisory boards of fifteen companies that went public. Mr. Hawk previously served as a Director of Covad Communications and is a current Director for Centillium Communications and several private high technology companies.

Lawrence M. Ingeneri. Mr. Ingeneri has served as a Director since October 2006. Mr. Ingeneri is currently the Chief Financial Officer and a member of the Board of Directors of mindSHIFT Technologies, Inc., an IT managed services provider which he joined in October 2003. Prior to that time, Mr. Ingeneri was employed by COLT Telecom Group plc, or COLT, a European telecommunications services company from July 1996 to December 2002. Mr. Ingeneri was the Chief Financial Officer of COLT from July 1996 to June 2002 and a member of the Board of Directors of COLT from June 2001 to June 2002.

Our board of directors has the power to appoint our officers. Each officer will hold office for the term determined by the board of directors and until such person’s successor is chosen and qualified or until such persons resignation, removal or death. Our board currently consists of six persons. The board has determined that each of the directors, with the exception of Mr. Hynes and Mr. Wren, satisfy the independence requirements of the NASDAQ Stock Market. The board has not adopted categorical standards in making its determination of independence and instead relies on standards set forth in the Nasdaq marketplace rules.

There are no family relationships among any of our directors or executive officers.

We currently have an audit committee, compensation committee and a nominating and corporate governance committee. Each such committee has three or more members, who serve at the pleasure of the board of directors. At the time of the offering, each committee will consist of three persons, at least one of whom is not employed by us, and is “independent” as defined under the rules of the NASDAQ Stock Market. Prior to November 1, 2008, the first anniversary of our initial public offering, all of the members of these committees will be independent.

Compensation Committee. The Compensation Committee is responsible for reviewing and making recommendations to the Board of Directors with respect to compensation of executive officers and other related compensation matters. Currently, Dr. Doll, Mr. Hynes and Mr. Barris serve on the Compensation Committee. Dr. Doll is chairman of the committee.

Our board of directors has adopted a written charter for this committee, which is available in the Investor Relations section of our website.

Audit Committee. The Audit Committee is responsible for reviewing our financial statements, audit reports, internal financial controls, and for making recommendations with respect to those matters to the Board of Directors. Currently, Mr. Ingeneri, Mr. Hawk and Mr. Hynes serve on the Audit Committee. The board has determined that Mr. Ingeneri, the current chairman of the committee, qualifies as an “audit committee financial expert” within the meaning of the regulations of the SEC.

Our board of directors has adopted a written charter for this committee, which is available in the Investor Relations section of our website.

Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee is responsible for the oversight of and providing assistance to our board of directors in developing and recommending governance practices and selecting the director nominees to stand for election at annual meetings of our shareholders. Currently, Mr. Hawk, Mr. Barris and Mr. Ingeneri serve on the Nominating and Corporate Governance Committee. Mr. Hawk is chairman of the committee.

Our board of directors has adopted a written charter for this committee, which is available in the Investor Relations section of our website.

We have adopted a finance code of professional conduct for our chief executive officer, chief financial officer and other key employees of the finance organization. Our finance code of professional conduct is available in the Investor Relations section of our website.

The Compensation Committee is currently comprised of three directors, Messrs. Doll, Barris and Hynes. Dr. Doll serves as Chairman of the Compensation Committee. Prior to November 1, 2008, the first anniversary of our initial public offering, each member of the Compensation Committee will meet the definition of independence under our corporate governance guidelines and further qualifies as a non-employee director for purposes of Rule16b-3 under the Securities Exchange Act of 1934. None of the current members of the Compensation Committee are current or, other than Mr. Hynes, former employees of ours nor are any members eligible to participate in any of our executive compensation programs. See “—Committees of the Board of Directors” for a further description of the Compensation Committee. As discussed in “Certain Relationships and Related Transactions,” Dr. Doll is co-founder of DCM and Mr. Barris is Managing General Partner of NEA, each of which are affiliates of certain of our stockholders.

We were incorporated on April 19, 2001, commenced operations in November 2003 and began generating revenue with the launch of our service in February 2004. The material principles underlying our executive compensation policies and decisions are intended to:

To implement these principles, the Compensation Committee, which is responsible for approving and administering the compensation program for executive officers and certain senior employees, including our named executive officers, expects to maintain compensation plans that tie a substantial portion of executives’ overall compensation to key strategic goals such as the development of our network, the establishment and maintenance of key strategic relationships and the growth of our customer base as well as our financial and operational performance, as measured by metrics such as revenue, customer growth, churn and markets launched. As our executives assume greater responsibility, a larger portion of their total compensation is expected to be “at risk” and thus subject to corporate and individual performance.

To assist the Compensation Committee in discharging its responsibilities, in 2005, the Compensation Committee retained a compensation consultant, Human Capital Solution, to evaluate certain aspects of our compensation practices and to assist in developing and implementing our executive compensation program. Human Capital Solution also provides outsourced human resources management services to us. Human Capital Solution developed a competitive peer group—which included the following private and public companies, such as Level 3, Arbinet-thexchange, Inc., NeuStar, Inc., KMC Telecom, Inc., New Global Telecom, Inc. and VeriSign Inc.—and performed benchmarking analyses of competitive compensation levels focusing on base salary and bonus for the peer group (“2005 Benchmarking Study”). Our management developed recommendations using the 2005 Benchmarking Study that were reviewed and approved by the Compensation Committee in connection with developing and approving the salary and bonus compensation awards. The 2005 Benchmarking Study was used to set compensation and bonuses for senior management at that time, but has not been directly relied upon since that time in making compensation decisions, except to the extent that the compensation levels established during 2005 still comprise a substantial portion of our named executive officers’ salary and bonus compensation levels. The 2005 Benchmarking Study did not address the terms and conditions of the employment agreements, and therefore the 2005 Benchmarking Study was not relied upon in establishing the terms and conditions for our executive employment agreements. Rather, the Compensation Committee of our board of directors, relying on its collective experience as directors for similar sized companies, together with our outside law firm, established the terms and conditions of our employment agreements. No member of our management, including our named executive officers, provides recommendations to the Compensation Committee with respect to his or her own compensation. Our board of directors reviews and ratifies the findings of the Compensation Committee.

Other than our retention of Human Capital Solution in 2005, we have not retained any other compensation consultant to review our policies and procedures relating to executive compensation. Human Capital Solution

continues to provide outsourced human resources management services to us but has not performed any additional compensation benchmark studies for us since 2005. Our Compensation Committee may request a similar study periodically in the future if it feels it is necessary, and it does informally consider competitive market practices by speaking to recruitment agencies and reviewing publicly available information relating to compensation of executive officers at other comparable telecommunications companies.

Our Compensation Committee reviews and approves all of our compensation policies.

Base salary is used to recognize the experience, skills, knowledge and responsibilities required of all our employees, including our named executive officers. When establishing base salaries, the Compensation Committee and management considered a number of factors, including the seniority of the individual, the functional role of the position, the level of the individual’s responsibility, the ability to replace the individual, the base salary of the individual at their prior employment and the number of well qualified candidates available to assume the individual’s role. Generally, we believe that executive base salaries should be targeted near the median of the range of salaries for executives in similar positions at comparable companies.

Base salaries of our named executive officers are reviewed at a minimum annually by our Compensation Committee during our performance review, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience.

We have an annual cash incentive bonus plan for nearly all employees, including our named executive officers. The annual cash incentive bonuses are intended to compensate for the achievement of both our annual financial goals and individual annual performance objectives, outlined below. Amounts payable under the annual cash incentive bonus plan are calculated as a percentage of the applicable officer’s base salary, with higher ranked executive officers being compensated at a higher percentage of base salary. The corporate targets and the individual objectives are given roughly equal weight in the bonus analysis. The corporate targets are the financial metrics contained in the internal business plan adopted by our board of directors, including revenue, EBITDA and net income. For 2006, our corporate targets were revenues of $56.9 million, EBITDA of $13.8 million and net income of $6.3 million. For 2007, our corporate targets were revenues of $74.4 million and EBITDA of $18.6 million. Since the components of the corporate targets for 2008 contain highly sensitive data such as targeted revenue growth and operating income, we do not disclose specific future measures and targets because we believe that such disclosure would result in serious competitive harm and be detrimental to our operating performance. Achievement of the annual internal business plan financial metrics adopted by our board of directors will result in full credit being given for the corporate targets portion of the annual cash

incentive bonus. In addition, if the annual internal business plan financial metrics are exceeded by pre-determined targeted percentage (5% for revenue and 10% for EBITDA), or “stretch goal,” the annual cash incentive bonus for our named executive officers may be increased above the target bonus. For example, while the 2008 target bonus for our named executive officers is set at 40% of their annual base salary, for 2008 our Compensation Committee has established a “stretch goal” with specific criteria tied to exceeding the annual internal business plan which could result in an additional cash incentive bonus, as determined by the Compensation Committee, awarded for meeting such “stretch goals.” Individual objectives are necessarily tied to the particular area of expertise of the employee and their performance in attaining those objectives relative to external forces, internal resources utilized and overall individual effort. Other than for Mr. Lopez, who is compensated based on our financial goals and other individual performance objectives, the individual objectives for our named executive officers in 2007 generally included the following primary qualitative and quantitative criteria:

Measurement of the above criteria is both quantitative and qualitative. For example, actual performance is compared relative to internal business plan financial metrics to determine if a quantitative criteria is met, whereas, qualitative factors are based upon a review of the prior year’s events and the change, if any, in the relative criteria. Successful attainment of both qualitative and quantitative individual objectives combined with successful achievement of the annual internal business plan financial metrics adopted by our board of directors will result in payment of the full annual cash incentive bonus, plus an additional bonus amount awarded at the discretion of the Compensation Committee if the “stretch goal” criteria are met in whole or in part.

The corporate and individual targets under our annual cash incentive bonus program are intended to be challenging yet achievable for the participants, but only if there was a high level of performance by our executive officers and if we have what we consider to be a successful year. The targets are meant to require substantial efforts by executive officers and their teams toward our strategic goals and cost cutting measures, but at the same time they were intended to be within reach if such significant efforts were made. In addition, achievement of “stretch goal” criteria will be substantially more challenging and therefore less likely to be achieved. There was no stretch goal established for 2006.

Due to both the quantitative and qualitative nature of named executive officer’s individual objectives, the Compensation Committee exercises discretion in determining whether an objective has been achieved and, if achieved, the amount of the annual cash incentive bonus to be awarded to the named executive officer. For example, during 2006 Messrs. Junkroski and Gavillet received their maximum target bonus of 40% of base salary and option awards for 50,000 shares of common stock notwithstanding that certain of their individual quantitative objectives discussed above were only substantially met after the Compensation Committee balanced these quantitative results against Messrs. Junkroski and Gavillet exceeding their qualitative objectives for 2006. In exercising this discretion the Compensation Committee awarded each of our named executive officers their maximum target bonus of 40% of base salary. For a description of awards made to our named executive officers during 2006 under our 2003 Equity Incentive Plan see “—Grants of Plan-Based Awards” below. Further, in 2007, the Compensation Committee determined that our named executive officers exceeded their respective stretch goal quantitative and qualitative objectives and exercised the Compensation Committee’s discretion to award cash bonus amounts and option awards in excess of the targeted amounts. As a result, Mr. Wren received a bonus that was 75% of his base salary, Dr. Saboo received a bonus that was 73% of his base salary, and Messrs. Junkroski and Gavillet each received a bonus that was 71% of base salary.

Set forth below are the bonus awards for 2006 and 2007 and the expected target bonus awards for 2008 (each as a percentage of annual base salary) for the named executive officers:

David Lopez, our Senior Vice President—Sales, is compensated quarterly based upon achievement of certain of our financial goals and individual performance objectives.

The annual cash incentive bonus for the named executive officers, other than Mr. Lopez, is normally paid in a single installment in the first quarter following any given year. Further, unlike our other named executive officers, Mr. Lopez, who manages our sales force, receives his bonus compensation quarterly, which is consistent with the compensation structure of all the members of the sales organization he manages.

We believe that our long-term performance is fostered by a compensation methodology which compensates executive officers through the use of stock-based awards, such as stock options, restricted stock awards, and other rights to receive compensation based on the value of our stock. Therefore, our executive officers have a continuing stake in our long-term success. We believe that the annual aggregate value of these awards should be set near competitive median levels for comparable companies. However, due to the early stage of our business, we expect to provide a greater portion of total compensation to our executives through our stock compensation than through cash based compensation.

On November 24, 2003, before we were a public company, we adopted the 2003 Stock Incentive Plan to provide certain of our employees, including our executive officers, with incentives to help align those employees’ interests with the interests of our stockholders. Until we became a public company, our 2003 Stock Incentive Plan was the principal method for our executive officers to acquire equity interests in us.

The Compensation Committee administers the 2003 Stock Incentive Plan and determines the type and amount of awards to be granted to eligible employees, directors and consultants based upon the principles underlying our executive compensation program. See “—Overview of Compensation Methodology” above. Awards under our 2003 Stock Incentive Plan were made throughout the relevant year and were generally tied to Compensation Committee meetings. Prior to completing our initial public offering, we adopted our 2007 Long-Term Equity Incentive Plan discussed below and ceased awarding equity grants under the 2003 Stock Incentive Plan. As of February 15, 2008, there were 3,104,247 shares reserved for issuance under the 2003 Stock Incentive Plan in respect of awards made prior to our initial public offering.

Stock Options. Stock option grants are typically made at the commencement of employment and generally thereafter by the Compensation Committee upon achievement of key strategic goals and on the anniversary of previous grants. Periodic stock option grants are made at the discretion of the Compensation Committee. In making these discretionary awards, the Compensation Committee considers the same corporate and individual targets considered in determining our named executive officers’ annual cash incentive bonus, as described “—Annual Cash Incentive Bonus” above. The Compensation Committee determines the exercise price of options awards granted under our 2003 Stock Incentive Plan, but with respect to incentive stock options intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code, the exercise price must at least be equal to the fair market value of our common stock on the date of grant. The Compensation Committee determines the term of all options. Generally, option awards under the 2003 Stock Incentive Plan vest 25% per year. Upon termination of a participant’s service with us or with a subsidiary of ours, he or she may exercise his or her vested options for the period of 90 days from the termination of employment; provided, if termination is due to death or disability, the option will remain exercisable for 12 months after such termination. However, an option may never be exercised later than the expiration of its term. The terms of option awards under the 2003 Stock Incentive Plan are generally 10 years.

Restricted Stock. Restricted stock awards are shares of our common stock that vest in accordance with terms and conditions established by the Compensation Committee. Holders of restricted stock have all the rights of a stockholder of ours. Until adoption of the 2003 Stock Incentive Plan, it was more common for us to award shares of restricted stock than options. Since adoption of that plan, however, our compensation practice generally has been to award options rather than shares of restricted stock. The change was largely based upon the increased appreciation in the stock value and the requirement of the employees to pay significant sums to purchase the restricted stock at the fair market value at the time of the grant and putting significant capital at risk as opposed to the employee not taking any capital risk and only incurring a cash cost after the vesting period of the stock options and at the time of exercise. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture.

Unless otherwise determined by the Compensation Committee, the 2003 Stock Incentive Plan does not allow for the sale or transfer of awards under the plan other than by will or the laws of descent and distribution, and may be exercised only during the lifetime of the participant and only by such participant. We do not have a policy to recover awards if relevant performance measures upon which they were based are restated or otherwise adjusted in a manner that would reduce the size of a payment.

Prior to the completion of our initial public offering, we adopted the Neutral Tandem, Inc. 2007 Long-Term Equity Incentive Plan. The 2007 Long-Term Equity Incentive plan provides for grants of stock options, restricted stock, restricted stock units, deferred stock units and other equity-based awards. Our directors, officers and other employees, as well as others performing services for us, are eligible for grants under the plan. Our Compensation Committee approves all awards under the plan. For the reasons discussed above under “—Elements of Compensation—Long-Term Incentive Plan Awards—Restricted Stock,” in the near term we anticipate the primary awards under the 2007 Long-Term Equity Incentive Plan will be stock options. However, decisions regarding the amount and type of equity incentive compensation and relative weighting of these awards among total executive compensation will also be based on our understanding of market practices of similarly situated companies and negotiations with our executives in connection with their initial or continued employment by us. Other factors, including the amount and percentage of our total equity on a diluted basis held by our executive officers, will also be considered.

The purpose of the 2007 Long-Term Equity Incentive Plan is to provide these individuals with incentives to maximize stockholder value and otherwise contribute to our success. We believe that the 2007 Long-Term Equity Incentive Plan, which we believe is competitive with comparable organizations, will assist us in attracting and retaining the best possible executive talent. We believe that stock options as well as restricted stock awards granted pursuant to the 2007 Long-Term Equity Incentive Plan will align our executives’ incentives with that of our shareholders and assist in the creation of long-term shareholder value. Because our Compensation Committee has the ability to determine certain vesting criteria and, with respect to options, the exercise price, our Compensation Committee may use such equity-based awards to create an appropriate balance of the short and long-term non-cash compensation. In addition, because our Compensation Committee has discretion over the granting of awards under the 2007 Long-Term Equity Incentive Plan, we believe the 2007 Long-Term Equity Incentive Plan provides the Compensation Committee with the ability to encourage integrity in our business dealings.

The following is a summary of the material terms of the 2007 Long-Term Equity Incentive Plan, but does not include all of the provisions of the plan. For further information about the plan, we refer you to the complete copy of the 2007 Long-Term Equity Incentive Plan, which is an exhibit to the registration statement of which this prospectus forms a part.

Administration. The Compensation Committee administers the 2007 Long-Term Equity Incentive Plan. Our board of directors also has the authority to administer the plan and to take all actions that the Compensation Committee is otherwise authorized to take under the plan.

Available Shares. As of February 15, 2008 there were awards for 18,000 shares issued under the 2007 Long Term Equity Incentive Plan and 2,855,613 shares, representing approximately 9.2% of our outstanding common stock as of February 15, 2008, available for issuance under the 2007 Long Term Equity Incentive Plan. The number of shares available for issuance under the 2007 Long-Term Equity Incentive Plan is subject to adjustment in the event of a reorganization, stock split, merger or similar change in our corporate structure or the outstanding shares of common stock. In the event of any of these occurrences, we may make any adjustments we consider appropriate to, among other things, the number and kind of shares, options or other property available for issuance under the plan or covered by grants previously made under the plan. The shares available for issuance under the plan may be, in whole or in part, authorized and unissued or held as treasury shares.

Eligibility. Our directors, officers and employees, as well as other individuals performing services for us, are eligible to receive grants under the 2007 Long-Term Equity Incentive Plan. However, only employees may receive grants of incentive stock options. In each case, the Compensation Committee will select the actual grantees.

Stock Options. Under the 2007 Long-Term Equity Incentive Plan, the Compensation Committee or the board of directors may award grants of incentive stock options conforming to the provisions of Section 422 of the Internal Revenue Code, and other, non-qualified stock options. The Compensation Committee may not, however, award to any one person in any calendar year options to purchase common stock equal to more than 25.0% of the total number of shares authorized under the plan and, if required by the Internal Revenue Code, it may not award incentive options first exercisable in any calendar year whose underlying shares have a fair market value greater than $100,000, determined at the time of grant.

The exercise price of an option granted under the plan may not be less than 100% of the fair market value of a share of common stock on the date of grant, and the exercise price of an incentive option awarded to a person who owns stock constituting more than 10% of our voting power may not be less than 110% of such fair market value on such date.

Unless the Compensation Committee determines otherwise, the exercise price of any option may be paid in any of the following ways:

If a participant elects to deliver shares of common stock in payment of any part of an option’s exercise price, the Compensation Committee may in its discretion grant the participant a “reload option.” The reload option entitles its holder to purchase a number of shares of common stock equal to the number so delivered. The reload option may also include, if the Compensation Committee chooses, the right to purchase a number of shares of common stock equal to the number delivered or withheld in satisfaction of any of our withholding requirements in connection with the exercise of the original option. The terms of each reload option will be the same as those of the original exercised option, except that the grant date will be the date of exercise of the original option, and the exercise price will be the fair market value of the common stock on the date of exercise.

