Use these links to rapidly review the documentTABLE OF CONTENTS Item 8. Financial Statements and Supplementary Data

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission File Number: 001-33041


ACME PACKET, INC.(Exact name of registrant as specified in its charter)

Delaware

04-3526641(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)71 Third Avenue
Burlington, MA 01803(Address of principal executive offices) (zip code)(781) 328-4400(Registrant's telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of each class

Name of each exchange on which registeredCommon Stock, $0.001 par value

The Nasdaq Stock Market LLC


Securities registered pursuant to Section 12(g) of the Act: None.

Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

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. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o    No ý

The aggregate market value of common stock held by non-affiliates of the registrant based on the closing price of the registrant's common stock as
reported on the NASDAQ Global Market on June 30, 2008, was $332,100,623. Shares of voting and non-voting stock held by executive officers, directors and holders of more than 5% of
the outstanding stock have been excluded from this calculation because such persons or institutions may be deemed affiliates. This determination of affiliate status is not a conclusive determination
for other purposes.

54,787,900
shares of the registrant's common stock were outstanding as of March 9, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended
December 31, 2008. Portions of such proxy statement are incorporated by reference into Part III of this Annual Report on Form 10-K.



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TABLE OF CONTENTS



PART IItem 1.

Business


3Item 1A.

Risk Factors


20Item 1B.

Unresolved Staff Comments


37Item 2.

Properties


37Item 3.

Legal Proceedings


37Item 4.

Submission of Matters to a Vote of Security Holders


37PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities


38Item 6.

Selected Financial Data


41Item 7.

Management's Discussion and Analysis of Financial Condition and Results of
Operations


43Item 7A.

Quantitative and Qualitative Disclosure About Market Risk


64Item 8.

Financial Statements and Supplementary Data


65Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure


95Item 9A.

Controls and Procedures


95Item 9B.

Other Information


97PART IIIItem 10.

Directors, Executive Officers and Corporate Governance


98Item 11.

Executive Compensation


98Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters


98Item 13.

Certain Relationships and Related Transactions, and Director Independence


98Item 14.

Principal Accountant Fees and Services


98PART IVItem 15.

Exhibits, Financial Statement Schedules


99SIGNATURES


101


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The information in this Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21 E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Such statements are based
upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. We may, in
some cases, use words such as "project," "believe," "anticipate," "plan," "expect," "estimate," "intend," "continue," "should," "would," "could," "potentially," "will," "may" or similar words and
expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K may
include statements about:



The
outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from
the results anticipated by these forward-looking statements. These important factors include our financial performance, difficulties in attracting and retaining customers, difficulties in meeting
customer needs through our development activities, difficulties leveraging market opportunities, poor product sales, long sales cycles, difficulties in developing new products, difficulties in our
relationships with vendors and partners, risks associated with international operations, difficulty in managing rapid growth and increased competition, and those factors we discuss in this Annual
Report on Form 10-K under the caption "Risk Factors" and the risks discussed in our other filings with the Securities and Exchange Commission (SEC). We undertake no obligation to
publicly release any revisions to the forward-looking statements after the date of this Annual Report on Form 10-K other than as required by law. You should read these factors and
the other cautionary statements made in this Annual Report on Form 10-K as being applicable to all related forward-looking statements wherever they appear in this Annual Report on
Form 10-K. These risk factors are not exhaustive and other sections of this Annual Report on Form 10-K may include additional factors which could adversely impact
our business and financial performance.

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PART I

Item 1.    Business

Overview

Acme Packet, Inc. enables the delivery of trusted, first class interactive communicationsvoice, video and
multimedia sessionsand data services across IP network borders. Our Net-Net family of session border controllers, multiservice security gateways and session routing proxies
supports multiple applications in service provider, large enterprise and contact center networksfrom VoIP trunking to unified communications to hosted enterprise and residential services
to fixed-mobile convergence. They satisfy critical security, service assurance and regulatory requirements in wireline, cable and wireless networks; and support multiple protocolsSIP,
H.323, MGCP/NCS, H.248 and real time streaming protocol, or RTSPand multiple border pointsinterconnect, access and data center.

We
are the world's leading provider of session border controllers, or SBCs, that enable service providers, enterprises and contact centers to deliver secure and high quality interactive
communications across defined border points where Internet Protocol networks connect, known as network borders. Service providers include wireline, wireless, cable and Internet telephony service
providers. The Internet Protocol, or IP, is a standardized method of transmitting information, such as interactive communications, from one device, such as a personal computer, server, IP telephone
and personal digital advisor, to another device over any type of physical private or public network, including the Internet. Our Net-Net products, which consist of our hardware and
proprietary software, serve as a central element in unifying the separate IP networks. Our customers use our products to deliver next-generation interactive communications services, such
as Voice over IP, or VoIP, with the same quality assurance and security as they historically have offered for voice services over their legacy telephone networks.

SBCs
are deployed at the borders between IP networks, such as between two service providers or between a service provider and its enterprise, residential or mobile customers as more
fully described below in the sections entitled "Industry Background," "The Need for a New IP Network Element," "Our Solution" and "Our Technology." SBCs are the only network element currently capable
of integrating the control of signaling messages and media flows. This capability complements the roles and functionality of routers, softswitches and data firewalls that operate within the same
network. Our Net-Net products support a broad range of communications applications at multiple network border points, providing key control functions in the areas of security, service
reach maximization, service level agreement assurance, revenue optimization, cost efficiency and regulatory compliance, while also supporting next-generation service architectures such as
IP Multimedia Subsystem, or IMS. IMS provides a blueprint for building a network capable of delivering IP-based voice, video and multimedia services to subscribers.

We
began shipping our Net-Net products in 2002. Since that time, approximately 635 customers, consisting of service providers, enterprises and contact centers in 92
countries, have purchased our products.

We
sell our products and support services through approximately 55 distribution partners and our direct sales force. Our distribution partners include many of the largest networking and
IP communications equipment vendors throughout the world.

We
were founded in 2000 under the name Primary Networks, Inc. and changed our name to Acme Packet, Inc. in January 2001. Our principal executive offices are located at 71
Third Avenue, Burlington, MA 01803. Our telephone number is (781) 328-4400. Our website address iswww.acmepacket.com.Through a link
on the Investor Relations section of our website, we make available the following filings after they are electronically filed with or furnished to the SEC: our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and

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any
amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act. All such filings are available free of charge.

Industry Background

Since the advent of IP, service providers have used two separate networksthe Public Switched Telephone Network, or PSTN,
for voice communications and IP networks, both privately-based and the public Internet, for data applications and services. PSTN, also known as the voice or traditional telephone network, was created
decades ago to provide seamless, reliable and secure global voice communications services. Users are accustomed to the high reliability and security of the PSTN, and have high confidence in utilizing
it to share personal information and engage in activities such as banking and commerce. The PSTN is limited, however, in its ability to support high bandwidth video and other interactive multimedia
services.

The
Internet is a collection of IP networks that provides global reach for a broad range of information services such as e-mail, web browsing, electronic commerce and
research. IP is a data-oriented protocol which provides communicable unique global addressing among computers. Internet service quality, while adequate for these types of information
services, can vary significantly depending upon, among other factors, available bandwidth, how busy a particular web site may be, how many people are using the network at a particular time and the
activity being performed. Although the Internet is capable of cost-effectively transmitting any form of traffic that is IP-based, including interactive voice, video and data,
it transmits only on a best-efforts basis, because all forms of traffic have the same priority. The Internet, therefore, attempts to deliver all traffic without distinction, which can
result in significantly varying degrees of service quality for the same or similar types of traffic transmissions. In addition, Internet communications, unlike those over the PSTN, are subject to
disruptive and fraudulent behavior, including identity theft, viruses, unwanted and excessively large input data known as SPAM,
unauthorized use, and attempts to circumvent or bypass security mechanisms associated with those services, known as hacking. Although Internet users have adopted many security measures to protect
themselves, their networks and their websites, these measures currently are not adequate to provide highly secure, real-time interactive communications.

Evolution to a Converged IP Network

IP networks can be designed and operated more cost-effectively than the PSTN. In addition, IP networks are capable of
delivering converged voice, video and data service packages to businesses and consumers. Service providers are seeking to provide these next-generation services to enhance their
profitability by generating incremental revenue and by reducing subscriber turnover. Enterprises are searching for ways to unify their communications by seamlessly integrating voice, video, instant
messaging and collaboration while reducing costs. Managing two distinct networksthe PSTN and an IP networkis not a viable economic alternative. As a result, service providers
and enterprises have begun to migrate to a single IP network architecture to serve as the foundation for their next-generation services and applications. In order to successfully
transition to a single IP network, however, they must maintain the same reliability, quality and security that have for decades exemplified their delivery of voice services.