The Compensation Committee will determine the term of each option in its discretion. However, the terms of option awards under the 2007 Long-Term Equity Incentive Plan are generally 10 years and no term may exceed ten years from the date of grant or, in the case of an incentive option granted to a person who owns stock constituting more than 10% of the voting power of us, five years from the date of grant. In addition, all options under the 2007 Long-Term Equity Incentive Plan, whether or not then exercisable, generally cease vesting when a grantee ceases to be a director, officer or employee of, or to otherwise perform services for, us or our subsidiaries.

For example, options generally expire 90 days after the date of cessation of service, so long as the grantee does not compete with us during the 90-day period. In the case of a participant’s retirement, all options that are exercisable shall remain so for up to 90 days after the date of retirement, and all options that were not exercisable will terminate upon the date of retirement. However, in the case of a participant’s death or disability, all options that are exercisable shall remain so for up to 180 days after the date of death or disability, and all options that were not exercisable will terminate upon the date of death or disability. In each of the foregoing circumstances, the board of directors or the Compensation Committee may elect to accelerate the vesting of unvested options and further extend the applicable exercise period in its discretion. Upon termination for cause, all options will terminate immediately. If we undergo a change in control and a grantee is terminated from service (other than for cause) within one year thereafter, all options will become fully vested and exercisable and remain so for up to one year after the date of termination. In addition, the Compensation Committee has the authority to grant options that will become fully vested and exercisable automatically upon a change in control of us, whether or not the grantee is subsequently terminated. We did not award any stock options to our named executive officers in 2007 under our Long-Term Equity Incentive Plan. However, it is expected that during the first six months of 2008, stock option awards will be made to our named executive officers attributable in part to their service and performance in 2007.

Restricted Stock. Under the 2007 Long-Term Equity Incentive Plan, the Compensation Committee may award restricted stock subject to the conditions and restrictions, and for the duration, which will generally be at least six months, that it determines in its discretion. If a participant ceases to be a director, officer or employee of, or to otherwise perform services for, us or our subsidiaries during any period of restriction, all shares of restricted stock on which the restrictions have not lapsed shall be immediately forfeited to us. If, however, the cessation occurs due to death, disability or retirement, the Compensation Committee may elect to provide that all restrictions on shares of restricted stock granted to such participant shall lapse. If we undergo a change in control and a participant is terminated (other than for cause) from being a director, officer or employee of, or otherwise performing services for, us or our subsidiaries within one year after such change in control, all restrictions on shares of restricted stock granted to such participant shall lapse. In addition, the Compensation Committee has the authority to award shares of restricted stock with respect to which all restrictions shall lapse automatically upon a change in control of us, whether or not the participant is subsequently terminated.

Restricted Stock Units; Deferred Stock Units. Under the 2007 Long-Term Equity Incentive Plan, the Compensation Committee may award restricted stock units subject to the conditions and restrictions, and for the duration, which will generally be at least six months, that it determines in its discretion. Each restricted stock unit is equivalent in value to one share of common stock and entitles the grantee to receive one share of common stock for each restricted stock unit at the end of the vesting period applicable to such restricted stock unit. If a participant ceases to be a director, officer or employee of, or to otherwise perform services for, us or our affiliates during any period of restriction, all restricted stock units on which the restrictions have not lapsed shall be immediately forfeited to us. If, however, the cessation occurs due to death, disability or retirement, the Compensation Committee may elect to provide that all restrictions on restricted stock units granted to such participant shall lapse. If we undergo a change in control and a participant is terminated (other than for cause) from being a director, officer or employee of, or otherwise performing services for, us or our subsidiaries within one year after such change in control, all restrictions on restricted stock units granted to such participant shall lapse. In addition, the Compensation Committee has the authority to award restricted stock units with respect to which all restrictions shall lapse automatically upon a change in control of us, whether or not the participant is subsequently terminated. Prior to the later of (i) the close of the tax year preceding the year in which restricted stock units are granted or (ii) 30 days of first becoming eligible to participate in the plan (or, if earlier, the last day of the tax year in which the participant first becomes eligible to participate in the plan) and on or prior to the date the restricted stock units are granted, a grantee may elect to defer the receipt of all or a portion of the shares due with respect to the restricted stock units and convert such restricted stock units into deferred stock units. Subject to specified exceptions, the grantee will receive shares in respect of such deferred stock units at the end of the deferral period. We did not award any restricted stock or deferred stock units to our named executive officers in 2007, and we do not expect to make any such awards to our named executive officers in 2008 attributable to their service or performance in 2007.

Performance Awards. Under the 2007 Long-Term Equity Incentive Plan, the Compensation Committee may grant performance awards contingent upon achievement by the grantee, us and/or our subsidiaries or divisions of set goals and objectives regarding specified performance criteria, such as, for example, return on equity, over a specified performance cycle, as designated by the Compensation Committee. Performance awards may include specific dollar-value target awards, performance units, the value of which is established by the Compensation Committee at the time of grant, and/or performance shares, the value of which is equal to the fair market value of a share of common stock on the date of grant. The value of a performance award may be fixed or fluctuate on the basis of specified performance criteria. A performance award may be paid out in cash and/or shares of our common stock or other securities.

Unless the Compensation Committee determines otherwise, if a grantee ceases to be a director, officer or employee of, or to otherwise perform services for, us or our subsidiaries prior to completion of a performance cycle due to death, disability or retirement, the grantee will receive the portion of the performance award payable to him or her based on achievement of the applicable performance criteria over the elapsed portion of the performance cycle. If termination of employment or service occurs for any other reason prior to completion of a performance cycle, the grantee will become ineligible to receive any portion of a performance award. If we

undergo a change in control, a grantee will earn no less than the portion of the performance award that he or she would have earned if the applicable performance cycle had terminated as of the date of the change in control.

Vesting, Withholding Taxes and Transferability of All Awards. The terms and conditions of each award made under the 2007 Long-Term Equity Incentive Plan, including vesting requirements, will be set forth consistent with the plan in a written agreement with the grantee. Except in limited circumstances, no award under the 2007 Long-Term Equity Incentive Plan may vest and become exercisable within six months of the date of grant, unless the Compensation Committee determines otherwise.

Unless the Compensation Committee determines otherwise, a participant may elect to deliver shares of common stock, or to have us withhold shares of common stock otherwise issuable upon exercise of an option or upon grant or vesting of restricted stock or a restricted stock unit, in order to satisfy our withholding obligations in connection with any such exercise, grant or vesting.

Unless the Compensation Committee determines otherwise, no award made under the 2007 Long-Term Equity Incentive Plan will be transferable other than by will or the laws of descent and distribution or to a grantee’s family member by gift or a qualified domestic relations order, and each award may be exercised only by the grantee, his or her qualified family member transferee, or any of their respective executors, administrators, guardians, or legal representatives.

Amendment and Termination of the 2007 Long-Term Equity Incentive Plan. The board of directors may amend or terminate the 2007 Long-Term Equity Incentive Plan in its discretion, except that no amendment will become effective without prior approval of our stockholders if such approval is necessary for continued compliance with NASDAQ listing requirements. Furthermore, any termination may not materially and adversely affect any outstanding rights or obligations under the 2007 Long-Term Equity Incentive Plan without the affected participant’s consent. If not previously terminated by the board of directors, the 2007 Long-Term Equity Incentive Plan will terminate on October 31, 2017.

Our named executive officers and certain other executives with employment agreements are covered by arrangements which specify payments in the event the executive’s employment is terminated. The type and amount of payments vary by executive level and the nature of the termination. These severance benefits are payable if and only if the executive’s employment terminates as specified in the applicable employment agreement. Our primary reason for including severance benefits in compensation packages is to attract and retain the best possible executive talent. We believe our severance benefits are competitive with general industry packages. For a further description of these severance benefits, see “—Employment Agreements” below.

Members of our board of directors, our named executive officers, and certain other members of our senior management are covered by arrangements which specify accelerated vesting of unvested stock options and restricted stock in the event of a “change in control.” The board of directors’ stock options and restricted stock awards fully vest upon a change of control, and certain executives’ stock options and restricted stock partially vest upon a change of control and fully vest if, within a period of time of the change of control, they are not retained in their current capacity. Our primary reason for including change in control benefits in compensation packages is to attract and retain the best possible executive talent. We believe our change in control benefits are competitive with general industry practices.

In addition, our 2003 Stock Incentive Plan provides that in the event of our “change in control,” the Compensation Committee may otherwise determine the status of unvested options or restricted stock, including, without limitation, whether the successor corporation will assume or substitute an equivalent award, or portion thereof, for each outstanding award under the plan or, if there is no assumption or substitution of unvested outstanding awards, such unvested awards may be canceled. The 2007 Long-Term Equity Incentive Plan

provides that if there is a “change in control,” and a participant is terminated other than for “cause” within one year after such “change in control,” all of the participant’s options will become fully vested and exercisable upon such termination and will remain so for up to one year after the date of termination, but in no event after the expiration date of the options. In addition, the Compensation Committee has the authority to grant options that become fully vested and exercisable automatically upon a “change in control,” whether or not the grantee is subsequently terminated.

For additional information concerning severance and change in control benefits, see “—Severance and Change in Control Benefits” below.

During the year ended December 31, 2006, certain of our named executive officers received reimbursement of up to $75,000 for moving expenses, use of a corporate apartment and, in the case of the Chief Executive Officer, a tax “gross up” payment with respect to reimbursement of moving expenses. See “—Employment Agreements” below.

In addition, prior to adopting the 2003 Stock Incentive Plan, we allowed certain employees to purchase shares of restricted stock at a price equal to the fair market value on the date of purchase. The number of shares of restricted stock available for purchase by each employee was determined by the board of directors based upon the employees’ position and expected contribution to us. The restricted stock was subject to a defined vesting period which if not met, resulted in forfeiture of the shares of restricted stock.

In 2007, none of our named executive officers received a material perquisite or other similar compensation, however, we intend to continue to maintain executive benefits and perquisites for officers, and, the Compensation Committee may in its discretion revise, amend or increase named executive officers’ perquisites as it deems advisable. We believe these benefits and perquisites are currently not above median competitive levels for comparable companies and are beneficial in attracting and retaining executive talent.

We maintain a tax-qualified retirement plan that provides eligible employees with an opportunity to save for retirement on a tax advantaged basis. Eligible employees are able to participate in the 401(k) plan as of the first day of the month following 60 days of employment. The 401(k) plan permits us to make cash profit sharing contributions to eligible participants of 2.5%. Pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives, other than our common stock, according to the participants’ directions. All employee contributions are 100% vested. The 401(k) plan is intended to qualify under Sections 401(a) and 501(a) of the Internal Revenue Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan. We believe that offering a 401(k) retirement plan increases our ability to attract and retain the best possible executive talent.

Between our named executive officers there are variances in both the amount and the mix of compensation. Generally, the differences reflect the level of responsibility and the experience of the named executive officer. In addition, compensation can differ based on differences in the timing risk associated with the named executive officer joining us. For example, employees joining a more mature company may receive a lower overall compensation package because the risk of joining such a company as compared to an early stage venture is much lower. Among our named executive officers, the compensation differences are not significant and largely reflect the differences in overall responsibility, with Mr. Wren, our Chief Executive Officer, paid at the highest pay scale, including his receipt of the largest stock option grant in 2006, reflective of his greater responsibility. Our next three named executives, Dr. Saboo and Messrs. Junkroski and Gavillet, had similar base salaries and similar

target bonus levels for 2006 and 2007. Their option grants and cash bonus amounts were also similar during that time. In 2006, because of Mr. Wren’s seniority and the fact that he joined us earlier than Dr. Saboo, Mr. Wren received certain perquisites that Dr. Saboo did not. For example, Mr. Wren’s “All Other Compensation” in 2006 consisted of $48,750 for reimbursement of moving expenses and closing costs associated with the sale of Mr. Wren’s home in New Jersey and $27,767 related to the use of a corporate apartment in Chicago, Illinois from February until September 2006 and $42,037 to reimburse Mr. Wren for federal and state taxes. Dr. Saboo’s “All Other Compensation” in 2006 consisted primarily of reimbursement of approximately $13,926 for moving expenses and use of a corporate apartment from May until September 2006.

The Compensation Committee determines the compensation payable to each of the named executive officers as well as the compensation of the members of the board of directors. The Compensation Committee determines the compensation paid to each of our named executive officers based upon various factors and sources of information, including recommendations of management. See “—Overview of Compensation Methodology” and “—Elements of Compensation” above. No member of our management, including our named executive officers, provides recommendations to the Compensation Committee with respect to his or her own compensation. Our board of directors reviews and ratifies the actions of the Compensation Committee.

Effective February 6, 2006, Mr. Wren was appointed our President and Chief Executive Officer and James Hynes, our then President, Chief Executive Officer and Chairman of the Board, assumed the role of Executive Chairman of the Board of Directors. In October 2006, Mr. Hynes’ title was changed to Chairman of the Board of Directors. We entered into employment agreements with each of our named executive officers in 2006. As discussed in further detail below, Mr. Gavillet resigned from the Company effective February 1, 2008.

The employment agreements for each named executive officer are four years in duration. Each employment agreement provides for an annual salary and a discretionary annual incentive cash bonus and/or equity awards up to 40% of the named executive officer’s base salary during the first year of employment. In subsequent years, the amount of annual incentive cash and/or equity award bonus is subject to determination by our board of directors without limitation on the amount of the award. Each of the agreements provides for a severance payment over a prescribed term in the event the named executive is terminated without cause, including if his duties are materially changed in connection with a change of control. Each agreement also provides that no severance payment is due in the event of termination with cause, which includes termination for willful misconduct, conviction of a felony, dishonesty or fraud. Each agreement further contains an agreement by the named executive officer not to compete with us for a defined term equal in length to the applicable severance payment in the respective employment agreement, which we feel is reasonable and consistent with industry guidelines.

Rian Wren. We have entered into an employment agreement with Mr. Wren, dated February 6, 2006, under which Mr. Wren has agreed to serve as our President and Chief Executive Officer. Pursuant to the terms of the agreement, Mr. Wren’s salary for 2007 was $300,000, and effective on January 1, 2008, Mr. Wren’s annual salary was increased to $350,000. The agreement entitled Mr. Wren to receive reimbursement of up to $75,000 for moving expenses plus use of a corporate apartment until September 2006, with the amount of the moving expenses “grossed up” to cover federal and state taxes. If Mr. Wren’s employment is terminated by us without cause or terminated by Mr. Wren for good reason, we are obligated to pay to Mr. Wren any unpaid base salary through the date of termination, any accrued vacation pay and severance equal to 12 months’ base salary at the salary rate in effect on the date of termination. If Mr. Wren’s employment is terminated within six months following a change of control or his responsibilities are materially diminished within six months of such change of control, we are obligated to pay to Mr. Wren any unpaid base salary through the date of termination, any accrued vacation pay and severance equal to twenty-four months’ base salary at the salary rate in effect on the date of termination. In the event Mr. Wren dies, becomes disabled or his employment terminates for any other

reason, we are obligated to pay Mr. Wren any unpaid base salary through the date of termination, any unused vacation accrued through the date of termination and any unreimbursed business expenses. During the employment period and through (i) the second anniversary of the date of Mr. Wren’s termination or material change in responsibilities, in the event he is terminated within six months of a change of control or his responsibilities are materially diminished within six month of such change of control or (ii) the first anniversary of the date of Mr. Wren’s termination in the event his employment is terminated in any other circumstance, Mr. Wren is prohibited from directly or indirectly competing with us.

Robert Junkroski. We have entered into an employment agreement with Mr. Junkroski, dated May 9, 2006, under which Mr. Junkroski has agreed to serve as our Chief Financial Officer. Pursuant to the terms of the agreement, Mr. Junkroski’s salary for 2007 was $240,000, and effective on January 1, 2008, Mr. Junkroski’s annual salary was increased to $252,000. If Mr. Junkroski’s employment is terminated by us without cause, terminated by Mr. Junkroski for good reason or is terminated within six months following a change of control or his responsibilities are materially diminished within six months of such change of control, we are obligated to pay to Mr. Junkroski any unpaid base salary through the date of termination, any accrued vacation pay and severance equal to twelve months’ base salary at the salary rate in effect on the date of termination. In the event Mr. Junkroski dies, becomes disabled or his employment terminates for any other reason, we are obligated to pay Mr. Junkroski any unpaid base salary through the date of termination, any unused vacation accrued through the date of termination and any unreimbursed business expenses. During the employment period and through the first anniversary of the date of Mr. Junkroski’s termination, Mr. Junkroski is prohibited from directly or indirectly competing with us.

Ronald Gavillet. Prior to Mr. Gavillet’s resignation effective February 1, 2008, Mr. Gavillet served as our Executive Vice President and General Counsel pursuant to an employment agreement dated May 9, 2006. Pursuant to the terms of the agreement, Mr. Gavillet’s salary for 2007 was $240,000, and effective on January 1, 2008, Mr. Gavillet’s annual salary was increased to $252,000. Mr. Gavillet’s employment agreement provided that if Mr. Gavillet’s employment was terminated by us without cause, terminated by Mr. Gavillet for good reason or if Mr. Gavillet was terminated within six months following a change of control or his responsibilities were materially diminished within six months of such change of control, we would have been obligated to pay to Mr. Gavillet any unpaid base salary through the date of termination, any accrued vacation pay and severance equal to 12 months’ base salary at the salary rate in effect on the date of termination. In addition, in the event Mr. Gavillet died, became disabled or his employment terminated for any other reason, we would have been obligated to pay Mr. Gavillet any unpaid base salary through the date of termination, any unused vacation accrued through the date of termination and any unreimbursed business expenses. As a result of Mr. Gavillet’s resignation, Mr. Gavillet is prohibited from directly or indirectly competing with us for one year following his resignation on February 1, 2008.

Surendra Saboo. We have entered into an employment agreement with Dr. Saboo, dated May 9, 2006, under which Dr. Saboo has agreed to serve as our Executive Vice President and Chief Operating Officer. The agreement provides that Dr. Saboo shall be paid an annual salary of $215,000 for the year ending December 31, 2006. Effective January 1, 2007, Dr. Saboo’s annual salary was increased to $240,000 and effective on January 1, 2008, Dr. Saboo’s annual salary was increased to $260,000. The agreement further provided that Dr. Saboo shall receive reimbursement of up to $75,000 for moving expenses plus use of a corporate apartment until September 2006. If Dr. Saboo’s employment is terminated by us without cause, terminated by Dr. Saboo for good reason or is terminated within six months following a change of control or his responsibilities are materially diminished within six months of such change of control, we are obligated to pay to Dr. Saboo any unpaid base salary through the date of termination, any accrued vacation pay and severance equal to 12 months’ base salary at the salary rate in effect on the date of termination. In the event Dr. Saboo dies, becomes disabled or his employment terminates for any other reason, we are obligated to pay Dr. Saboo any unpaid base salary through the date of termination, any unused vacation accrued through the date of termination and any unreimbursed business expenses. During the employment period and through the first anniversary of the date of Dr. Saboo termination, Dr. Saboo is prohibited from directly or indirectly competing with us.

David Lopez. We have entered into an employment agreement with Mr. Lopez, dated November 3, 2006, under which Mr. Lopez has agreed to serve as our Senior Vice President of Sales. The agreement provides that Mr. Lopez shall be paid an annual salary of $155,250 for the year ending December 31, 2006, subject to adjustment no less than annually at the discretion of the board of directors beginning June 2007, but in no event will the base salary be reduced. If Mr. Lopez’s employment is terminated by us without cause, terminated by Mr. Lopez for good reason or is terminated within six months following a change of control or his responsibilities are materially diminished within six months of such change of control, we are obligated to pay to Mr. Lopez any unpaid base salary through the date of termination, any accrued vacation pay and severance equal to 12 months’ base salary at the salary rate in effect on the date of termination, but in no event less than $185,000. In the event Mr. Lopez dies, becomes disabled or his employment terminates for any other reason, we are obligated to pay Mr. Lopez any unpaid base salary through the date of termination, any unused vacation accrued through the date of termination and any unreimbursed business expenses. During the employment period and through the first anniversary of the date of Mr. Lopez’s termination, Mr. Lopez is prohibited from directly or indirectly competing with us.

The Compensation Committee carefully determines the mix of compensation, both among short and long-term compensation and cash and non-cash compensation, to determine compensation structures that we believe are appropriate for each of our named executive officers. We use short-term compensation (base salaries and annual cash bonuses) and long-term compensation (options and restricted stock awards) to encourage long-term growth in shareholder value and further our additional objectives discussed above. See “—Overview of Compensation Methodology” above. The mix of cash and non-cash compensation may sometimes be adjusted to reflect an individual’s need for current cash compensation. Base salary typically has constituted a minority position of the total compensation of our named executive officers. We set some salary to provide adequate compensation to support a reasonable standard of living, so that our named executive officers are prepared to have “at risk” compensation awarded under our 2003 Stock Incentive Plan and 2007 Long-Term Incentive Plan. The summary compensation table below illustrates the long and short-term and cash and non-cash components of compensation.

The following Summary Compensation Table sets forth the information concerning the 2007 and 2006 compensation of our CEO, CFO and other named executive officers in 2007.

The following table includes the assumptions used to calculate the compensation expense reported for 2007 and 2006 on a grant by grant basis for the named executive officers listed above.

For an additional discussion of the assumptions used for purposes of determining stock-based compensation during 2007 see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-Based Compensation,” and note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.

We did not grant any non-equity incentive plan awards, equity incentive plan awards, stock awards or option awards to our named executive officers in 2007. However, it is expected that during the first six months of 2008, stock option awards will be made to our named executive officers attributable in part to their service and performance in 2007.

The following table summarizes equity awards granted to our CEO, CFO and other named executive officers that were outstanding at December 31, 2007.

With respect to our CEO, CFO and other named executive officers, the following table provides information concerning restricted stock awards that vested during 2007. No stock options were exercised by our named executive officers in 2007.

In the event a named executive officer was terminated (i) by us without cause or (ii) by the named executive officer for good reason, such officer would be entitled to (a) cash payments of any unpaid base salary through the date of termination and any accrued vacation pay and severance pay equal to 12 months’ base salary and (b) in certain cases, accelerated vesting of outstanding stock options and restricted stock, as the case may be.

If a named executive officer was terminated as set forth above at December 31, 2007, the following individuals would be entitled to cash payments in the amounts set forth opposite their name in the table below:

If a named executive officer was terminated as set forth above at December 31, 2007, the applicable officer could be entitled to accelerated vesting of his outstanding stock options or restricted stock, as the case may be, as set forth opposite their name in the table below:

Following a change of control at December 31, 2007, the following named executive officers could be entitled to accelerated vesting of their outstanding stock options or restricted stock, as the case may be, as set forth opposite their name in the table below:

A “change of control” is defined as any transaction or series of related transactions whether by consolidation, merger, sale or issuance of equity securities, or sale or transfer of all or substantially all of our assets, or otherwise, that results in our equity holders immediately prior to such transaction or series of transactions owning less than 50% of the equity or voting power of the surviving entity, or controlling less than 50% of our assets, thereafter.

In the event the following named executive officers are terminated in connection with a change of control, certain of their unvested options and restricted stock will be accelerated as set forth below:

Mr. Wren. In the event Mr. Wren is terminated without “cause” (as defined in his employment agreement) within six months following a change of control, the balance of his unvested options will become fully vested, which at December 31, 2007 would result in (i) an additional 209,040 options vesting at an exercise price of $1.17 per share and (ii) an additional 88,541.67 options vesting at an exercise price of $3.68 per share. The value of these options was $5,089,593.22 as of December 31, 2007.

Mr. Junkroski. In the event (i) Mr. Junkroski’s employment is terminated without “cause” (as defined in his restricted stock agreements) or he leaves in connection with a constructive termination during the 60-day period prior to a change of control or (ii) Mr. Junkroski is not employed by the successor corporation, he is terminated without cause or he leaves in connection with a constructive termination within 12 months following such change of control, then, in either case, the restrictions will lapse with respect to the balance of his restricted stock, which at December 31, 2007 would result in restrictions lapsing with respect to 8,000 shares. The value of these shares was $152,160.00 as of December 31, 2007. In addition, in the event Mr. Junkroski is terminated without “cause”

(as defined in his employment agreement) within six months following a change of control, the balance of his unvested options will become fully vested, which at December 31, 2007 would result in an additional 16,666.68 options vesting at an exercise price of $2.56 per share. The value of these options was $274,333.55 as of December 31, 2007.

Mr. Gavillet. In the event Mr. Gavillet is terminated without “cause” (as defined in his employment agreement) within six months following a change of control, the balance of his unvested options will become fully vested, which at December 31, 2007 would result in an additional 16,666.68 options vesting at an exercise price of $2.56 per share. The value of these options was $274,333.55 as of December 31, 2007. Upon his resignation, 32,292 unvested options expired.

Dr. Saboo. In the event Dr. Saboo is terminated without “cause” (as defined in his employment agreement) within six months following a change of control, the balance of his unvested options will become fully vested, which at December 31, 2007 would result in (i) an additional 98,177.10 options vesting at an exercise price of $1.33 per share and (ii) an additional 25,000 options vesting at an exercise price of $2.56 per share. The value of these options was $2,148,252.81 as of December 31, 2007.

Mr. Lopez. In the event (i) Mr. Lopez’s employment is terminated without “cause” (as defined in his restricted stock agreements) or he leaves in connection with a constructive termination during the 60-day period prior to a change of control or (ii) Mr. Lopez is not employed by the successor corporation, he is terminated without cause or he leaves in connection with a constructive termination within 12 months following such change of control, then, in either case, the restrictions will lapse with respect to the rest of his restricted stock, which at December 31, 2007 would result in restrictions lapsing with respect to 10,625 shares. The value of these shares was $202,087.50 as of December 31, 2007.

Following a change in control and the named executive officer is either terminated by the surviving company or his or her responsibilities are materially diminished within six months by the surviving company at December 31, 2007, the following individuals would be entitled to cash payments in the amounts set forth opposite their name in the table below:

None of our named executive officers participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us.

None of our named executive officers participate in or have account balances in non-qualified defined contribution plans or other deferred compensation plans sponsored by us. The Compensation Committee may elect to provide our officers and other employees with non-qualified defined contribution or deferred compensation benefits if the Compensation Committee determines that doing so is in our best interests. See “—Elements of Compensation—Retirement Plan” for a description of the 401(k) retirement plan which we maintain.

The following table summarizes our estimate of the compensation that our non-employee directors earned for services as members of our Board of Directors or any committee thereof during 2007, including amounts for meetings through December 31, 2007.

The following table includes the assumptions used to calculate the compensation expense reported for 2007 on a grant by grant basis for the directors listed above.

Director compensation is reviewed annually by the Compensation Committee and, except as described above, paid quarterly. In addition, directors are reimbursed for their business expenses related to their attendance at board and committee meetings, including room, meals and transportation to and from board and committee meetings (e.g., commercial flights, cars and parking).

As permitted by the Delaware General Corporation Law, we adopted provisions in our amended and restated certificate of incorporation that limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. However, these provisions do not eliminate or limit the liability of any of our directors for:

Any amendment to or repeal of these provisions will not eliminate or reduce the effect of these provisions in respect of any act or failure to act, or any cause of action, suit or claim that would accrue or arise prior to any amendment or repeal or adoption of an inconsistent provision. If the Delaware General Corporation Law is amended to provide for further limitations on the personal liability of directors of corporations, then the personal liability of our directors will be further limited to the greatest extent permitted by the Delaware General Corporation Law.

In addition, the certificate of incorporation provides that we must indemnify our directors, officers and certain other agents to the fullest extent permitted under Delaware law, and we must advance expenses, including

attorneys’ fees, to our directors and officers in connection with legal proceedings, subject to very limited exceptions.

In addition to the indemnification provided for in our certificate of incorporation, we have and may in the future enter into separate indemnification agreements with each of our directors and named executive officers which is broader than the specific indemnification provisions contained in our certificate of incorporation. These indemnification obligations may require us, among other things, to indemnify our directors and executive officers for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of his service as one of our directors or executive officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified individuals to serve as directors and executive officers.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

We currently maintain a directors’ and officers’ liability insurance policy that provides our directors and officers with liability coverage relating to certain potential liabilities.

Prior to the completion of our initial public offering, our board of directors adopted a statement of policy relating to the Audit Committee’s review and approval of transactions with related persons that are required to be disclosed in proxy statements by SEC regulations, which we refer to as “related person transactions.” A “related person” is defined under the applicable SEC regulation and includes our directors, executive officers, and 5% or more beneficial owners of our common stock. The Audit Committee administers procedures adopted by our board of directors with respect to related person transactions and reviews all such transactions. At times, it may be advisable to initiate a transaction before the Audit Committee has evaluated it, or a transaction may begin before discovery of a related person’s participation. In such instances, management consults with the Chairman of the Audit Committee to determine the appropriate course of action, which may include the Audit Committee’s subsequent ratification of such transaction. Approval or ratification of a related person transaction requires the affirmative vote of the majority of disinterested directors on the Audit Committee. It is our policy that directors interested in a related person transaction will recuse themselves from any vote of a related person transaction in which they have an interest. In approving or ratifying any related person transaction, the Audit Committee shall consider all of the relevant facts and circumstances available, including (if applicable) but not limited to: the benefits to us; the impact on a director’s independence in the event the related person is a director, an immediate family member of a director or an entity in which a director is a partner, shareholder or executive officer; the availability of other sources for comparable products or services; the terms of the transaction; and the terms available to unrelated third parties or to employees generally. The Audit Committee periodically reports on its activities to the board of directors.

On November 19, 2004, we entered into an Amended and Restated Stockholders’ Agreement, among DCM III, L.P., DCM III-A, L.P., DCM Affiliates Fund III, L.P., New Enterprise Associates 10, Limited Partnership, NEA Ventures 2003, Limited Partnership, Mesirow Capital Partners VIII, L.P., Montagu Newhall Global Partners II, L.P., Montagu Newhall Global Partners II-A, L.P., Montagu Newhall Global Partners, II-B, L.P., Wasatch Small Cap Growth Fund, Wasatch Ultra Growth Fund, Wasatch Global Science & Technology Fund, James P. Hynes, Robert Hawk, Ed Greenberg, Joseph Onstott, Elizabeth Ann Petty, Doreen Kluber, Louise D’Amato, Karen L. Linsley, Paul Oakley, Bill Capraro, Paul W. Chisholm, Robert C. Atkinson, David Weisman, Joseph Tighe, Robert M. Junkroski, Lawrence M. Ingeneri, C. Ann Brown, John Barnicle and Ronald W. Gavillet (the “Investors”) and certain of our other then existing common stockholders (the “Other Stockholders”). This agreement terminated upon the closing of our initial public offering. Prior to our initial public offering, the parties thereunder agreed to nominate and use their reasonable best efforts to set the number of our directors at five and to cause to be elected and cause to remain as directors on our board:

On February 2, 2006, we entered into a Second Amended and Restated Registration Rights Agreement with the Investors and the Other Stockholders. Pursuant to the Second Amended and Restricted Rights Agreement, the Investors and the Other Stockholders have piggyback rights, subject to certain conditions and exceptions, to include the resale of their shares on any registration statement we file with respect to an offering of securities.

The selling shareholders listed in this prospectus are offering an aggregate of shares of our common stock for sale in this offering. Immediately after this offering, these shareholders will hold an aggregate of shares of our common stock, with respect to shares of which we will continue to have registration obligations under the Second Amended and Restated Registration Rights Agreement until these shares cease to be registrable securities, as described below. Additional shareholders who are a party to the Second Amended and Restated Registration Rights Agreement, but who have elected not to participate in this offering, hold additional shares of our common stock with respect to which we will continue to have registration obligations following this offering.

We have agreed to pay the registration expenses of the stockholders selling their shares of our common stock pursuant to the Second Amended and Restated Registration Rights Agreement (including the registration expenses of the selling shareholders in this offering), including, but not limited to, the payment of federal securities law and state blue sky registration fees and the reasonable fees and expenses of legal counsel to the holders of shares subject to the Second Amended and Restated Registration Rights Agreement and fees and disbursements to underwriters. We have agreed to indemnify selling shareholders for certain violations of federal or state securities laws in connection with any registration statement in which such selling shareholders sell shares of our common stock pursuant to the Second Amended and Restated Registration Rights Agreement. Each such selling shareholder in turn has agreed to indemnify us and any other selling shareholder for federal or state securities law violations that occur in reliance upon written information provided by it for use in a registration statement.

Each party to the Second Amended and Restated Registration Rights Agreement has registration rights under the agreement until the earlier of the fifth anniversary of our initial public offering or the date on which all such securities may be sold without regard to the provisions of Rule 144 of the Securities Act concerning volume limitations, notice and manner of sale and public availability of information.

Board of Directors, Management Rights Agreements and Observation Rights Agreements

Dr. Dixon Doll has served as a member of our board of directors since 2003, and is the co-founder of DCM, an affiliate of DCM III, L.P., DCM III-A, L.P. and DCM Affiliates Fund III, L.P., which are significant shareholders of us.

Mr. Peter Barris has served as a member of our board of directors since 2003, and is currently the Managing General Partner of NEA, an affiliate of New Enterprise Associates 10, Limited Partnership and NEA Ventures 2003, Limited Partnership, which are significant shareholders of us.

On November 26, 2003, we entered into a Management Rights Agreement with DCM III, L.P., DCM III-A, L.P. and DCM Affiliates Fund III, L.P. and a Management Rights Agreement with New Enterprise Associates 10, Limited Partnership. Each Management Rights Agreement entitled the counterparties thereunder to: (i) consult with and advise our management on significant business issues and regularly meet with management, (ii) examine our books and records and inspect facilities at reasonable times; and (iii) if such counterparty is not represented on our board of directors, receive copies of all notices, minutes, consents and other material provided to directors, except, among other things, highly confidential proprietary information. New Enterprise Associates 10, Limited Partnership was also afforded board observation rights to the extent it was not represented on our board of directors. The Management Rights Agreements terminated upon the consummation of our initial public offering.

Prior to our initial public offering, we entered into an Observation Rights Agreements with each of (i) Mesirow Capital Partners VIII, L.P., (ii) Montagu Newhall Global Partners II, L.P. and (iii) Wasatch Small Capital Growth Fund, Wasatch Ultra Growth Fund and Wasatch Global Science & Technology Fund. Each Observation Rights Agreement provided that, subject to certain limitations, we permit one representative of each counterparty to attend all meetings of our board of directors in a non-voting observer capacity and give such counterparty copies of all notices, minutes, consents and other material provided to directors, except, among other things, to protect highly confidential proprietary information. The Observation Rights Agreements terminated upon the consummation of this offering.

Mesirow Insurance Services, Inc., an affiliate of our stockholder, Mesirow Capital Partners VIII, L.P., has provided us with insurance brokerage services since our inception. During 2007, we paid Mesirow Insurance Services, Inc. $0.9 million for these services. Immediately prior to the completion of our initial public offering, Mesirow Capital Partners VIII, L.P. held approximately 6% equity interest in us.

Contemporaneously with the pricing and closing of our initial public offering, each of our named executive officers and certain of our directors and other officers adopted written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or executive officer when entering into the plan, without further direction from such director or executive officer. Such sales would not commence until expiration of the applicable lock-up agreements entered into in connection with this offering. Any director or executive officer party to such plan may amend or terminate it in some circumstances. Our directors and executive officers may also buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information.

The following table sets forth information with respect to the beneficial ownership of our outstanding capital stock as of February 15, 2008, by:

In addition, for purposes of the table below, we deem shares subject to options that are currently exercisable or exercisable within 60 days of February 15, 2008 to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. Except as otherwise noted, the persons or entities in this table have sole voting and investing power with respect to all of the shares of common stock beneficially owned by them, subject to community property laws, where applicable. Except as otherwise set forth below, the street address of a beneficial owner is c/o Neutral Tandem, Inc., One South Wacker Drive, Suite 200, Chicago, Illinois 60606.

Our total authorized capital stock consists of 150,000,000 shares of common stock, par value $0.001 per share, and 50,000,000 shares of preferred stock, par value $0.001 per share. After completion of this offering, 31,366,419 shares of our common stock and no shares of our preferred stock will be issued and outstanding. The following description of our capital stock and certain provisions of our amended and restated certificate of incorporation and restated bylaws is a summary. The description below is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and restated bylaws, which have been filed as exhibits to the registration statement, which includes this prospectus.

The issued and outstanding shares of our common stock are, including the shares of our common stock being offered by the selling shareholders in this offering, validly issued, fully paid, and nonassessable. Holders of shares of our outstanding common stock are entitled to receive dividends if and when declared by our board of directors. Our common stock is neither redeemable nor convertible. Upon our liquidation, dissolution, or winding up, holders of shares of our common stock are entitled to receive, pro rata, our assets that are legally available for distribution, after payment of all debts and other liabilities. Each outstanding share of common stock is entitled to one vote on all matters submitted to a vote of shareholders. Our amended and restated certificate of incorporation does not allow for cumulative voting in the election of directors.

Our amended and restated certificate of incorporation authorizes the issuance of 50,000,000 shares of preferred stock. Our board of directors is authorized to provide for the issuance of shares of preferred stock in one or more series, and to fix for each series voting rights, if any, designation, preferences and relative, participating, optional or other special rights and such qualifications, limitations, or restrictions as provided in a resolution or resolutions adopted by our board of directors.

The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a shareholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions, future financings, and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Upon completion of this offering, there will be no shares of preferred stock outstanding, and we have no present plans to issue any shares of preferred stock.

After completion of this offering, shares of our common stock will be issuable upon exercise of outstanding options, of which are currently exercisable, and an additional shares of our common stock will be reserved for issuance under our equity incentive plans. See “Compensation Discussion and Analysis.” Each of these options includes a cashless exercise feature and the holders thereof are entitled to the adjustments to the number of shares of common stock issuable upon exercise of the options in the event of the occurrence of specified anti-dilution events.

Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Amended and Restated Certificate of Incorporation and Restated Bylaws

Effect of Delaware Anti-Takeover Statute. We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a merger or other business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:

In general, Section 203 of the Delaware General Corporation Law defines an “interested stockholder” as:

The provisions of Section 203 of the Delaware General Corporation Law described above could have the following effects, among others:

This could be the case even if a majority of our shareholders might benefit from a change of control or offer.

Amended and Restated Certificate of Incorporation and Restated Bylaw Provisions. Our amended and restated certificate of incorporation and restated bylaws include provisions that may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal that a shareholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by shareholders. In addition, these provisions may adversely affect the prevailing market price of our common stock. These provisions are summarized in the following paragraphs.

Removal of Directors by the Shareholders. Our amended and restated certificate of incorporation and restated bylaws provide that the shareholders may remove directors only for cause and the affirmative vote of the holders of at least 66²/3% of the total shares eligible to be cast in the election of directors. We believe that the removal of directors by the shareholders only for cause, together with the classification of the board of directors, will promote continuity and stability in our management and policies and that this continuity and stability will facilitate long-range planning.

Special Meetings of Shareholders. Our restated bylaws provide that special meetings of our shareholders may be called only by our Chairman of the Board of Directors or our President or our board of directors. Stockholders are not be permitted to call a special meeting or to request the board of directors to call a special meeting.