Challenges of IP Networks in Delivering Session-Based Communications

IP networks were designed initially to provide reliable delivery of data services such as file downloads and website traffic that are
not sensitive to latency, or time delay. If data packets are lost or misdirected, an IP network exhibits tremendous resiliency in re-transmitting and eventually executing the desired user
request, which generally is an acceptable result for these types of data services. However, IP networks historically have not been capable of guaranteeing real-time, secure delivery of
high quality sessions-based communications such as interactive voice and video.

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A
session is a communications interaction that has a defined beginning and end, and is effective only when transmitted in real-time without latency or delays. In order to
enable a session-based communication, control of the session from its origination point to its defined end point is
required. No single IP network extends far enough to enable that level of control, however, and the Internet lacks the fundamental quality of service and security mechanisms necessary to consistently
deliver the security and quality of real- time multimedia communications that consumers and businesses require. In order to gain the trust of users, service providers and enterprises must
be able to assure secure and high quality interactive communications across multiple networks.

The Need for a New IP Network Element

Managing Session-Based Communications

In order to provide secure and high quality interactive communications, IP networks must be able to manage and integrate the
communication flows that comprise a session. Each session includes three sets of bidirectional communication flows:



A
session is initiated using signaling messages. These messages establish a virtual connection between the participants' personal computers, IP phones or other IP devices. In addition,
they negotiate the IP addresses used for the session's media streams and control messages as well as the algorithms, referred to as codecs, used to digitize analog voice and video. Various codecs are
required for voice and video, and they involve trade-offs between quality and bandwidth efficiency. Once the call is
initiated, media streams and control messages flow in both directions between participants. Signaling messages also are used to transfer a call, place a call on hold and terminate a session.

The
management of session-based communications is complicated by the following characteristics of today's IP networks:



Additionally,
unlike typical data communications, not all session-based communications can be treated with the same priority. For example, a 911 call or a high quality enterprise video
conference should take priority over a person calling into a reality TV program.

Limitations of Existing Network Elements

Successful session-based communications require tight integration between signaling and media control. However, existing network
elements such as softswitches, IP Private Branch Exchanges, or IP PBXs, unified communication servers, routers and data firewalls do not provide the control functions required for session-based
communications.

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Our Solution

We provide a category of network equipment called the session border controller, or SBC, to enable the delivery of secure and high
quality interactive communications across multiple IP networks, including the separate IP networks that comprise wireline, wireless and cable networks. Prior to the advent of the SBC, IP network
infrastructure equipment, such as those discussed above were able to initiate and route undifferentiated data, but lacked the ability to target specifically the management of interactive
communications sessions. The development of the SBC, unlike many emerging networking products, was not catalyzed by standards bodies, but rather by the pragmatic needs of service providers and
enterprises.

To
date, SBCs have been deployed around the world principally to deliver VoIP services, or the routing of voice conversations over both private IP networks and the public Internet. We
believe that there is a significant demand for SBCs that can assure delivery of secure and high quality real-time interactive communications across all IP network borders. Infonetics
Research, a market research and

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consulting
firm specializing in networking and IP communications, projects that worldwide revenue for SBCs will increase from $211 million in 2008 to $375 million in 2013.

SBCs
are deployed at the borders of IP networks, such as between two service providers, referred to as an interconnect border, between a service provider and its enterprise, residential
or mobile customers, referred to as an access borders, or between a service provider's network and a data center, referred to as a data center border. Large enterprises also deploy SBC's between their
IP network and their service provider's network and between their data centers and their employees. SBCs act as the source and destination for all signaling messages and media streams entering and
exiting the network. To that end, SBCs complement rather than replace existing network and service infrastructure. At all borders, SBCs sit in front of session agents and make call acceptance or
rejection decisions. This function protects the session agent from both malicious signaling attacks initiated by hackers and
non-malicious overloads, as well as, ensuring calls are only accepted when adequate network quality and softswitch resources are available. At many borders, SBCs sit alongside data
firewalls. The data firewalls protect web and application servers and PCs from attacks while the SBC protects the session agent. SBCs augment the simple and different
packet-by-packet routing decisions routers make. Unlike routers, SBCs are able to classify these flows as a single interactive communication session and make more intelligent
routing decisions to use the best path across the network to ensure secure, high quality communications.