No Shareholder Action by Written Consent. Our amended and restated certificate of incorporation and restated bylaws provide that stockholder action can be taken only at an annual or special meeting of stockholders and preclude shareholders from initiating or effecting any action by written consent in lieu of a meeting and thereby taking actions opposed by the board.

Advance Notice Procedures. Our restated bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the board of directors. Stockholders at an annual meeting are only able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given our corporate secretary timely written notice, in proper form, of the stockholder’s intention to bring that business before the meeting. Although the restated bylaws do not give the board of directors the power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting, the restated bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed or may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of us.

Super Majority Approval Requirements. The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless either a corporation’s certificate of incorporation or bylaws require a greater percentage. Our amended and restated certificate of incorporation provides that the affirmative vote of holders of at least 66²/3% of the total votes eligible to be cast in the election of directors is required to amend, alter, change or repeal provisions relating to election of directors, limitation of liability and indemnification of directors and officers, stockholder action by written consent, special meetings of stockholders and amendment of the amended and restated certificate of incorporation. Our amended and restated certificate of incorporation and restated bylaws also provide that, notwithstanding the authority of the board to adopt, amend, alter, change or repeal the restated bylaws, the affirmative vote of holders of at least 66²/3% of the total votes eligible to be cast in the election of directors is required to amend, alter, change or repeal the restated bylaws. This requirement of a super-majority vote to approve amendments to our amended and restated certificate of incorporation and restated bylaws could enable a minority of our stockholders to exercise veto power over any such amendments.

Authorized but Unissued Shares. Our authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to the rules and regulations of The Nasdaq Global Market. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of a majority of our common stock by means of a proxy contest, tender offer, merger or otherwise.

Other Anti-Takeover Provisions. See “Compensation Discussion and Analysis—Elements of Compensation” for a discussion of certain provisions of our benefits plans which may have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals.

Our common stock is listed on The NASDAQ Global Market under the symbol “TNDM.”

The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.

Following this offering, we will have 31,366,419 shares of common stock outstanding. All the shares sold in our initial public offering, and all of the shares sold in this offering, including shares sold in the over-allotment option (assuming the underwriters exercise their over-allotment option), will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by our affiliates, as that term is defined in Rule 144, may generally only be sold in compliance with the limitations of Rule 144 described below.

Following the offering, shares of common stock outstanding following this offering will be “restricted securities” as the term is defined under Rule 144. We issued and sold these restricted securities in private transactions in reliance on exemptions from registration under the Securities Act. Restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption under Rule 144 or Rule 701 under the Securities Act, as summarized below.

Taking into account the lock-up agreements described below and the Second Amended and Restated Registration Rights Agreement described in “Certain Relationships and Related Transactions,” and assuming that shareholders are not released from these agreements, the following shares will be eligible for sale in the public market at the following times:

The SEC has recently adopted amendments to Rule 144 which became effective on February 15, 2008. Under these amendments, a person who has beneficially owned restricted shares of our common stock for at least six months would be entitled to sell their securities provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least three months before the sale.

Persons who have beneficially owned restricted shares of our common stock for at least six months but who are our affiliates at the time of, or at any time during the three months preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of either of the following:

provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least three months before the sale.

Such sales by affiliates must also comply with the manner of sale, current public information and notice provisions of Rule 144.

At the time of our initial public offering, we, our directors, executive officers and each of our shareholders selling shares of our common stock in such initial public offering, had agreed with the underwriters not to, without the prior written consent of Morgan Stanley & Co. Incorporated, offer, sell, pledge or otherwise dispose of any shares of our common stock or any securities convertible into or exercisable or exchangeable for, or any rights to acquire or purchase, any of our common stock, or publicly announce an intention to effect any of these transactions, for a period of 180 days after November 1, 2007, except that we may grant options to purchase shares of common stock under our stock incentive plans, and issue shares of common stock upon the exercise of outstanding options and warrants. As permitted by those lock-up agreements, Morgan Stanley & Co. Incorporated has waived the terms of those agreements as they relate to the sale of our common stock by the selling shareholders in this offering. Other than waivers related to this offering, the lock-up agreements entered into in connection with our initial public offering remain effective.

In connection with this offering, we, our officers and directors and each of the selling shareholders and directors individually owning shares will agree, subject to certain exceptions, that they will not, without the prior written consent of Morgan Stanley & Co. Incorporated, offer, sell, pledge or otherwise dispose of any shares of our common stock or any securities convertible into or exercisable or exchangeable for, or any rights to acquire or purchase, any of our common stock, or publicly announce an intention to effect any of these transactions, for a period of 90 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated, except that nothing will prevent any of them from exercising outstanding options.

In the event that we announce during the 90-day period that we will issue an earnings release during the 16-day period beginning on the last day of the 90-day period or we issue an earnings release or material news or a material event relating to us occurs during the last 17 days of the 90-day period, the restrictions imposed on us, our officers, directors, and some of our other shareholders will continue to apply for 18 days after such earnings release is issued or such material news or material event occurs.

We are party to a registration rights agreement currently in effect with our shareholders. See “Certain Relationships and Related Transactions—Second Amended and Restated Registration Rights Agreement.”

As of the date of this prospectus, we have outstanding options to purchase 3,116,791 shares of common stock to specified persons pursuant to our stock incentive plans. On November 7, 2007, we filed a registration statement on Form S-8 to register the sale of approximately 3,549,325 shares of common stock upon exercises of options granted under our stock incentive plans. These registered shares issued under our stock incentive plans may be sold in the open market, subject, in the case of some holders, to the Rule 144 limitations applicable to affiliates and subject to lock-up agreements similar to those described above which we have entered into with holders of substantially all options.

This section summarizes material United States federal income and estate tax consequences of the ownership and disposition of common stock by a beneficial owner that is a non-U.S. holder. You are a non-U.S. holder if you are, for United States federal income tax purposes:

This section does not consider the specific facts and circumstances that may be relevant to a particular non-U.S. holder and does not address the treatment of a non-U.S. holder under the laws of any state, local or foreign taxing jurisdiction. This section is based on the tax laws of the United States, including the Internal Revenue Code of 1986, as amended, existing and proposed Treasury regulations, and administrative and judicial interpretations, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.

This section does not address the tax consequences to holders that are partnerships (including any entity treated as a partnership under United States federal income tax law) or to the partners of those partnerships. If a partnership (including any entity treated as a partnership under United States federal income tax law) holds common stock, the United States federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership (including any entity treated as a partnership under United States federal income tax law) holding common stock should consult its tax advisor with regard to the United States federal income tax treatment of an investment in common stock.

You should consult a tax advisor regarding the United States federal tax consequences of acquiring, holding and disposing of common stock in your particular circumstances, as well as any tax consequences that may arise under the laws of any state, local or foreign taxing jurisdiction.

Except as described below, if you are a non-U.S. holder of common stock, any dividends we pay to you are subject to withholding of United States federal income tax at a 30% rate, or at a lower rate if (1) you are eligible for the benefits of an income tax treaty that provides for a lower rate and (2) you have furnished to us or another payor:

If you are eligible for a reduced rate of United States withholding tax under a tax treaty, you may obtain a refund of any amounts withheld in excess of that rate by filing a refund claim with the Internal Revenue Service.

If dividends paid to you are “effectively connected” with your conduct of a trade or business within the United States, and the dividends are attributable to a permanent establishment that you maintain in the United

States within the meaning of an applicable tax treaty, we and other payors generally are not required to withhold tax from the dividends, provided that you have furnished to us or another payor a valid Internal Revenue Service Form W-8ECI or an acceptable substitute form upon which you represent, under penalties of perjury, that:

“Effectively connected” dividends are taxed at rates applicable to United States citizens and resident aliens or domestic United States corporations.

If you are a corporate non-U.S. holder, “effectively connected” dividends that you receive may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.

If you are a non-U.S. holder, you generally will not be subject to United States federal income tax on gain that you recognize on a disposition of common stock unless:

If you are a corporate non-U.S. holder, “effectively connected” gains that you recognize may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.

We have not been, are not and do not anticipate becoming a United States real property holding corporation for United States federal income tax purposes.

Individual non-United States holders and entities the property of which is potentially includible in such an individual’s gross estate for United States federal estate tax purposes (for example, a trust funded by such an individual and with respect to which the individual has retained certain interests or powers), should note that, absent an applicable treaty benefit, common stock will be treated as United States situs property subject to United States federal estate tax.

If you are a non-U.S. holder, you are generally exempt from backup withholding and information reporting requirements with respect to:

as long as the income associated with such payments is otherwise exempt from United States federal income tax, and provided that:

Payment of the proceeds from the sale of common stock effected at a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, a sale of common stock that is effected at a foreign office of a broker will be subject to information reporting and backup withholding if:

In addition, a sale of common stock will be subject to information reporting if it is effected at a foreign office of a broker that is:

unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption. Backup withholding will apply if the sale is subject to information reporting and the broker has actual knowledge that you are a United States person.

You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the Internal Revenue Service.

Under the terms and subject to the conditions contained in the underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated is acting as representative, have severally agreed to purchase, and the selling shareholders have agreed to sell to them, severally, the number of shares of common stock indicated below:

The underwriters and the representative are collectively referred to as the “underwriters” and the “representative,” respectively. The underwriters are offering the shares of common stock subject to their acceptance of the shares from the selling shareholders and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of our common stock offered by this prospectus are subject to the approval of legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.

The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. No dealer may reallow a concession to other dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives.

The underwriters have been granted an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 675,000 additional shares of our common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of our common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to limited conditions, to purchase approximately the same percentage of the additional shares of our common stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of our common stock listed next to the names of all underwriters in the preceding table.

The following table shows the public offering price, underwriting discount and proceeds before expenses to the selling shareholders. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.

We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, to be paid by us will be approximately $ .

The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of our common stock offered by them.

Our common stock is listed on The NASDAQ Global Market under the symbol “TNDM.”

At the time of our initial public offering, we, our directors, executive officers and each of our shareholders selling shares of our common stock in such initial public offering, had agreed with Morgan Stanley & Co. Incorporated not to, without the prior written consent of Morgan Stanley & Co. Incorporated, offer, sell, pledge or otherwise dispose of any shares of our common stock or any securities convertible into or exercisable or exchangeable for, or any rights to acquire or purchase, any of our common stock, or publicly announce an intention to effect any of these transactions, for a period of 180 days after November 1, 2007, except we may grant options to purchase shares of common stock under our stock incentive plans, and issue shares of common stock upon the exercise of outstanding options and warrants. As permitted by those lock-up agreements, Morgan Stanley & Co. Incorporated has waived the terms of those agreements as they relate to the sale of our common stock by the selling shareholders in this offering. Other than waivers related to this offering, the lock-up agreements entered into in connection with our initial public offering remain in full force and effect.

In connection with this offering, each of us, our directors, executive officers and the selling shareholders will agree that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, each of us would not, during the period ending 90 days after the date of this prospectus:

whether any transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. The restrictions described in the preceding paragraph do not apply, subject to certain qualifications, to:

The 90-day restricted period described above is subject to extension such that, in the event that either (a) during the last 17 days of the 90-day restricted period, we issue an earnings release or material news or a material event relating to us occurs or (b) prior to the expiration of the 90-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 90-day period, the “lock-up” restrictions described above will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. The release of any securities subject to these lock-up agreements is considered on a case-by-case basis. Factors that would be considered by Morgan Stanley & Co. Incorporated in determining whether to release securities subject to these lock-up agreements may include the length of time before the lock-up agreement expires, the number of shares or other securities involved, the reason for a requested release, market conditions at the time of the requested release, the trading price of our common shares, historical trading volumes of our common shares and whether the person seeking the release is an officer, director or affiliate of ours.

In order to facilitate the offering of our common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position in our common stock for their own account. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in the offering. In addition, in order to cover any over-allotments or to stabilize the price of our common stock, the underwriters may bid for, and purchase, shares of our common stock in the open market. Finally, the underwriting syndicate may also reclaim selling concessions allowed to an underwriter or a dealer for distributing our common stock in the offering, if the syndicate repurchases previously distributed shares of our common stock to cover syndicate short positions or to stabilize the price of the common stock. Any of these activities may stabilize or maintain the market price of our common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time.

The selling shareholders and the underwriters have each agreed to indemnify each other against specified liabilities, including liabilities under the Securities Act.

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive, each underwriter has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Member State it has not made and will not make an offer of our shares to the public in that Member State, except that it may, with effect from and including such date, make an offer of our shares to the public in that Member State:

(a) at any time to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;

(b) at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or

(c) at any time in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of the above, the expression an “offer of our shares to the public” in relation to any shares in any Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in that Member State.

Each underwriter has represented and agreed that it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of the shares in circumstances in which Section 21(1) of such Act does not apply to us and it has complied and will comply with all applicable provisions of such Act with respect to anything done by it in relation to any shares in, from or otherwise involving the United Kingdom.

The validity of the common stock offered hereby will be passed upon for us by Kirkland & Ellis LLP, a limited liability partnership that includes professional corporations, Chicago, Illinois. Certain legal matters in connection with this offering will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.

The consolidated financial statements as of December 31, 2007 and 2006 and for each of the three years in the period ended December 31, 2007, included in this prospectus and the related financial statement schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their reports appearing herein and elsewhere in the registration statement and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offering hereby. This prospectus, which constitutes part of the registration statement, does not include all of the information contained in the registration statement. You should refer to the registration statement and its exhibits for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the registration statement or incorporated by referenced therein for copies of the actual contract, agreement or other document. We are currently required to file annual, quarterly and special reports, proxy statements and other information with the SEC. We anticipate making these documents publicly available, free of charge, on our website at www.neutraltandem.com as soon as reasonably practicable after filing such documents with the SEC. The information on our website is not incorporated by reference into this prospectus and should not be considered to be a part of this prospectus. We have included our website address as an inactive textual reference only.

You can read the registration statement and our future filings with the SEC, over the Internet at the SEC’s web site at http://www.sec.gov. You may also read and copy any document that we file with the SEC at its public reference room at 100 F Street, N.E., Washington, DC 20549.

You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room.

We have audited the accompanying consolidated balance sheets of Neutral Tandem, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 16. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Neutral Tandem, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

Organization—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 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 was through use of the incumbent local exchange carriers’, or ILECs, tandem switches. Under certain interpretations of the Telecommunications Act of 1996, ILECs are required to provide tandem switching to competitive carriers. For tandem transit services, ILECs generally set per minute rates and other charges according to mandated rate schedules (including varying rates) set by state public utility commissions. The Company’s solution enables competitive carriers to exchange traffic between their networks without using an ILEC tandem.

Initial Public Offering—In November 2007, the Company completed its initial public offering (“IPO”) of common stock in which it sold 7,247,489 shares of its common stock, including 997,489 shares sold pursuant to the underwriter’s full exercise of their over-allotment option, at an issue price of $14.00 per share. The Company raised a total of $101.5 million in gross proceeds from its IPO, or $91.3 million in net proceeds after deducting underwriting discounts and commissions of $7.1 million and other offering costs of $3.1 million. Upon the closing of the IPO, all shares of convertible preferred stock outstanding automatically converted into 18 million shares of common stock. Upon the closing of the Company’s IPO, warrants to purchase shares of the Company’s convertible preferred stock became warrants to purchase shares of the Company’s common stock.

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

Use of Estimates—The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. These accounting principles require management to make certain estimates and assumptions that can affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Significant estimates and assumptions made by management include the determination of fair value of stock-based awards and warrants issued prior to its IPO, the allowance for doubtful accounts and certain accrued expenses. The Company believes that the estimates and assumptions upon which it relies are reasonable based upon information available to it at the time that these estimates and assumptions are made. To the extent there are material differences between these estimates and actual results, the Company’s consolidated financial statements will be affected.

Cash and Cash Equivalents—The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.

Property and Equipment—Property and equipment are recorded at historical cost. These costs are depreciated over the estimated useful lives of the individual assets using the straight-line method. Any gains and losses from the disposition of property and equipment are included in operations as incurred. The estimated useful life for switch equipment and tools and test equipment is five years. The estimated useful life for computer equipment, computer software and furniture and fixtures is three years. Leasehold improvements are amortized on a straight-line basis over an estimated useful life of five years or the life of the lease, whichever is less.

Software Development Costs—The Company capitalizes costs associated with software developed or obtained for internal use when both the preliminary project stage is completed and management has authorized project funding. The carrying value of software and development costs is regularly reviewed by management for potential impairment. The Company amortizes capitalized software costs over the estimated useful life of three years.

Restricted Cash—The Company has letters of credit securing certain building leases. In accordance with the terms of the letters of credit, the Company pledged cash for a portion of the outstanding amount. The Company had restricted cash of $0.4 million at both December 31, 2006 and 2007. As the Company expands into additional markets, the amount of restricted cash pledged to letters of credit may increase.

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. Typically, the fair value of the asset is determined by discounting the estimated future cash flows associated with the asset.

In October 2006, the Company decided to invest in new switch equipment in its Atlanta and Miami locations. The new equipment provides greater functionality that will improve network efficiency and performance. The equipment being replaced had no further use in the network. The Company completed a test for impairment consistent with the two-step process described above. For Atlanta, the expected future cash flows from October 2006 through January 2007 were discounted at 12% to determine the fair value of the equipment to be disposed of. For Miami, the expected future cash flows from October 2006 through March 2007 were discounted at 12% to determine the fair value of the equipment to be disposed of. As a result, the Company recorded a charge of $1.2 million related to the asset impairment. In Atlanta, the new equipment was installed and became operational February 2007. In Miami, the new equipment was installed and became operational at the end of March 2007. The Company assumed no salvage value for disposal of the old Atlanta and Miami switch equipment. The entire impairment amount was recorded in the fourth quarter of 2006.

In July 2007, the Company decided to invest in new switch equipment, which will replace existing equipment in February 2008, in its New York location. The new equipment provides greater functionality that will improve network efficiency and performance. The equipment being replaced has no further use in the network. The Company completed a test for impairment consistent with the two-step process described above. The expected future cash flows from July 2007 through February 2008 were discounted at 12% to determine the fair value of the equipment to be disposed of. As a result, there is no impairment of the existing switch equipment in New York, however, the Company began accelerating the depreciation on the switch equipment to be disposed of in February 2008 when the new switch equipment is expected to be installed and operational.

Asset Retirement Obligation—The Company leases all of its switch locations. The Company’s leases with its landlords require it to return the switch locations back to their original condition or that major work, such as heating and ventilation upgrades, stay with the facility. Therefore, the Company has a basic requirement to remove its switch equipment, telephone connections and battery power supply. This cost is estimated to be immaterial. The Company’s operations and engineering management team believes the cost to remove all items identified above would be an immaterial amount.

Freestanding Convertible Preferred Stock Warrants—Upon the closing of the Company’s IPO in November 2007, warrants to purchase shares of the Company’s convertible preferred stock became warrants to

purchase shares of the Company’s common stock and, as a result, are no longer subject to Financial Accounting Standards Board Staff Position (FSP) No. 150-5, “Issuers Accounting under Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable” (FSP 150-5). The then-current aggregate fair value of these warrants of $6.9 million was reclassified from current liabilities to warrants, a component of stockholders’ equity (deficit), and the Company has ceased to record any further periodic fair value adjustments.

In 2006 and 2007 (through the completion of its IPO), the Company recorded $0.8 million and $4.9 million, respectively, of expense reflected in change in fair value of warrants, a component of other (income) expense, net to reflect the increase in fair value during the period.

On February 21, 2008 the note holders elected to exercise all of the outstanding warrants. Pursuant to the terms of the warrants the note holders elected to exercise the warrants on a net basis based upon the average closing price of our common stock during the three days prior to such exercise. Based upon the closing prices of our common stock on February 20, 2008, February 19, 2008 and February 15, 2008 we issued a total of 356,921 shares of common stock on February 25, 2008 in full satisfaction of all outstanding warrants.

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 on an accrual basis 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.

Accounting for Legal Costs Expected to Be Incurred In Connection with a Loss Contingency—The Company includes an estimate of future legal fees to be incurred in connection with the resolution of vendor disputes when a loss contingency is initially determined. The estimate is consistent with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies.

Network and Facilities Expense—The Company’s network and facilities expenses include transport and signaling network costs, facility rents and utilities, together with other costs that directly support the switch locations. The Company does not defer any costs associated with the start-up of new switch locations and does not capitalize any costs.

Network transport costs typically occur on a repeating monthly basis, which the Company refers to as recurring costs, or on a one-time basis, which the Company refers to as non-recurring costs. Recurring costs primarily include monthly usage charges from telecommunication carriers, related to the circuits utilized by the Company to interconnect our customers. As the Company’s traffic increases, it must provide additional circuits. Non-recurring costs primarily include the initial installation of such circuits. Facility rents include the leases on our switch facilities, which expire through April 2018. Additionally, the Company pays the cost of all the utilities for all of its switch locations.

The largest component of other costs relates to charges paid to utilize ILEC services. The Company incurs some monthly charges from the ILECs as it diversifies its network and provides alternative routes to complete the customers’ traffic. In some cases, the Company may not have sufficient capacity of network transport lines installed in its network to handle the volume of traffic destined for a particular customer. In this case, it will incur these charges, generally temporarily, in order to maintain a high quality of service.

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

Earnings (Loss) Per Share—Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of

common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of common stock include stock options, convertible warrants, Series A Convertible Preferred Stock, Series B-1 Convertible Preferred Stock, Series B-2 Convertible Preferred Stock and Series C Convertible Preferred Stock. During periods in which a net loss is incurred, diluted earnings per share amounts are the same as the basic per share amounts because the effect of all options, convertible warrants, Series A Convertible Preferred Stock, Series B-1 Convertible Preferred Stock, Series B-2 Convertible Preferred Stock and Series C Convertible Preferred Stock is anti-dilutive. The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per common share:

For purposes of calculating the 2006 diluted earnings per share, the Company excluded the impact of the convertible warrants on weighted average shares as the cash settlement method results in an anti-dilutive impact on the calculation.

The Company incurred a net loss for the year ended December 31, 2005; therefore, conversion of preferred stock, warrants and potential common stock issuances attributable to stock options were excluded from the calculation of diluted earnings per share amount because the effect would have been anti-dilutive. The number of shares used to calculate diluted per share amounts otherwise would have been increased by 15,775,000.

Options to purchase 1,335,000 and 93,000 shares of common stock at a weighted-average price of $1.22 and $10.40 per share were outstanding during the year ended December 31, 2006 and 2007, respectively, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

Comprehensive Income—Comprehensive income includes all changes in equity during a period from non-owner sources. Comprehensive income was the same as net income (loss) for the years ended December 31, 2005, 2006 and 2007.

Accounting for Stock-Based Compensation—As of January 1, 2005, the Company adopted SFAS No. 123(R) using the modified retrospective method. The modified retrospective method requires the prior period financial statements to be restated to recognize compensation cost in the amounts previously reported in the pro forma footnotes.

The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with the Company’s valuation techniques previously utilized for options in footnote disclosures required under

SFAS No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. 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 accelerated method under SFAS 123(R). 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 substantially from the Company’s current estimates.

The amount of share-based expense recorded in the years ended December 31, 2005, 2006 and 2007, is $29,000, $399,000, and $906,000, respectively.

Income Taxes—The Company accounts for income taxes in accordance with SFAS No. 109 Accounting for Income Taxes. Deferred income tax assets and liabilities are recognized for future income tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases and for net operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in income tax rates is recorded in earnings in the period of enactment. A valuation allowance is provided for deferred income tax assets whenever it is more likely than not that future tax benefits will not be realized. Deferred income tax assets are reviewed on a quarterly basis to determine if a valuation allowance is necessary based on current and historical performance, along with other relevant factors.

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

Concentrations—For the years ended 2005, 2006 and 2007, the aggregate revenues of four customers accounted for 55%, 46% and 54% of total revenues, respectively. At December 31, 2006 and 2007, the aggregate accounts receivable of four customers accounted for 43% and 55% of the Company’s total trade accounts receivable, respectively.

In 2005, the Company had three customers in excess of ten percent of sales, which were 18%, 15% and 13% of the Company’s total revenue, respectively. At December 31, 2005, the Company had three customers who accounted for 13%, 11% and 10% of the Company’s accounts receivable balance, respectively.

In 2006, the Company had two customers in excess of ten percent of sales, which were 23% and 14% of the Company’s total revenue, respectively. At December 31, 2006, the Company had two customers who accounted for 21% and 13% of the Company’s accounts receivable balance, respectively.

In 2007, the Company had two customers in excess of ten percent of sales, which were 26% and 14% of the Company’s total revenue, respectively. At December 31, 2007, the Company had three customers who accounted for 22%, 14% and 11% of the Company’s accounts receivable balance, respectively.

For the year ended December 31, 2007, the company had $112 million in cash and cash equivalents. Of this amount, approximately $105.9 million was invested in one money market fund. Investment policies have been implemented that limit investments to highly liquid investments with an original maturity of 90 days or less.

Recent Accounting Pronouncements—In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No . 109 (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. FIN 48 is effective for fiscal years beginning after December 15, 2006, and was adopted by the Company on January 1, 2007. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of the benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company’s policy is to recognize interest and penalty expense associated with uncertain tax positions as a component of income tax expense in the consolidated statement of operations. The adoption of FIN 48 did not have an effect on the Company’s consolidated results of operations or financial condition at adoption or for the year ended and as of December 31, 2007.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The standard provides guidance for using fair value to measure assets and liabilities. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS No. 157 will not have a material impact upon the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115. SFAS 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has determined that it is not electing to adopt this standard.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS 141R retains the fundamental requirements in previously issued Statement 141 that the acquisition method of accounting (the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement requires an acquirer to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date at the fair values as of that date. This replaces the Statement 141’s cost allocation process which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based upon their estimated fair values. The Company will adopt this standard for acquisitions consummated after the effective date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before this statement was issued, limited guidance existed for reporting noncontrolling interest. The Company will adopt this standard for acquisitions consummated after the effective date.

Property and equipment as of December 31, 2006 and 2007 consists of the following:

The Company invoices customers for services occurring through the 24th of each month. The Company accrues revenue each month for services from the 25th through the end of the month resulting in unbilled receivables. The unbilled receivables at the end of each month are billed as part of the following month’s billing cycle.

In May 2004, the Company entered into an equipment loan and security agreement with an affiliate of Western Technology Investment (“WTI”) that provided for aggregate borrowings of up to $4.0 million for the Company’s capital purchases through July 31, 2004. The Company borrowed $3.0 million and $1.0 million against this facility in May and July of 2004, respectively. Borrowings are payable in 36 monthly installments and bear interest at prime plus 3.005% (7.0% and 7.3% at May and July 2004, respectively), plus a final payment equal to 8.14% of the principal amount of such borrowings.

The agreement was amended in December 2004 to allow for an additional $5.5 million of borrowings of which $2.8 million was drawn that month and the balance was drawn in August of 2005. The December 2004 borrowing is payable in 36 monthly installments and bears interest at prime plus 1.25% (6.5% at the date of issuance) with a final payment equal to 9.3% of the principal amount borrowed. The August 2005 borrowing is payable in 36 monthly installments and bears interest at prime plus 1.25% (7.5% at the date of issuance) with a final payment equal to 9.3% of the principal amount borrowed.

The agreement was again amended in January 2006 to allow for $10.0 million of additional borrowings of which $2.5 million was drawn on May 1, 2006, $2.5 million was drawn on June 30, 2006, $2.5 million was drawn on September 29, 2006, and another $2.5 million was drawn on December 22, 2006. The May 2006 borrowing is payable in 36 monthly installments and bears interest at prime plus 1.25% (9.6% at the date of issuance) with a final payment equal to 9.6% of the principal amount borrowed. The June 2006 borrowing is payable in 36 monthly installments and bears interest at prime plus 1.25% (9.25% at the date of issuance) with a final payment equal to 9.6% of the principal amount borrowed. The September 2006 borrowing is payable in 36 monthly installments and bears interest at prime plus 1.25% (9.5% at the date of issuance) with a final payment equal to 9.6% of the principal amount borrowed. The December 2006 borrowing is payable in 36 monthly installments and bears interest at prime plus 1.25% (9.5% at the date of issuance) with a final payment equal to 9.6% of the principal amount borrowed.

In accordance with the terms of the agreement, the Company issued warrants to the note holders. The warrants are exercisable any time up to eight years after their issuance. The terms of the agreement provide for the adjustment of stock purchase price and number of shares under the warrant subject to, any stock split, stock dividend, subdivision or combination of shares, reclassification of shares dilution or similar event, merger, sale or issuance of shares below purchase prices. There have been no new sales of securities, or other events, that would lower the conversion price of the warrants. The warrants are required to be settled with physical shares of the applicable Preferred Convertible Stock. As a result of the automatic conversion of the Company’s Series A, B-1, B-2 and C preferred convertible stock to common stock the warrants are now exercisable for an equivalent number of the Company’s common shares.

With respect to periods ending prior to completion of the IPO, the Company has classified the warrants as a liability given the conditional redemption feature of the underlying preferred stock. The warrants were recorded at the fair value at each period reported. No warrants had been exercised at December 31, 2007. On February 21, 2008 the note holders elected to exercise all of the outstanding warrants. Pursuant to the terms of the warrants the note holders elected to exercise the warrants on a net basis based upon the average closing price of our common stock during the three days prior to such exercise. Based upon the closing prices of our common stock on February 20, 2008, February 19, 2008 and February 15, 2008 we issued a total of 356,921 common shares on February 25, 2008 in full satisfaction of all outstanding warrants.

The Company estimated the fair value of these warrants using the Black-Scholes option pricing model. The Company utilized the full term of the warrants as their expected life. The range of expected life ranges from less than one year to 7.5 years. The risk-free rate assumption ranges from 3.69% to 5.12%. Volatility of the Company’s underlying preferred convertible stock is utilized which ranges from 55.5% to 72.1%.

The fair value of these warrants at the time of issuance, as calculated using the Black-Scholes model, was estimated at $495,000 and has been reflected as a reduction of the carrying amount of the note and is being accreted over the term of the note. The charges to interest expense for the years ended December 31, 2005, 2006 and 2007 were $68,000, $124,000 and $139,000, respectively.

Under the terms of its debt agreement, the Company must comply with certain negative covenants that limit our ability to declare or pay dividends, incur additional indebtedness, incur liens, dispose of significant assets, make acquisitions or significantly change the nature of its business without the permission of the lender. For the periods ended December 31, 2005, 2006 and 2007, the Company was in compliance with all the covenants under its debt agreements.

The Company uses cash collateralized letters of credit issued by LaSalle Bank N.A. to secure certain facility leases and other obligations. At December 31, 2007 there was $419,000 of restricted cash used as collateral for $374,000 in letters of credit outstanding.

Total principal repayments required for each of the next three years under all long-term debt agreements are summarized as follows (dollars in thousands):

The Company sponsors a 401(k) plan covering substantially all employees. The plan is a defined contribution savings plan in which employees may contribute up to 15% of their salary, subject to certain limitations. The Company may elect to make discretionary contributions into the Plan. The Company did not contribute to the Plan during the years ended December 31, 2005 and 2006. The Company contributed $0.1 million to this plan during the year ended December 31, 2007

At December 31, 2007, the Company no longer had any shares of convertible preferred stock issued and outstanding.

In 2003, the Company issued 8,723,000 shares of Series A Preferred Convertible Stock (Series A Preferred) with a par value of $0.001 per share for approximately $8.6 million. Also in 2003, the Company issued 100 shares of Series X Preferred Convertible Stock (Series X Preferred) with a par value of $0.001 per share for less than $0.1 million. The Series X Preferred Convertible Stock was issued to NT Holdings, LLC as part of the Company’s initial capitalization. The Series X Preferred are non-redeemable and are automatically convertible based on conversion rate per the stock terms once the Company has raised, in aggregate, more than $10.0 million of equity financing.

In 2004, an additional 277,000 shares of Series A Preferred Convertible Stock were issued for $0.3 million. Also in 2004, the Company issued 5,737,416 shares of Series B-1 Preferred Convertible Stock (Series B-1 Preferred) with a par value of $0.001 per share for approximately $8.3 million.

In June 2005, the entire outstanding 100 shares of Series X Preferred converted to $1.0 million of Common Stock, or 417,084 shares, at a blended rate (Series B-1 Preferred and Series B-2 Preferred) price of $2.3976. Also in 2005, the Company issued 1,352,867 shares of Series B-2 Preferred Convertible Stock (Series B-2 Preferred) with a par value of $0.001 per share for approximately $8.4 million.

In February 2006, the Company issued 1,909,947 shares of Series C Preferred Convertible Stock (Series C Preferred) with a par value of $0.001 per share for approximately $11.9 million.

In 2006, the Company classified the preferred convertible stock as mezzanine equity on the consolidated balance sheet. The Company recognized changes in the redemption value immediately as they occur and adjusts the carrying value of the security equal to the redemption value at the end of each reporting period.

On November 7, 2007, upon closing of the Company’s IPO, the Series A, B-1, B-2, and C Preferred Convertible Stock automatically converted into common stock. On this date, the Series A, B-1, B-2, and C preferred convertible stock converted into 9,000,000 shares, 5,737,000 shares, 1,353,000 shares and 1,910,000 shares, respectively, of the Company’s common stock.

Series A, B-1, B-2 and C Preferred Convertible Shares—Series A Preferred Convertible Shareholders, Series B-1 Preferred Convertible Shareholders, Series B-2 Preferred Convertible Shareholders and Series C Preferred Convertible Shareholders had the following rights and privileges:

Voting—Holders of each Series A, B-1, B-2 and C Preferred Stock shall have voting rights on an as if converted basis.

Conversion—The holder of any shares of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred and Series C Preferred have the right at such holder’s option, at any time, to convert any of such shares into such number of fully paid and nonassessable shares of Common Stock as is determined (i) in the case of Series A Preferred by dividing $1.00 by the Series A Preferred Conversion Price in effect at the time of conversion; (ii) in

the case of Series B-1 Preferred by dividing $1.4815 by the Series B-1 Preferred Conversion Price in effect at the time of conversion; (iii) in the case of Series B-2 Preferred by dividing $6.2829 by the Series B-2 Preferred Conversion price in effect at the time of conversion; and (iv) in the case of Series C Preferred by dividing $6.2829 by the Series C Preferred Conversion Price in effect at the time of conversion. No payment or adjustment will be made for any dividends on the Common Stock issuable upon such conversion.

Dividends—The holders of shares of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred and Series C Preferred are entitled to receive, when and if declared by the Board of Directors, out of assets of the Company which are by law available therefore under the Delaware General Corporation Law and other applicable law, prior and in preference to any declaration or payment on Common Stock, non-cumulative dividends at an annual rate of eight percent (8%) of the original purchase price paid per share for the Series A Preferred, Series B-1 Preferred, Series B-2 Preferred and Series C Preferred payable either in cash, in property or in shares of capital stock.

Liquidation—In the event of a change in control or any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of shares of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred and Series C Preferred are entitled to receive from the assets of the Company available for distribution to the stockholders prior and in preference to the holders of all other classes and series of stock, an amount equal to $1.00 for each outstanding share of Series A Preferred, $1.4815 for each outstanding share of Series B-1 Preferred, $6.2829 for each outstanding share of Series B-2 Preferred and $6.2829 for each outstanding share of Series C Preferred (in each case as adjusted for any stock split, stock dividend, combination, reclassification of shares dilution or similar event), plus all dividends declared and unpaid thereon. If, upon the occurrence of such event, the assets and funds thus distributed among the holders of shares of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred and Series C Preferred are insufficient to permit the payment to all holders of shares of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred and Series C Preferred of the aforesaid preferential amounts, then the entire assets of the Company legally available for distribution are distributed ratably among the holders of the holders of shares of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred and Series C Preferred in proportion to the full preferential amount each holder is otherwise entitled to receive.

In 2003, the Company authorized 25,000,000 shares of Common Stock with a par value of $0.001 per share. In that same year, the Company issued 4,918,320 shares of Common Stock, in the form of restricted stock, with a par value of $0.001 per share for less than $0.1 million. In 2004, an additional 481,680 shares of Common Stock were issued, in the form of restricted stock, for $0.1 million and the Company issued 90,000 shares of Common Stock to two employees who exercised stock options.

During June 2005, the entire outstanding 100 shares of Series X Preferred converted to 417,084 shares of Common Stock. Series X Preferred automatically converted into $1.0 million worth of Common Stock at a blended rate (Series B-1 Preferred and Series B-2 Preferred) price of $2.3976. In 2005, the Company issued 15,000 shares of Common Stock to one employee who exercised stock options. Also in 2005, the Company repurchased 386,800 unvested restricted shares at a price of $0.001 per share, or $387, from two former employees.

The repurchase of unvested restricted shares in 2004 and 2005 was approved by the Board of Directors and is pursuant to section 2(a) of the Restricted Stock Agreements and Restated Restricted Stock Agreements between the employees and the Company. In both such agreements, the Company has the right to repurchase unvested restricted shares at the lower of the price paid to the Company for such shares, or the par value of $0.001 per share in most cases, or the fair market value of such shares at the time of repurchase.

In February 2006, the Company authorized an additional 1,500,000 shares of Common Stock with a par value of $0.001 per share to accommodate the increase of 1,050,000 in authorized stock options (see note 12) and

the issuance of 1,909,947 shares of Series C Convertible Preferred Stock. In July 2006, the Company authorized an additional 2,000,000 options and restricted stock within the 2003 Stock Option Plan. Also in July 2006, the Company authorized an additional 2,000,000 shares of Common Stock with a par value of $0.001 per share. During the year 2006, the Company issued a total of 83,250 shares of Common Stock to five employees and one director who exercised stock options.

The Company repurchased 299,100 unvested restricted shares in February 2006, at a price of $0.001 per share, or $299, from a former employee. This action was approved by the Board of Directors and is pursuant to section 2(a) of the Restricted Stock Agreements and Restated Restricted Stock Agreements between the employees and the Company.

All shares of common stock issued prior to the IPO were subject to either the Company’s Amended and Restated Stockholders’ Agreement, (the “Stockholders’ Agreement”) or the Restricted Stock Agreements and Restated Restricted Stock Agreements between certain employees and the Company. Certain restricted shares are subject to a vesting period. Of these shares, approximately 4.7 million shares were outstanding of which 4.3 million shares were vested at December 31, 2007. The Stockholders’ Agreement was terminated upon completion of the IPO.

In November 2007, the Company completed its IPO of common stock in which it sold 7,247,489 shares of its common stock, including 997,489 shares sold pursuant to the underwriter’s full exercise of their over-allotment option, at an issue price of $14.00 per share. The Company raised a total of $101.5 million in gross proceeds from its IPO, or $91.3 million in net proceeds after deducting underwriting discounts and commissions of $7.1 million and other offering costs of $3.1 million.

The Series A, B-1, B-2, and C Preferred Convertible Stock automatically converted into common stock upon the closing of the Company’s IPO on November 7, 2007. On this date, the Series A, B-1, B-2, and C preferred convertible stock convert into 9,000,000 shares, 5,737,000 shares, 1,353,000 shares and 1,910,000 shares, respectively, of the Company’s common stock.

The Company’s authorized capital stock after the IPO is 150,000,000 shares of common stock, par value $0.001 per share.

Voting—Each holder of Common Stock has one vote in respect to each share of stock held on record for the election of directors and on all matters submitted to a vote of stockholders of the Company.

Dividends—The holders of shares of Common Stock are entitled to receive, when and if declared by the Board of Directors, out of assets of the Company which are by law available therefore, dividends payable either in cash, in property or in shares of capital stock.