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Our
SBCs utilize our proprietary technology to process session-based communications at network borders, and are designed to ensure that security and quality standards are met. Our key
advantages include the following:



In
addition to our SBC offerings, we leveraged the technologies employed within our SBCs to introduce two additional categories of products in 2008multiservice security
gateways and session routing proxies.



Multiservice security gateways, or MSGs, are a very specific type of IP network "border controller" used by mobile service providers. A
MSG securely connects subscribers to their mobile voice and data services over the untrusted Internet and/or untrusted wireless networks. As a "gateway" they are deployed at the border between the
core mobile services network and the untrusted wired Internet and/or wireless networks that use public, unlicensed spectrum such as Wi-Fi. They are "multiservice" in that they transport
both voice and data services. Their "security" function authenticates mobile endpoints, secures the voice and data traffic within IPsec tunnels to ensure privacy and protect against theft, and defends
against denial of service/distributed denial of service, or DoS/DDoS, attacks on the mobile service infrastructure at the TCP/IP and IPsec networking levels to deliver non-stop service.

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Used
in conjunction with Wi-Fi and femtocell access points in homes and businesses, MSGs overcome the poor radio access network coverage found in many geographic areas and
inside large buildings. Consequently, they may accelerate fixed-mobile substitutionwhereby the wireless phone will be the only phonefor today's mobile circuited-switched
time-division multiplexing, or TDM, voice and IP packet data services. This solution also reduces mobile service provider networking costs by off-loading the macro radio access
network and using the "free" Internet for backhaul.

MSGs
will also help enable new revenue opportunities for our customers by delivering enhanced SIP-based applications such as video sharing, video calling,
push-to-talk, home monitoring, instant messaging, multimedia collaboration, white-boarding, international toll bypass and others. We believe that SIP-based voice
may eventually replace today's circuited-switched TDM basic voice service. These SIP-based services are controlled by the SBC, making the integration of SBC and MSG a natural combination.



Session routing proxies, or SRPs, route SIP-based voice, video, instant messaging and multimedia sessions within and
between the mobile, fixed-line and transit networks of service providers. Session routing proxies address scaling problems when session routing decisions become much more complex,
requiring a dynamic, real-time routing decision for each individual session for multiple sources and destinations within a network. These multiple sources and destinations are other SIP
signaling elements such as session border controllers, wireless Mobile Switching Centers (MSC), IMS subscriber call control elements, CLASS 5 softswitches, Cable Modem Termination Systems (CMTS) and
softswitches controlling media gateways.

Provisioning
routing information and control in each of these SIP elements are expensive and error-prone. Enabling each element to make routing decisions also increases capital costs
since additional hardware processing is required by each element. The use of a SRP centralizes and consolidates routing control, reducing costs. Because the source and destination SIP signaling
elements are session-stateful, a SRP can operate in a stateless or transaction-stateful mode, maximizing routing performance.

Because
the routing table size needed to support SIP-based services can be significant, session routing proxies are capable of using both internal and external routing
databases. Internal routing databases best support static, localized routing decisions for up to a few million routes. Routing rules that are extremely dynamic, global or exceed a few million routes
are best supported using the high-capacity, centralized external databases.

Acme
Packet's Open Session Routing (OSR) architecture features its session routing proxy using industry-standard ENUM, SIP, extensible markup language, or XML, or domain name system, or
DNS, protocols to access industry-leading routing database products and services from Acme Packet's OSR partners. This solution provides significant deployment flexibility and facilitates network
evolution from small to large numbers of border points and from PSTN to IP network-focused connectivity.

We
believe that these key advantages of our products and services, together with their deployment by our approximately 635 customers, make Acme Packet the leading provider of border
control solutions.

Our Strategy

Our objective is to grow our market and technology leadership in the SBC market. Principal elements of our strategy
include:



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Our Technology

Our SBCs are designed specifically to make networks "session aware" by enabling them to recognize, manage and integrate the various
communication flows that comprise a single session and then treat those media flows as a single session with the appropriate priority, security and routing among other different networks. Acme Packet
Session Aware Networking, our technology
architecture, enables the delivery of secure and high quality interactive communication sessions across IP network borders. Implemented by the tight integration of our Net-Net OS software
and Net-Net hardware platforms, our technology combines five elements that make the network session aware:



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Session Aware Networking is designed to enable these five elements to share information dynamically. The session routing policy element collects the information
necessary to guide the session signaling service in the selection of the optimal route across multiple IP networks. The media control element moves packets in compliance with security, quality of
service, bandwidth and regulatory requirements. The session monitoring and reporting element updates the routing policy element with information about actual signaling element load, bandwidth
availability and route performance. The session security service element protects the SBC, service infrastructure, customer networks and sessions among users of the services and applications.

We
believe that the combination of these elements creates a comprehensive solution required to deliver secure and high quality interactive communications services across IP network
borders.

Session routing policy.This software-based element defines and collects the information needed to make routing and related decisions.
Session
routing policy includes the following:



Session signaling service.This software-based element supports a broad range of signaling protocols such as SIP, H.323, MGCP/NCS and
H.248. Based on
information received from the session routing policy element, the signaling service element selects the best path through the network for each session. It selects the next signaling element in the
network, such as user devices, softswitches, gateways and application servers that each session should visit. To initiate the session, this element signals the next device along the path. If no
acceptable path is available, the signaling service rejects the initiation request. It performs network address and port translations for addresses exposed in the signaling messages for security and
bridging incompatible networks, strips previous routing information to hide customers or suppliers and adds or strips codecs to ensure codec compatibility. It also determines if the media flows should
be released peer-to-peer between endpoints or relayed through the media control element. For relayed sessions, it passes address information for the next signaling element in
the path to the media control element. The signaling service also performs protocol repair and interworking by, for example, converting one protocol into another. Lastly, this element is able to track
sessions for reporting and billing purposes.

Session media control.Once the session is established, this hardware-based element controls the media flows that are not released
peer-to-peer between endpoints. Media control performs network address and port translations for security and bridging incompatible networks. It relays media to support the
ability to address the cross network address translation and firewall devices, applies quality of service markings such as DiffServ bits and virtual area network, or VLAN, tags, performs transcoding
between codecs when needed, and polices bandwidth usage in order to prevent, for example, a 64-Kbps voice session from switching to 384-Kbps video without permission. Media
control also can extract touch tones embedded in the media flows, replicate the media flows for lawful intercept when required, and detect and repair certain session faults based on limits for items
such as

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call
length and maximum idle time. For example, if a signaling message terminating a session is lost, the session media control element notices and terminates the errant connection, freeing resources
for other use.

Session monitoring and reporting.This element compiles signaling and media performance information on a per session basis. Media
quality
measurements may include objective network attributes, such as delay, jitter and packet loss, or subjective measurements using mean opinion score algorithms. Signaling performance information includes
signaling element availability and load and call completion ratios. The reported information is used in fault and performance management and service level agreement reporting, and is input to
subsequent routing and admission control policy decisions.

Session security service.This element exploits integrated hardware and software capabilities to secure the SBC, the service
infrastructure and
subscriber sessions with respect to signaling and media flows. Static and dynamic access control lists for signaling messages are enforced by the SBC's network processing subsystem to protect the
signaling processor from DoS/DDoS attack and overload. DoS/DDoS attacks prevent network equipment from receiving legitimate media flows by overloading the network equipment with unrequested
information. To avoid such attacks, subscriber endpoints must earn trust through successful registrations or calls to gain trusted access. For media flows, an SBC acts as a media firewall, permitting
access for authorized sessions and blocking other traffic. All internal bandwidth consumed by all signaling and media flows are policed in hardware for optimum scalability in DoS/DDoS protection.

DoS/DDoS
attack prevention entails blocking all attacks and overloads at the SBC. Many of the session routing policies described above prevent signaling and media overloads on the
service infrastructure from legitimate subscribers. A hardware-based encryption engine can ensure confidentiality of both signaling and media flows for subscriber sessions.