Liquidation—In the event of any liquidation, dissolution or winding up of the Company, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of the Preferred Stock, holders of all Common Stock shares, including converted Preferred Stock, are entitled to receive all of the remaining assets of the Company of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively.

In November 2007, after its IPO, the Company authorized 50,000,000 shares of preferred stock, par value $0.001 per share. The Board of Directors is authorized to issue shares of Preferred Stock in one or more series, to establish the number of shares to be included in each such series, and to fix the voting powers and preferences of the shares of each such series.

Operating Leases—The Company leases its facilities and certain equipment under operating leases which expire through April 2018. Rental expense for the years ended December 2005, 2006 and 2007 was $2.1 million, $2.1 million, $3.2 million, respectively.

The following table represents future lease payments under the operating leases having lease terms in excess of one year:

Legal Proceedings—From time to time, the Company is a party to legal or regulatory proceedings arising in the normal course of its business. Aside from the matters discussed below, management does not believe that the Company is party to any pending legal action that could reasonably be expected to have a material adverse effect on its business or operating results.

In February 2007, Level 3 notified the Company that they were terminating two contracts under which the Company delivered transit traffic to Level 3 in a number of states. That same month, the Company began filing regulatory proceedings in eight states, asserting that the Company has the legal right to remain directly connected to Level 3 in order to terminate transit traffic to Level 3 on behalf of its third party carrier customers. The Company has also asserted in these proceedings that the Company has the right to terminate this traffic to Level 3 on non-discriminatory terms, including without the payment to Level 3 of a per minute of use or similar charge. The Company currently continues to terminate traffic to Level 3 in these eight states. The traffic the Company terminated to Level 3 in these eight states accounted for approximately 9.2% of the Company’s total traffic during the 2007 calendar year. The following summarizes the status of these proceedings:

Illinois. On July 10, 2007, the Illinois Commerce Commission, or the Illinois Commission, issued an order requiring that Level 3 remain directly connected to the Company and finding that the Company should not be required to pay Level 3 any fee or compensation for transit traffic delivered to Level 3. The decision by the Illinois Commission also directs the parties to negotiate an interconnection agreement consistent with the decision’s conditions and finds that, absent such an agreement, Level 3 must continue to directly interconnect with the Company under the operational interconnection terms in effect between the parties as of January 30, 2007. The decision also ordered Level 3 to pay 80% of the Company’s attorney’s fees and costs and 90% of the Illinois Commission’s costs. On August 15, 2007, the Illinois Commission denied Level 3’s petition for rehearing, and on September 10, 2007, Level 3 filed a notice of appeal of the Illinois Commission’s July 10 order with the Appellate Court of Illinois, First District. Level 3 filed its opening brief with the Illinois Appellate Court on December 14, 2007. The Illinois Commission filed a motion with the Illinois Appellate Court requesting that response briefs be due on March 13, 2008. As of March 3, 2008, the Illinois Appellate Court has not ruled on that motion. If that motion is granted, Level 3’s reply brief will be due on March 27, 2008.

On February 22, 2008, Level 3 filed a petition with the Illinois Commission requesting that the Illinois Commission reopen the state proceeding to permit Level 3 to discontinue its direct connection to the Company. On February 29, 2008, the Company filed its opposition to Level 3’s petition to reopen the proceedings before the Illinois Commission.

On November 29, 2007, Level 3 filed a complaint for declaratory and injunctive relief in the United States District Court for the Northern District of Illinois against the commissioners of the Illinois Commission, in their official capacity, challenging the Commission’s July 10 order. Among the relief Level 3 seeks in its federal court complaint is a ruling that the federal Telecommunications Act of 1996 preempts the Commission’s July 10 order and an injunction permanently barring the Illinois Commission from enforcing its July 10 order. Although Level 3 did not name the Company as a defendant in its federal court action, on February 6, 2008, the Company filed an unopposed motion to intervene in the proceeding. The Court granted the Company’s motion to intervene on February 11, 2008. On February 19, 2008, the Company filed a motion to stay or dismiss Level 3’s federal complaint. On February 19, 2008, the Illinois Commission commissioners similarly filed a motion to stay or dismiss Level 3’s federal complaint. Level 3’s responses to the Company’s motion and the Illinois Commission’s motion to stay or dismiss are due on March 21, 2008. The Company’s reply and the Illinois Commission’s reply in support of their respective motions are due on April 4, 2008. A status hearing and/or ruling on the Company’s motion and the Illinois Commission’s motion is set for June 6, 2008.

On August 13, 2007, the Company filed a petition in the Circuit Court of Cook County, Illinois seeking enforcement of that part of the Illinois Commission’s July 10 decision requiring Level 3 to pay 80% of the Company’s attorneys’ fees and costs. The Company also sought an award of punitive damages against Level 3. On October 1, 2007, the Circuit Court of Cook County ordered the Company to file a motion to enforce the Illinois Commission’s attorneys’ fee award on or before October 10, 2007. The Circuit Court ordered Level 3 to file any response to the Company’s motion to enforce on or before November 7, 2007 and ordered the Company to file any reply on or before November 21, 2007. On December 3, 2007, the court held a hearing on the Company’s motion to enforce. On February 6, 2008, the Circuit Court of Cook County issued an order finding that the Illinois Commission’s attorneys’ fees order did not constitute an enforceable judgment and suggesting that the Company proceed before the Illinois Commission for a determination of the specific amount of attorneys’ fees that Level 3 is required to pay to the Company. On February 19, 2008, the Company filed with the Illinois Commission a motion for approval of attorneys’ fees and costs.

On February 29, 2008, simultaneous with the filing of the Company’s opposition to Level 3’s petition to reopen the proceedings before the Illinois Commission, the Company filed a notice of withdrawal, without prejudice, of the Company’s motion for approval of attorneys’ fees. The Company’s opposition to Level 3’s petition to reopen the proceedings before the Illinois Commission indicated that if the Illinois Commission reopens the parties’ proceeding, the Company will ask the commission to address the Company’s request for approval of attorneys’ fees as part of the reopened proceeding. The Company’s opposition to Level 3’s petition to reopen also stated that if the Illinois Commission does not reopen the parties’ proceeding, the Company will raise its request for attorneys’ fees through a subsequent procedurally appropriate submission.

of direct interconnection. On September 6, 2007, Level 3 filed with the Georgia Commission a petition for rehearing and reconsideration of the August 27 order. On September 21, 2007, the Company filed an opposition to Level 3’s petition for reconsideration. On November 20, 2007, the Georgia Commission orally denied Level 3’s petition for rehearing and reconsideration and on December 20, 2007, the Georgia Commission issued a written order confirming its denial of Level 3’s petition.

On January 22, 2008, Level 3 filed a complaint for declaratory and injunctive relief in the United States District Court for the Northern District of Georgia against the Company and the commissioners of the Georgia Commission, in their official capacity, challenging the Commission’s August 27, 2007 order. Among the relief Level 3 seeks in its federal court complaint is a ruling that the federal Telecommunications Act of 1996 preempts the Commission’s August 27 order and an injunction permanently barring the Georgia Commission from enforcing its August 27 order. The Company’s response to Level 3’s federal complaint in Georgia is due to be filed on March 24, 2008.

New York. On June 22, 2007, the New York Public Service Commission, or the NYPSC, determined that Level 3 must remain directly connected with the Company to receive terminating transit traffic. The NYPSC also found that if the parties do not first resolve the dispute, the NYPSC will hold further proceedings to investigate the rates, rules and regulations related to the termination services at issue. On September 24, 2007, the NYPSC issued an order denying Level 3’s petition for rehearing and/or clarification of the NYPSC’s June 22 order. In the order denying the petition for rehearing, the NYPSC stated that it would initiate a rate proceeding in November 2007. Pending the rate proceeding, the NYPSC ordered the parties to continue performing their respective obligations as if the canceled termination agreements remained in effect. On November 9, 2007, the NYPSC issued an order initiating a proceeding to investigate the rates, rules and regulations related to the termination services at issue. On January 30, 2008, Level 3 filed with the NYPSC a petition to stay and/or suspend the rate proceeding. On February 8, 2008, the Company filed its opposition to Level 3’s petition to stay and/or suspend the NYPSC rate proceeding.

On January 25, 2008, Level 3 filed a complaint for declaratory and injunctive relief in the United States District Court for the Northern District of New York against the commissioners of the NYPSC, in their official capacity, challenging the Commission’s June 22 order. Among the relief Level 3 seeks in its federal court complaint is a ruling that the federal Telecommunications Act of 1996 preempts the NYPSC’s June 22 order and an injunction permanently barring the NYPSC from enforcing its June 22 order. Although Level 3 did not name the Company as a defendant in its federal court action, Level 3 does not oppose the Company intervening in the matter. The Company anticipates filing a motion to intervene in March 2008. In addition, the Company’s response to Level 3’s federal complaint in New York is due to be filed on March 25, 2008.

Connecticut. On June 20, 2007, the Connecticut Department of Public Utility Control, or the CDPUC, held that the evidentiary record developed to date did not warrant CDPUC intervention at this time, but ordered the parties to make a good-faith effort to resolve their dispute pursuant to a settlement that produces a nondiscriminatory commercial agreement governing the delivery of tandem transit traffic by the Company to Level 3. The CDPUC also stated that it retained jurisdiction over the dispute and, if the parties were unable to arrive at a commercial agreement by November 1, 2007, the parties were required to report the details of their negotiations to the CDPUC no later than November 15, 2007. On November 6, 2007, Level 3 filed with the CDPUC a purported “Report on Negotiations For A Commercial Traffic Exchange Agreement and Request For Final Decision” (“Report”). On November 15, 2007, the Company filed a motion to strike Level 3’s Report. In the Company’s November 15 motion, the Company also requested that the CDPUC convene an in-person technical meeting to establish an appropriate procedural schedule for the Connecticut proceeding. On November 28, 2007, Level 3 responded to the Company’s motion to strike and request for a technical meeting.

On January 18, 2008, the CDPUC issued a “Draft Decision,” finding, among other things, that the CDPUC “lacks the necessary statutory authority to decide” the issues raised by the parties’ disputes and lacks authority to resolve CLEC-to-CLEC interconnection disputes of the type at issue in the proceeding. The CDPUC stated

further, however, that “the Department is of the opinion that the optimum resolution of this issue is through the commercial agreement process.” On January 30, 2008, the Company and the Connecticut Office of Consumer Counsel filed exceptions to the Draft Decision. In its exceptions, the Company argued, among other things, that the CDPUC has authority under Connecticut law to address the merits of the Company’s petition and that the Company’s petition implicated significant public policy concerns. The Connecticut Office of Consumer Counsel argued, among other things, that the CDPUC has jurisdiction to resolve the parties’ disputes and that removing the Company’s services from the Connecticut market would “be devastating to network integrity and the economics of the Connecticut competitive market.” The CDPUC will hold oral argument on the Company’s and the Office of Consumer Counsel’s exceptions on March 17, 2008 and is scheduled to issue its final decision on the exceptions on March 26, 2008.

Florida. On February 26, 2007, the Company filed a petition against Level 3 before the Florida Public Service Commission, or the Florida Commission. On June 27, 2007, the staff of the Florida Commission issued a proposed recommendation regarding whether the Company’s case should proceed to a hearing on the merits. In its recommended ruling, the staff found that the Florida Commission had jurisdiction over the dispute and that the Company’s service benefits competition. The staff of the Florida Commission also suggested that the Company did not make an adequate demonstration of standing to pursue the matter. On July 9, 2007, the Company voluntarily withdrew its petition and on July 11, 2007, the Company filed a revised petition with the Florida Commission. The Company’s revised petition includes additional legal arguments and information the Company hopes will demonstrate that the Company has standing. On July 25, 2007, Level 3 filed a motion to dismiss the Company’s revised petition. On August 3, 2007, the Company filed its opposition to Level 3’s motion to dismiss the Company’s revised petition. On September 21, 2007, the Florida Commission issued an order directing the parties to file supplemental briefs to address issues related to Level 3’s motion to dismiss the Company’s revised petition. The parties filed their supplemental briefs on October 5, 2007. On November 20, 2007, the staff of the Florida Commission issued a proposed recommendation regarding whether the Company’s revised petition should proceed to a hearing on the merits. In its recommended ruling, the staff again found that the Florida Commission had jurisdiction over the Company’s petition and that the Company’s service benefits competition. The staff of the Florida Commission also suggested, however, that the Company did not have standing to pursue the matter.

On December 26, 2007, the staff of the Florida Commission issued a revised proposed recommendation. In its December 26 recommendation, staff again found that the Florida Commission had jurisdiction over the Company’s petition and that the Company’s service benefits competition. Staff’s December 26 recommendation also again suggested that the Company did not have standing to pursue this matter and recommended that the Commission should grant Level 3’s motion to dismiss the Company’s petition. At an agenda conference held on January 8, 2008, the Florida Commission agreed with staff’s recommendation that the Commission has jurisdiction over the Company’s petition. The Commission rejected, however, staff’s recommendation that the Commission should grant Level 3’s motion to dismiss the Company’s petition and ordered staff to work with the office of the Commission Chairman to set this matter for hearing. At the January 8 agenda conference, the Commission also deemed “moot,” for purposes of Level 3’s motion to dismiss the Company’s petition, staff’s recommendation that the Company does not have standing to pursue this matter. The Commission did not make an express finding with respect to the Company’s standing to pursue this matter. On January 30, 2008, the Commission issued an order denying Level 3’s motion to dismiss the Company’s petition and ordering that the docket of the matter remain open to conduct an administrative hearing.

California. On March 2, 2007, the Company filed a complaint with the California Public Utility Commission, or the CPUC, seeking an order requiring Level 3 to maintain its direct interconnection with the Company and to receive terminating transit traffic from the Company on non-discriminatory terms and conditions. On June 4 and 5, 2007, hearings were held before a California Commission Administrative Law Judge. There is no date certain by which the Administrative Law Judge must issue a ruling.

Minnesota. On March 6, 2007, the Company filed a complaint with the Minnesota Public Utilities Commission, or the MPUC, seeking an order requiring Level 3 to maintain its direct interconnection with the

Company and to receive terminating transit traffic from the Company on non-discriminatory terms and conditions. On July 31 and August 1, 2007, hearings were held before a MPUC Administrative Law Judge. On November 7, 2007, the Administrative Law Judge issued his “Findings of Fact, Conclusions, and Recommendation,” recommending, among other things, that (1) the MPUC has authority to grant the Company the relief the Company seeks in the Minnesota proceeding; (2) the record established that the public convenience requires the continuation of the direct physical connection between the Company and Level 3; (3) Minnesota law prohibits Level 3 from attempting to impose a discriminatory termination charge on the Company and not on the only other tandem transit service provider in the State; (4) Level 3’s effort to impose a termination fee on the Company is inconsistent with well-established reciprocal compensation principles; and (5) the relevant provisions of Minnesota law are not preempted by federal law. On November 27, 2007, Level 3 filed its exceptions to the Administrative Law Judge’s findings and on December 7, 2007, the Company filed its reply to Level 3’s exceptions. On February 28, 2008, the MPUC held a hearing on Level 3’s exceptions to the Administrative Law Judge’s findings. Following argument, the MPUC adopted the Administrative Law Judge’s findings with respect to the recommendations described above.

Michigan. On March 2, 2007, the Company filed a complaint with the Michigan Public Service Commission, or the Michigan Commission, seeking an order requiring Level 3 to maintain its direct interconnection with the Company and to receive terminating transit traffic from the Company on non-discriminatory terms and conditions. On August 8 through August 10, 2007 hearings were held before a Michigan Commission Administrative Law Judge. On November 26, 2007, the Michigan Commission issued an order finding, among other things, that: (1) Level 3 must remain directly connected with the Company; (2) Level 3 shall not require the Company to pay any fee or other compensation to recover termination costs recoverable as reciprocal compensation from originating carriers, or to impose on the Company a market-based rate that is not based on Level 3’s costs to maintain direct interconnection with the Company; (3) the relevant provisions of Michigan law are not preempted by federal law; and (4) the parties should negotiate non-discriminatory rates and conditions for their continued direct interconnection. On December 21, 2007, Level 3 filed its Claim of Appeal with the Michigan Court of Appeals, indicating Level 3’s intent to appeal the Michigan Commission’s November 26, 2007 order. Level 3’s opening brief with the Michigan Court of Appeals currently is due to be filed on March 14, 2008.

In December 2007, the Company filed with the Michigan Commission a motion seeking an order approving the Company’s request that Level 3 reimburse the Company for the attorneys’ fees and costs that it incurred in connection with the Michigan proceeding. In January 2008, Level 3 responded to the Company’s request for attorneys’ fees and the Company filed a reply in support of its request.

As a result of rulings in the Illinois, Connecticut New York, and Michigan proceedings, the Company has attempted to negotiate new interconnection agreements with Level 3 for each such state. Future rulings in additional states may also require that the Company negotiate one or more agreements for each such state. It is possible that disputes may arise during these negotiations that may cause the Company or Level 3 to seek additional regulatory or judicial relief. As described above, Level 3 also has appealed the Illinois Commission’s and the Michigan Commission’s decision and filed federal complaints for declaratory and injunctive relief in connection with the decisions in Illinois, Georgia and New York. Level 3 may also seek reconsideration, appeal or otherwise challenge one or more of any other existing or prospective ruling described above. Although the Company believes its position is meritorious, and the Company will continue to assert its position vigorously in any such additional proceeding, there can be no assurance that the Company will prevail. In any event, the Company’s efforts could have a material adverse effect on the Company’s results of operations and financial condition because of, among other things, legal costs, diversion of management resources and other factors.

Additional State Proceedings. After the Company commenced the state proceedings described above, Level 3 initiated regulatory proceedings in additional states. In these proceedings, Level 3 requested orders from the relevant state regulatory bodies directing the Company to notify its customers that the Company would not be able to terminate transit traffic directly to Level 3 and/or allowing Level 3 to disconnect the interconnection facility. In some states, Level 3 also sought to institute a per minute charge of $0.001 per minute of use. The

Company believes that under applicable law, the Company would have prevailed in these actions if the matter had proceeded to a hearing on the merits. After filing submissions to prevent Level 3 from disconnecting existing direct interconnections in some of the additional states, the Company elected not to pursue further its right to maintain direct interconnection to Level 3 in these additional states and moved to dismiss the proceedings in those states. The Company no longer directly terminates traffic to Level 3 in these additional states. The traffic the Company terminated to Level 3 in these additional states accounted for approximately 1.9% of the Company’s revenue during the first six months of 2007. In September and October 2007, Level 3 voluntarily withdrew its petitions for disconnection in each of the states in which it had initiated regulatory proceedings against the Company.

Level 3 Billing Disputes. The Company is also engaged in various billing disputes with Level 3 regarding amounts Level 3 claims the Company owes it. Although there can be no assurance as to the ultimate resolution of these disputes, the Company does not believe they will have a material adverse effect on the Company’s business, results of operations or financial condition.

In July 2006, Verizon Wireless notified the Company that it wished to terminate its existing Master Service Agreement. In response to the notification, in August 2006, the Company filed a petition for interconnection with the FCC. On January 14, 2008, the Company entered into a Direct Connection Agreement under which the Company may terminate traffic to Verizon Wireless and the Company dismissed without prejudice the petition for interconnection it had filed at the FCC.

The Company is considering initiating an arbitration proceeding against Verizon regarding a billing dispute of approximately $1.8 million. The dispute originates from an invoice which the Company feels is not owed under the Verizon tariff. There can be no assurance regarding how, whether or when this matter will be resolved.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and of net operating loss carryforwards. Significant components of the Company’s deferred income taxes are as follows:

The income tax provision for the years ended December 31, 2005, 2006 and 2007 are as follows:

A reconciliation of the federal statutory rate to our effective tax rate is as follows:

In 2003, the Company began to establish a valuation allowance for deferred tax assets such as those relating to its net operating loss and credit carryforward. In 2006, as required by SFAS No. 109, the Company continued its assessment of the realization of the deferred tax assets and as a result, concluded that a full valuation allowance was no longer appropriate. Consistent with prior assessments, the Company considered its current and historical performance, along with other relevant factors, in determining the adequacy of the valuation allowance. As part of the Company’s assessment, certain objective factors, such as previous operating losses, were given substantially more weight than management’s outlook for future profitability. Management believes that the Company will generate sufficient taxable income to utilize all of the net operating loss carryforward and credit amounts. No net operating loss carryforwards remain as of December 31, 2007. As of December 31, 2007, the Company has Illinois state credit carryforwards of approximately $0.6 million, which will begin to expire in the year 2010 if not utilized.

The Company adopted the provisions of FIN No. 48 on January 1, 2007. Upon adoption and at December 31, 2007, the Company did not recognize any adjustments for unrecognized income tax benefits. The tax years 2003-2007 remain open to examination by the major taxing jurisdictions to which the Company is subject.

The Company established the 2003 Stock Option and Stock Incentive Plan (the “2003 Plan”), which provides for issuance of options and restricted stock for up to 1,600,000 shares under incentive stock option and nonqualified stock option agreements to eligible employees, officers, and independent contractors of the Company. The Company authorized an additional 700,000, 350,000 and 2,000,000 options and restricted stock within the 2003 Plan in February 2006, May 2006 and July 2006, respectively. Prior to completing our initial public offering, we adopted the Neutral Tandem, Inc. 2007 Long-Term Equity Incentive Plan discussed below and ceased awarding equity grants under the 2003 Plan. As of December 31, 2007, there were 3,310,412 shares reserved for issuance under the 2003 Plan in respect of awards made prior to our initial public offering. Under the 2003 Plan, employees, officers and directors have been granted options to acquire shares of common stock of the Company. The number of shares, exercise price of the shares, and vesting conditions are determined by the Compensation Committee of the Company’s Board of Directors. Under the 2003 Plan, options generally vest ratably over four years and have a maximum term of 10 years as long as the option holder remains an employee of the Company.

In October 2007, the Company approved the adoption of the Neutral Tandem, Inc. 2007 Equity Incentive Plan (the “2007 Plan”) to become effective immediately prior to the consummation of the IPO. The 2007 Plan provides for grants of incentive or non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units, performance awards or any combination of the foregoing to directors, officers, employees and other individuals performing services for, or to whom an offer of employment has been extended, by the Company or its subsidiaries. The Company has reserved a total of 2,873,613 shares of common stock for issuance pursuant to the 2007 Plan. Unless terminated sooner, the 2007 Plan will terminate automatically on November 2, 2017.

As of December 31, 2007, there were awards for 18,000 shares issued under the 2007 Plan and 2,855,613 shares, representing approximately 9.3% of the Company’s outstanding common stock as of December 31, 2007, available for issuance under the 2007 Plan.

The Company currently records stock-based compensation expense in connection with any grant of options to its employees and independent contractors. The Company records stock-based compensation expense associated with its stock options in accordance with SFAS No. 123(R), which requires it to calculate the expense associated with its stock options by determining the fair value of the options.

The fair value of stock options is determined using the Black-Scholes valuation model, which 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 accelerated method under SFAS 123(R). 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. At December 31, 2007, the Company has not had any material forfeitures and does not anticipate future forfeitures. Actual results, and future changes in estimates, may differ substantially from current estimates.

The Company follows the fair-value method of accounting for stock options under SFAS No. 123(R) to account for the 2003 Plan and the 2007 Plan. Stock-based employee compensation is reflected in the statement of operations. 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. In 2007, the Company issued 10,000 stock options to contractors. The following table shows the fair value of one share of the Company’s common stock on each stock option grant date during the years ended December 31, 2005, 2006 and 2007:

The fair value of each option granted is estimated on the date of grant using the Black- Scholes option-pricing model for the years ended December 31, 2005, 2006 and 2007 with the following assumptions:

During the timeframe leading up to 2006, the Company’s volatility assumption was updated quarterly based upon historical prices of the Fidelity Select Telecommunications “FSTCX” index fund. In 2006, a new method for estimating volatility was adopted. This method focuses specifically on the simple average volatility of three telecommunication companies that share similar business characteristics. The simple average volatility of the three companies selected range from 31.0% at the beginning of 2005 to 40.1% at December 31, 2007. The Company calculated the volatility of its own stock for the period between November 2, 2007 and December 31, 2007 and found that it is not materially different than the results of the three company average. The Company will continue to calculate its own volatility. Once sufficient historical data is available, the Company will determine when it is appropriate to adopt its own volatility.

The weighted-average fair value of options granted, as determined by using the Black-Scholes valuation model, during the period was $0.24, $1.30 and $3.88 for the years ended December 31, 2005, 2006 and 2007, respectively. The total grant date fair value of options that vested during years ended December 31, 2005, 2006 and 2007 was approximately $0.0 million, $0.1 million and $1.0 million, respectively.

The unrecognized compensation cost associated with options outstanding at December 31, 2006 and 2007 is $2.8 million and $2.7 million, respectively. The weighted average remaining term that the compensation will be recorded is 3.7 years and 2.8 years as of December 31, 2006 and 2007, respectively.

The Company’s financial instruments include cash and cash equivalents, receivables, payables and debt. Except as described below, the estimated fair value of such financial instruments at December 31, 2006 and 2007 approximate their carrying value as reflected in the consolidated balance sheets. The fair value of the convertible preferred stock warrant liability was estimated using the Black-Scholes valuation model.

The estimated fair value of the Company’s debt at December 31, 2006 was $13.3 million compared to the carrying amount of $12.9 million included in the consolidated balance sheet. The estimated fair value of the Company’s debt at December 31, 2007 was $8.3 million compared to the carrying amount of $7.6 million included in the consolidated balance sheet.

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 companies. 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. Therefore, the Company has concluded that it has only one operating segment.

The Company’s operating results may fluctuate due to a variety of factors, many of which are outside of the Company’s control. As a result, comparing the Company’s operating results on a period-to-period basis may not be meaningful. You should not rely on the Company’s past results as an indication of its future performance.

Revenue has increased sequentially in each of the quarters presented due to increases in the number of minutes billed to new and existing customers. In the fourth quarter of 2006, the Company recorded $1.2 million of impairment of fixed assets for switch equipment at both its Atlanta and Miami locations, see footnote 2—Long-lived assets.

On February 21, 2008 the note holders elected to exercise all of the outstanding warrants. Pursuant to the terms of the warrants the note holders elected to exercise the warrants on a net basis based upon the average closing price of our common stock during the three days prior to such exercise. Based upon the closing prices of our common stock on February 20, 2008, February 19, 2008 and February 15, 2008 we issued a total of 356,921 common shares on February 25, 2008 in full satisfaction of all outstanding warrants.

The following table sets forth the various expenses (other than underwriting discounts and commissions), we expect to incur in connection with the offering described in this registration statement.

Section 102 of the Delaware General Corporation Law permits a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Our amended and restated certificate of incorporation provides that no director shall be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability, except to the extent required from time to time by applicable law, (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of Title 8 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.

Section 145 of the Delaware General Corporation Law provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the action, suit or proceeding, provided the person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. A similar standard of care is applicable in the case of actions by or in the right of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action was brought determines that, despite the adjudication of liability but in view of all of the circumstances of the case, the person is fairly and reasonably entitled to indemnity for expenses that the Delaware Court of Chancery or other court shall deem proper.

Our amended and restated certificate of incorporation will provide that, to the fullest extent permitted by the Delaware General Corporation Law and except as otherwise provided in our amended and restated bylaws, none of our directors shall be liable to Neutral Tandem, Inc. or our stockholders for monetary damages for a breach of fiduciary duty. Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify each person who is or was or had agreed to become a director or officer of the Company

or who is or was serving or who had agreed to serve at the request of our Board of Directors or an officer of the Company as an employee or agent of the Company or as a director, officer, partner, member, trustee, administrator, employee or agent of another corporation, partnership, joint venture, limited liability company, trust or other enterprise (including without limitation any employee benefit plan or any trust associated therewith), to the full extent permitted from time to time by the Delaware General Corporation or any other applicable laws as presently or hereafter in effect. In addition to the indemnification provided for in our amended and restated certificate of incorporation, we expect to enter into separate indemnification agreements with each of our directors and executive officers which may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law prior to completion of this offering. These indemnification agreements may require us, among other things, to indemnify our directors and executive officers for some expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of his service as one of our directors or executive officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified individuals to serve as directors and executive officers.

We maintain a directors’ and officers’ liability insurance policy to insure our directors and officers against liability for actions or omissions occurring in their capacity as a director or officer, subject to certain exclusions and limitations.

Set forth below is information regarding shares of common stock and preferred stock issued, and options and warrants granted, by the Registrant within the past three years. Also included is the consideration, if any, received by the Registrant for such shares, options and warrants and information relating to the section of the Securities Act, or rule of the SEC, under which exemption from registration was claimed.

On February 2, 2006, DCM III, L.P., DCM III-A, L.P., DCM Affiliates Fund III, L.P., New Enterprise Associates 10, Limited Partnership, Mesirow Capital Partners VIII, L.P., Montagu Newhall Global Partners II, L.P., Montagu Newhall Global Partners II-A, L.P., Montagu Newhall Global Partners II-B, L.P., Wasatch Small Cap Growth Fund, Wasatch Ultra Growth Fund, Wasatch Global Science & Technology Fund, Robert C. Hawk, Ed Greenberg, Paul W. Chisholm, Lawrence M. Ingeneri, Joseph Tighe and John Barnicle purchased a total of 1,909,947 shares of Series C Preferred Stock for $6.2829 per share for an aggregate purchase price of $12,000,006.01.

On November 2, 2006, Dixon Doll purchased a total of 70,000 shares of common stock for $3.68 per share for an aggregate purchase price of $257,600.

The sales and issuances listed above were deemed exempt from registration under the Securities Act by virtue of Section 4(2), as transactions not involving a public offering, and Rule 701 thereunder. Certain defined terms used herein not otherwise defined have the meanings ascribed to them in the prospectus, which forms a part of this registration statement.

As of December 31, 2007, the Registrant had granted stock options under the Neutral Tandem, Inc. 2003 Stock Option and Stock Incentive Plan for an aggregate of 3,328,412 shares of common stock (net of exercises, expirations and cancellations) at a weighted average exercise price of $1.98 per share. Options to purchase 362,825 shares of common stock have been exercised for an aggregate purchase price of approximately $353,662.

The issuance of stock options and the common stock issuable upon the exercise of such options as described in this paragraph (b) of Item 15 were issued pursuant to written compensatory plans or arrangements with our employees, directors and consultants, in reliance on the exemption provided by Rule 701 promulgated under the Securities Act. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.

All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock described in this Item 15 included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.

On December 20, 2004, the Registrant granted warrants to purchase 92,812 shares of Series B-1 Preferred Stock for $1.48 per share (which are exercisable for 92,812 shares of our common stock) and 21,885 of Series B-2 Preferred Stock for $6.28 per (which are exercisable for 21,885 shares of our common stock) share to Venture Lending and Leasing IV, Inc.

On July 13, 2005, the Registrant granted warrants to purchase 87,539 of Series C Preferred Stock for $6.28 per share (which are exercisable for 87,539 shares of our common stock) to Venture Lending and Leasing IV, Inc.

On February 21, 2008, the note holders elected to exercise all of the outstanding warrants. Pursuant to the terms of the warrants, the note holders elected to exercise the warrants on a net basis based upon the average closing price of our common stock during the three days prior to such exercise. Based upon the closing prices of our common stock on February 20, 2008, February 19, 2008 and February 15, 2008, we issued a total of 356,921 shares of common stock on February 25, 2008 in full satisfaction of all outstanding warrants.

The sales and issuances listed above were deemed exempt from registration under the Securities Act by virtue of Section 4(2), as transactions not involving a public offering. Certain defined terms used herein not otherwise defined have the meanings ascribed to them in the prospectus, which forms a part of this registration statement.

All other schedules have been omitted because the information required to be presented in them is not applicable or is shown in the consolidated financial statements or related notes.

(a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

(i) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and

(ii) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(c) The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, State of Illinois, on March 13, 2008.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby severally constitutes and appoints Rian J. Wren, Robert M. Junkroski and Richard Monto, and each of them individually, with full power of substitution and resubstitution, his or her true and lawful attorney-in fact and agent, with full powers to each of them to sign for us, in our names and in the capacities indicated below, the Registration Statement on Form S-1 filed with the Securities and Exchange Commission, and any and all amendments to said Registration Statement (including post-effective amendments), and any registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in connection with the registration under the Securities Act of 1933, as amended, of equity securities of the Registrant, and to file or cause to be filed the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as each of them might or could do in person, and hereby ratifying and confirming all that said attorneys, and each of them, or their substitute or substitutes, shall do or cause to be done by virtue of this Power of Attorney. This power of attorney may be executed in counterparts and all capacities to sign any and all amendments.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities on March 13, 2008.


Gerald T. Nowak		Richard A. Drucker
Andrew J. Terry		Davis Polk & Wardwell
Kirkland & Ellis LLP		450 Lexington Avenue
200 E. Randolph Drive		New York, New York 10017
Chicago, Illinois 60601		(212) 450-4000
(312) 861-2000



Title of Each Class of Securities to be Registered	Amount to be Registered⁽¹⁾	Proposed Maximum Offering Price Per Share⁽²⁾	Proposed Maximum Aggregate Offering Price⁽²⁾	Amount of Registration Fee⁽³⁾
Common Stock, $0.001 par value	5,175,000	$19.44	$100,602,000	$3,954


	*Price to Public*	Underwriting Discounts and *Commissions*	Proceeds to Selling Shareholders
Per share	$	$	$
Total	$	$	$


		Page
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		91
PRINCIPAL AND SELLING SHAREHOLDERS		94
DESCRIPTION OF CAPITAL STOCK		97
SHARES ELIGIBLE FOR FUTURE SALE		101
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON STOCK		103
UNDERWRITERS		106
VALIDITY OF SHARES		110
EXPERTS		110
WHERE YOU CAN FIND MORE INFORMATION		110
GLOSSARY		111
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1


	As of December 31, 2007
	(In thousands)
Long-term debt:
Term credit agreement⁽¹⁾	$	7,727

Total long-term debt	$	7,727
Shareholders’ equity:
Common Stock, $0.001 par value, 150,000,000 shares authorized; 30,832,939 shares issued and outstanding, actual		32
Additional paid-in capital		132,889
Warrants		6,920
Accumulated earnings		4,081

Total shareholders’ equity		143,922

Total capitalization	$	151,649


		Page
PROSPECTUS SUMMARY		1
RISK FACTORS		9
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		24
MARKET AND INDUSTRY DATA AND FORECASTS		24
USE OF PROCEEDS		25
DIVIDEND POLICY		25
PRICE RANGE OF COMMON STOCK		25
CAPITALIZATION		26
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA		27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		29
BUSINESS		45
MANAGEMENT		65
COMPENSATION DISCUSSION AND ANALYSIS		69


	Year Ended December 31,
	2003			2004			2005			2006			2007
	(In thousands, except share data)
Statements of Operations
Revenue	$	—		$	3,439		$	27,962		$	52,866		$	85,555
Operating Expense:
Network and Facilities Expense (excluding depreciation and amortization shown separately below)		13			2,027			11,349			21,305			30,163
Operations		155			2,704			8,189			11,613			15,536
Sales and marketing		69			775			1,360			1,553			1,770
General and administrative		449			2,310			3,053			4,166			9,426
Depreciation and amortization		2			655			3,141			7,160			11,076
Impairment of fixed assets		—			—			—			1,234			—
Loss (gain) on disposal of fixed assets		—			—			—			333			(144	)

Total operating expense		688			8,471			27,092			47,364			67,827

Income (Loss) From Operations		(688	)		(5,032	)		870			5,502			17,728

Other (Income) Expense:
Interest expense		8			276			843			1,289			1,668
Interest income		(6	)		(69	)		(170	)		(778	)		(1,321	)
Change in fair value of warrants		—			—			674			832			4,919
Other income		—			—			(11	)		—			—

Total other expense		2			207			1,336			1,343			5,266

Income (Loss) Before Income Taxes		(690	)		(5,239	)		(466	)		4,159			12,462
Provision (Benefit) For Income Taxes		—			—			—			(499	)		6,204

Net Income (Loss)	$	(690	)	$	(5,239	)	$	(466	)	$	4,658		$	6,258

Earnings (loss) per common share—basic⁽¹⁾	$	(0.14	)	$	(1.02	)	$	(0.08	)	$	0.88		$	0.68
Earnings (loss) per common share—diluted⁽¹⁾	$	(0.14	)	$	(1.02	)	$	(0.08	)	$	0.20		$	0.24
Weighted average common shares outstanding—basic		4,918			5,117			5,628			5,293			9,248
Weighted average common shares outstanding—diluted		4,918			5,117			5,628			23,481			26,378


	Years Ended December 31,
	2005		2006		2007
Revenue (In thousands)	$	27,962	$	52,866	$	85,555
Minutes of Use Billed (In millions)		10,428		24,749		41,003
Average fee per billed minute	$	0.0027	$	0.0021	$	0.0021


Grant Date	Number of Stock Options Issued	Weighted Average Fair Value of One Share of Common Stock
First Quarter 2005	120,500	$	0.30
Second Quarter 2005	145,875	$	0.49
Third Quarter 2005	67,500	$	0.50
Fourth Quarter 2005	85,500	$	0.78
First Quarter 2006	920,825	$	1.17
Second Quarter 2006	397,500	$	1.33
Third Quarter 2006	258,650	$	2.56
Fourth Quarter 2006	778,400	$	3.68
First Quarter 2007	—	$	4.09
Second Quarter 2007	131,650	$	4.14
Third Quarter 2007	77,950	$	8.26
Fourth Quarter 2007	18,000	$	19.30

Total	3,002,350


	December 31, 2005	December 31, 2006	December 31, 2007
Expected life	10 years	10 years	7.7-10 years
Risk-free interest rate range	4.2%-4.5%	4.7%-5.1%	3.8%-4.9%
Expected dividends	—	—	—
Volatility	31.0%	34.4%-41.6%	39.6%-40.1%


	Payment due by Period
Contractual Cash Obligation	Total		Current		2-3 years		4-5 years		More than 5 years
	(In thousands)
Principal payments on long-term debt	$	7,727	$	4,479	$	3,248	$	—	$	—
Interest payments on long-term debt ⁽¹⁾		2,138		1,020		1,118		—		—
Operating leases		22,329		3,617		7,365		5,538		5,809

Total	$	32,194	$	9,116	$	11,731	$	5,538	$	5,809


Wireless Carriers	Cable Companies	Broadband Providers	Wireline
Sprint/Nextel	Comcast	Vonage	Paetec
T-Mobile USA	Cablevision	Broadvox	McLeodUSA
MetroPCS	RCN	Intelepeer	MCI/Verizon Business
U.S. Cellular	Cox	Teleblend	AT&T
AT&T Mobility		Unipoint	Sprint Communications


Los Angeles, CA	Seattle, WA	Toledo, OH	Pensacola, FL	New Orleans, LA
New York, NY	Philadelphia, PA	Jacksonville, FL	Peoria, IL	Birmingham, AL
Chicago, IL	Tampa, FL	Fort Myers, FL	Bloomington, IN	Columbia, SC
San Francisco, CA	Minneapolis, MN	Buffalo, NY	Rockford, IL	Greenville, SC
Boston, MA	Hartford, CT	Albany, NY	Evansville, IN	Jackson, MS
Dallas, TX	Columbus, OH	Gainesville, FL	Springfield, IL	Knoxville, TN
Detroit, MI	Nashville, TN	Dayton, OH	Youngstown, OH	Huntsville, AL
N. New Jersey	Orlando, FL	Madison, WI	Savannah, GA	Poughkeepsie, NY
Atlanta, GA	Milwaukee, WI	Memphis, TN	Akron, OH	Delaware Valley, PA
Miami, FL	Indianapolis, IN	Green Bay, WI	Omaha, NE	Spokane, WA
Washington, DC	Cleveland, OH	Syracuse, NY	Tallahassee, FL	Macon, GA
Phoenix, AZ	Cincinnati, OH	South Bend, IN	Champaign, IL	Manchester, NH
Denver, CO	Sacramento, CA	Rochester, NY	Charleston, SC


Property Location	Approximate Square Feet	Use	Lease Expiration Date
Chicago, IL	15,423	Administrative Office	October 31, 2011
New York, NY	16,532	Switch site	August 31, 2014
Detroit, MI	10,800	Switch site	February 28, 2010
Chicago, IL	10,000	Sublet	September 30, 2015
Indianapolis, IN	9,577	Switch site	April 30, 2012
Los Angeles, CA	6,857	Switch site	October 31, 2011
Cleveland, OH	6,000	Switch site	October 31, 2011
Atlanta, GA	5,861	Switch site	May 31, 2015
Minneapolis, MN	5,808	Switch site	February 28, 2012
Chicago, IL	5.263	Switch site	March 31, 2009
Miami, FL	5,176	Switch site	December 31, 2011
Dallas, TX	4,842	Switch site	May 31, 2017
Chicago, IL	4,347	Switch site	May 31, 2011
San Francisco, CA	3,922	Switch site	April 30, 2014
Philadelphia, PA	3,902	Switch site	August 31, 2017
Cincinnati, OH	3,369	Switch site	September 30, 2015
Boston, MA	2.416	Switch site	June 11, 2016
Orlando, FL	2,092	Switch site	May 31, 2011
Columbus, OH	2,026	Switch site	February 28, 2011
Milwaukee, WI	1,703	Switch site	November 30, 2014
Phoenix, AZ	1,652	Switch site	March 31, 2012
Denver, CO	1,650	Switch site	May 31, 2017
Seattle, WA	1,051	Switch site	May 31, 2017
Tampa, FL	1,048	Switch site	January 31, 2016
Vienna, VA	1,131	Switch site	September 30, 2017
Portland, OR	635	Switch site	November 30, 2012
Salt Lake City, UT	212	Switch site	November 12, 2012
San Diego, CA	140	Switch site	December 09, 2012
Charlotte, NC	1,485	Switch site	March 31, 2018
Houston, TX	2,144	Switch site	April 30, 2018
Las Vegas, NV	140	Switch site	April 30, 2013


Name	Age	Position(s)
Rian J. Wren	51	President, Chief Executive Officer and Director
Robert Junkroski	44	Chief Financial Officer and Executive Vice President
Surendra Saboo	48	Chief Operating Officer and Executive Vice President
Richard Monto	43	General Counsel and Secretary
David Lopez	43	Senior Vice President of Sales
James P. Hynes	60	Director, Chairman
Dixon R. Doll	65	Director
Peter J. Barris	56	Director
Robert C. Hawk	68	Director
Lawrence M. Ingeneri	49	Director


	2006 Bonus as a % of Annual Base Salary				2007 Bonus as a % of Annual Base Salary				2008 Target Bonus as a % of Annual Base Salary
Category	Target		Actual		Target		Actual		2008 Target Bonus as a % of Annual Base Salary
Rian Wren	40	%	45	%	40	%	75	%	40	%
Robert Junkroski	40	%	41	%	40	%	71	%	40	%
Ronald Gavillet⁽¹⁾	40	%	41	%	40	%	71	%	—
Surendra Saboo	40	%	48	%	40	%	73	%	40	%
James Hynes⁽²⁾	—		—		—		—		—


Name and Principal Position	Year	Salary⁽¹⁾ ($)		Bonus⁽²⁾ ($)		Stock Awards⁽³⁾ ($)		Option Awards⁽³⁾ ($)		Non-Equity Incentive Plan Compensation ($)		Changes in Pension Value and Nonqualified Deferred Compensation Earnings ($)		All Other Compensation⁽⁴⁾ ($)		Total ($)
Rian Wren⁽⁵⁾	2007	$	300,000	$	225,000	$	—	$	269,525	$	—	$	—	$	—	$	794,525
Chief Executive Officer	2006		221,154		100,000		—		198,291		—		—		118,554		637,999
Robert Junkroski	2007		240,000		170,400				19,481		—		—		2,038		431,919
Chief Financial Officer	2006		220,169		90,300				6,672		—		—		—		317,141
Ronald Gavillet⁽⁶⁾	2007		240,000		170,400		—		19,481		—		—		962		430,843
Former Executive Vice President and General Counsel	2006		220,169		90,300		—		6,672		—		—		—		317,141
Surendra Saboo⁽⁷⁾	2007		240,000		175,200		—		93,795		—		—		1,806		510,801
Chief Operating Officer and Executive Vice President	2006		136,443		65,000		—		52,037		—		—		14,659		268,139
David Lopez	2007		159,000		175,000		—		19,507		—		—		—		353,507
Senior Vice President—Sales	2006		152,524		93,388		—		3,740		—		—		—		249,652


			Options			Assumptions			Expenses
Name	Grant Date	Restricted Stock (#)^(a)	Number Granted (#)	Exercise Price ($)		Expected Life (Years)	Risk- Free Interest Rate (%)	Dividend Yield (%)	2007 ($)	2006 ($)
Rian Wren	2/6/2006 10/11/2006	— —	864,000 250,000	$	1.17 3.68	10 10	4.72 4.78	0.0 0.0	130,326 139,199	166,990 31,301
Robert Junkroski	8/29/2006 11/8/2004	— 172,400	50,000 —		2.56 N/A	10 —	4.88 —	0.0 —	19,481 —	6,672 —
Ronald Gavillet	8/29/2006 11/8/2004	— 172,400	50,000 —		2.56 N/A	10 —	4.88 —	0.0 —	19,481 —	6,672 —
Surendra Saboo	5/8/2006 8/29/2006	— —	325,000 75,000		1.33 2.56	10 10	5.11 4.88	0.0 0.0	64,573 29,222	42,027 10,010
David Lopez	10/23/2006 11/8/2004	— 77,600	35,000 —		3.68 N/A	10 —	4.78 —	0.0 —	19,507 —	3,740 —


Name	Year	Relocation Expenses^(a)		Company Contribution to 401(k) Plan^(b)		Total
Rian Wren	2007 2006	$ $	— 118,554	$ $	— —	$ $	— 118,554
Robert Junkroski	2007 2006	$ $	— —	$ $	2,038 —	$ $	2,038 —
Ronald Gavillet	2007 2006	$ $	— —	$ $	962 —	$ $	962 —
Surendra Saboo	2007 2006	$ $	— 14,569	$ $	1,806 —	$ $	1,806 14,569
David Lopez	2007 2006	$ $	— —	$ $	— —	$ $	— —


	Option Awards						Stock Awards
	Number of Securities Underlying Unexercised Options (#)			Option Exercise Price ($)		Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested (#)⁽²⁾		Market Value of Shares or Units of Stock That Have Not Vested ($)⁽³⁾
Name	Exercisable	Unexercisable⁽¹⁾		Option Exercise Price ($)		Option Expiration Date
Rian Wren	448,000 72,917	416,000 177,083	^(a) ^(b)	$	1.17 3.68	February 6, 2016 October 11, 2016	— —		$	— —
Robert Junkroski	16,667	33,333	^(c)		2.56	August 29, 2016	16,000	^(a)		304,320
Ronald Gavillet⁽⁴⁾	16,667	33,333	^(c)		2.56	August 29, 2016	—			—
Surendra Saboo	128,646 25,000	196,354 50,000	^(d) ^(c)		1.33 2.56	May 8, 2016 August 29, 2016	— —			— —
David Lopez	8,750	26,250	^(e)		3.68	October 23, 2016	21,250	^(b)		404,175


	Stock Awards
	Number of Shares Acquired on Vesting (#)	Value Realized on Vesting ($)⁽¹⁾
Rian Wren	—	$	—
Robert Junkroski	156,400		1,423,240
Ronald Gavillet	—		—
Surendra Saboo	—		—
David Lopez	56,350		512,785


Name	Cash Payment
Rian Wren	$	344,565.40
Robert Junkroski	$	280,220.49
Ronald Gavillet	$	277,451.19
Surendra Saboo	$	272,434.14
David Lopez	$	223,306.33


Name		Value of Equity Awards: Termination Without Cause or for Good Reason⁽²⁾
Rian Wren		96,480 options become vested at an exercise price of $1.17 per share. 31,249.98 options become vested at an exercise price of $3.68 per share. The value of these options was $2,201,542.69 as of December 31, 2007.

Robert Junkroski		6,249.96 options become vested at an exercise price of $2.56 per share. The value of these options was $102,874.34 as of December 31, 2007.

Ronald Gavillet⁽¹⁾		6,249.96 options become vested at an exercise price of $2.56 per share. The value of these options was $102,874.34 as of December 31, 2007.

Surendra Saboo		40,624.98 options become vested at an exercise price of $1.33 per share. 9,375 options become vested at an exercise price of $2.56 per share. The value of these options was $872,968.40 as of December 31, 2007.

David Lopez		No accelerated vesting.


Name		Value of Equity Awards: In Connection with Change of Control⁽¹⁾
Rian Wren		209,040 options become vested at an exercise price of $1.17 per share. 88,541.67 options become vested at an exercise price of $3.68 per share. The value of these options was $5,089,593.22 as of December 31, 2007.

Robert Junkroski		Restrictions lapse with respect to 8,000 shares of common stock. The value of these shares was $152,160.00 as of December 31, 2007. 16,666.68 options become vested at an exercise price of $2.56 per share. The value of these options was $274,333.55 as of December 31, 2007.

Ronald Gavillet⁽¹⁾		16,666.68 options become vested at an exercise price of $2.56 per share. The value of these options was $274,333.55 as of December 31, 2007.

Surendra Saboo		98,177.10 options become vested at an exercise price of $1.33 per share. 25,000 options become vested at an exercise price of $2.56 per share. The value of these options was $2,148,252.81 as of December 31, 2007.

David Lopez		Restrictions lapse with respect to 10,625 shares of common stock. The value of these shares was $202,087.50 as of December 31, 2007.


Name	Fees Earned or Paid in Cash($)⁽¹⁾			Stock Awards($)⁽²⁾		Option Awards($)⁽²⁾⁽³⁾		Non-Equity Incentive Plan Compensation($)		Change in Pension Value and Nonqualified Deferred Compensation Earnings($)		All Other Compensation($)		Total($)
James Hynes	$	9,863	^(a)	$	—	$	38,975	$	—	$	—	$	—	$	48,838
Dixon Doll		—			—		38,975		—		—		—		38,975
Peter Barris		—			—		38,975		—		—		—		38,975
Robert Hawk		5,343	^(b)		—		38,975		—		—		—		44,318
Lawrence Ingeneri		6,575	^(c)		—		38,975		—		—		—		45,550


	Number of Shares Subject to Option Awards (Exercisable and Unexercisable) Held as of December 31, 2007 (#)		Number of Shares Restricted Stock Awards (Unvested) Held as of December 31, 2007 (#)^(a)
James Hynes	70,000		6,670	^(c)
Dixon Doll	—		49,584	^(d)
Peter Barris	70,000	^(b)	—
Robert Hawk	70,000	^(b)	20,000	^(e)
Lawrence Ingeneri	70,000	^(b)	—


Name and Address of Beneficial Owner	Number of Shares Beneficially Owned Before this Offering	Number of Common Shares Being Offered	Number of Common Shares Beneficially Owned After this Offering	Percentage of Common Shares Beneficially Owned After this Offering
Name and Address of Beneficial Owner	Number of Shares Beneficially Owned Before this Offering	Number of Common Shares Being Offered		Before this Offering		After this Offering
Holders of more than 5% of our voting securities
DCM III, L.P. and related entities⁽¹⁾ c/o Doll Capital Management 2420 Sand Hill Road Suite 200 Menlo Park, CA 94025	7,230,194			23.32	%		%

New Enterprise Associates 10, LP and NEA Ventures 2003, Limited Partnership⁽²⁾ 1119 St. Paul Street Baltimore, MD 21202	6,953,194			22.43	%		%

James P. Hynes and related entities⁽³⁾ c/o Hynes Capital Resources 115 Meadow Road Riverside, CT 06878	1,585,580			5.11	%		%

JPMorgan Chase & Co.⁽⁴⁾ 270 Park Avenue New York, NY 10017	1,771,600	—	1,771,600	5.71	%	5.71	%


Name		Number of Shares
Morgan Stanley & Co. Incorporated

Total		4,500,000


	Per Share	Without Option	With Option
Public offering price	$	$	$
Underwriting discount and commissions paid by the selling shareholders
Proceeds, before expenses, to the selling shareholders


Report of Independent Registered Public Accounting Firm		F-2

Consolidated Balance Sheets as of December 31, 2006 and 2007		F-3

Consolidated Statements of Operations for the years ended December 31, 2005, 2006 and 2007		F-4

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2004, 2005, 2006 and 2007		F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007		F-6

Notes to Consolidated Financial Statements		F-7


	As of December 31,
	2006			2007
ASSETS
Current assets:
Cash and cash equivalents	$	20,084		$	112,020
Accounts receivable		7,876			12,104
Deferred tax asset—current		2,699			2,242
Other current assets		866			1,016

Total current assets		31,525			127,382

Property and equipment—net		29,090			37,410
Restricted cash		397			419
Other assets		979			805

Total assets	$	61,991		$	166,016

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,919		$	575
Accrued liabilities:
Circuit cost		2,735			5,694
Rent		948			1,163
Payroll and related items		891			1,692
Other		1,515			2,768
Current installments of long-term debt		5,317			4,384

Total current liabilities		13,325			16,276

Other liabilities		2,420			527
Deferred tax liability—noncurrent		2,026			2,095
Long-term debt—excluding current installments		7,585			3,196

Total liabilities		25,356			22,094
Commitments and Contingencies
Preferred convertible stock—Series A, par value of $0.001; 9,200,000 authorized shares; 9,000,000 shares issued and outstanding at December 31, 2006 liquidation preference of $9.0 million at December 31, 2006		9,000			—
Preferred convertible stock—Series B-1, par value of $.001; 5,830,228 authorized shares; 5,737,416 shares issued and outstanding at December 31, 2006 liquidation preference of $8.5 million at December 31, 2006		8,500			—
Preferred convertible stock—Series B-2, par value of $.001; 1,374,752 authorized shares; 1,352,867 shares issued and outstanding at December 31, 2006 liquidation preference of $8.5 million at December 31, 2006		8,500			—
Preferred convertible stock—Series C, par value of $.001; 2,009,947 authorized shares; 1,909,947 shares issued and outstanding at December 31, 2006 liquidation preference of $12.0 million at December 31, 2006		12,000			—

Shareholders’ equity (deficit):
Preferred stock—par value of $.001; 50,000,000 authorized shares; no shares issued and outstanding at December 31, 2007		—			—
Common stock—par value of $.001; 28,500,000 and 150,000,000 authorized shares, respectively; 5,319,434 shares and 30,832,939 shares issued and outstanding at December 31, 2006 and December 31, 2007, respectively		6			32
Warrants		—			6,920
Additional paid-in capital		806			132,889
Accumulated earnings (deficit)		(2,177	)		4,081

Total shareholders’ equity (deficit)		(1,365	)		143,922

Total liabilities and shareholders’ equity (deficit)	$	61,991		$	166,016



	Shares Outstanding
	Series X Preferred Shares		Common Shares		Warrants	Common Shares		Warrants		Additional Paid-In Capital			Accum Deficit/ Earnings			Total Shareholders’ Equity
Balance at December 31, 2004	100		5,490,000		—	$	5	$	—	$	116		$	(6,242	)	$	(6,121	)

Net loss and comprehensive loss	—		—		—		—		—		—			(466	)		(466	)
Series X conversion to common shares	(100	)	417,084		—		—		—		—			—			—
Purchase of common shares for retirement	—		(386,800	)	—		—		—		—			—			—
Exercise of stock options	—		15,000		—		—		—		2			—			2
Stock option expense	—		—		—		—		—		29			—			29
Accretion of preferred stock	—		—		—		—		—		—			(53	)		(53	)

Balance at December 31, 2005	—		5,535,284		—		5		—		147			(6,761	)		(6,609	)
Net income and comprehensive income	—		—		—		—		—		—			4,658			4,658
Purchase of common shares for retirement	—		(299,100	)	—		—		—		(1	)		—			(1	)
Exercise of stock options	—		83,250		—		1		—		261			—			262
Stock option expense	—		—		—		—		—		399			—			399
Accretion of preferred stock	—		—		—		—		—		—			(74	)		(74	)

Balance at December 31, 2006	—		5,319,434		—		6		—		806			(2,177	)		(1,365	)
Net income and comprehensive income	—		—		—		—		—		—			6,258			6,258
Proceeds from issuance of common shares, net of costs	—		7,248,700		—		7		—		93,104			—			93,111
Preferred conversion to common shares	—		18,000,230		—		18		—		37,982			—			38,000
Reclassification of warrants	—		—		402,236		—		6,920		—			—			6,920
Exercise of stock options	—		264,575		—		1		—		91			—			92
Stock option expense	—		—		—		—		—		906			—			906

Balance at December 31, 2007	—		30,832,939		402,236	$	32	$	6,920	$	132,889		$	4,081		$	143,922


	December 31, 2006			December 31, 2007
(Dollars in thousands)
Switch equipment	$	35,657		$	46,745
Construction in process		2,866			5,385
Computer software		1,040			1,156
Computer equipment		860			1,237
Tools and test equipment		307			354
Furniture and fixtures		245			310
Leasehold improvements		230			1,205

		41,205			56,392
Less accumulated depreciation		(12,115	)		(18,982	)

Property and equipment-net	$	29,090		$	37,410


	December 31, 2006			December 31, 2007
(Dollars in thousands)
Secured term loan, interest payable at 7.0%. Principal repaid in 36 equal installments commencing June 1, 2004. A final payment of 8.14% of the borrowed amount was paid in May 2007	$	453		$	—

Secured term loan, interest payable at 7.3%. Principal repaid in 36 equal installments commencing October, 1, 2004. A final payment of 8.14% of the borrowed amount is required in August of 2007		240			—

Secured term loan, interest payable at 6.5%. Principal repaid in 36 equal installments commencing April 1, 2005. A final payment of 9.3% of the borrowed amount is required in March 2008		1,205			249

Secured term loan, interest payable at 7.5%. Principal repaid in 36 equal installments commencing December 1, 2005. A final payment of 9.3% of the borrowed amount is required in November 2008		1,816			902

Secured term loan, interest payable at 9.0%. Principal repaid in 36 equal installments commencing August 1, 2006. A final payment of 9.6% of the borrowed amount is required in July 2009		2,175			1,395

Secured term loan, interest payable at 9.25%. Principal repaid in 36 equal installments commencing October 1, 2006. A final payment of 9.6% of the borrowed amount is required in September 2009		2,299			1,528

Secured term loan, interest payable at 9.5%. Principal repaid in 36 equal installments commencing January 1, 2007. A final payment of 9.6% of the borrowed amount is required in December 2009		2,500			1,729

Secured term loan, interest payable at 9.5%. Principal repaid in 36 equal installments commencing April 1, 2007. A final payment of 9.6% of the borrowed amount is required in March 2010		2,500			1,924

Less—discount on debt associated with the issuance of warrants		(286	)		(147	)

Total long-term debt		12,902			7,580
Less—current installments		(5,317	)		(4,384	)

Long-term debt—excluding current installments	$	7,585		$	3,196


	December 31, 2007
2008		4,479
2009		3,013
2010		235

Total	$	7,727