Our Products

Our Net-Net family of products consists of the Net-Net OS software platform, the 4000 and 9000 series
platforms, 4000 Advanced Telecommunications Computing Architecture blade, or ATCA blade, and EMS and SAS management applications. The brand name "Net-Net" reflects the role of these
products in interconnecting IP networks for voice, video and multimedia services. Our Net-Net products serve as a central element in unifying the separate IP networks that comprise
wireline, wireless and cable networks. Our products include our hardware platforms and proprietary software. They deliver high quality border control functionality, performance, capacity, scalability,
availability and manageability, while allowing service providers and enterprises to deliver high-quality, secure, real-time, interactive communications.

Our
hardware and software products are designed to work in conjunction with each other. Our Net-Net OS software platform will only operate on our Net-Net hardware
platforms and, accordingly, our Net-Net hardware platforms will only operate with our embedded software. Customers can purchase our products in either a standalone or
high-availability configuration and can license our software in various configurations depending on customers' requirements for session capacity, feature groups and protocols.

Acme Packet Net-Net OS

The Acme Packet Net-Net OS is our software platform that supports SBC, MSG, and SRP, configurations. It operates on the
Net-Net 4000 and 9000 series platforms, and Net-Net 4000 ATCA blade. It offers rich border control functionality in terms of architectural flexibility, signaling protocol
breadth, control function and feature depth, and carrier-class availability and manageability.

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Net-Net
OS supports all five required border control functions:



Other
Net-Net OS features include the following:



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Acme Packet Net-Net Platforms

The Acme Packet Net-Net 4000 and 9000 series platforms and 4000 ATCA blade address a broad range of interactive
communications requirements for performance, capacity and bandwidth. Each of these platforms is more fully discussed below:



The
following table outlines the differentiating features of our hardware platforms:

Net-Net 4000

Net-Net 4000 ATCA

Net-Net 9000Signaling performance
(relative sessions/second)

1 or 2.5

2.5

3 or 7Media capacity with quality of service reporting
(maximum number of sessions)

32,000 or 64,000

64,000

32,000 or 128,000Transcoding capacity
(maximum number of sessions)

n/a

n/a

16,000IPsec tunnel capacity maximum
(number of tunnels)

120,000 or 200,000

200,000

tbdLocal route table capacity
(maximum number of routes)

1 or 2 million

2 million

1 or 2 millionNetwork interfaces
(maximum number and type)

(4) 1 Gbps

(4) 1 Gbps

(8) 1 Gbps or
(2) 10 GbpsDoS/DDoS protection, hardware-software based

Standard

Standard

StandardHigh availability configuration

Inter-system

Inter-system

Intra- or inter-
systemSize of high availability configuration (rack units)

2

n/a

7


Acme Packet Net-Net EMS

The Acme Packet Net-Net Element Management System, or Net-Net EMS, is a network element management application
for our Net-Net family of products. Net-Net EMS is designed to rapidly deploy and easily manage single or multiple Net-Net SBCs. As a standalone management system,
Net-Net EMS is designed to support all required configuration, fault, performance and security management functions through an easy-to-use, browser-based graphical
user interface. Net-Net EMS

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can
efficiently integrate into existing and next-generation operational support systems, through industry-standard interfaces.

Acme Packet Net-Net SAS

The Acme Packet Net-Net Session Analysis System, or Net-Net SAS, provides off-line collection,
reporting and analysis of session call detail records, or CDRs, for the Net-Net family of SBCs. It enables comprehensive session/call level troubleshooting, performance analysis and
traffic monitoring without the need for third party tools or application development.

General

The pricing of our products depends upon the hardware platform (Net-Net 4000 or 9000 system, or 4000 ATCA blade) and
related options, the signaling protocols used (for, example, SIP or H.323), the number of active sessions, and the software feature group options.

Support and Services

We believe that the provision of a broad range of professional support services is an integral part of our business model. We offer
services designed to deliver comprehensive support to our customers and distribution partners through every stage of our products' deployment. Our services can be categorized as follows:

Professional Services.Our professional services group provides pre-installation services, such as planning and consulting and network
engineering and design, as well as installation and network integration services.

Technical Assistance Center.From our headquarters in Burlington, Massachusetts, we operate a technical assistance center to provide our
customers
with post-installation services such as support and maintenance, informational services, and technical support services. We provide remote assistance to customers worldwide, including
periodic updates to our software and product documentation. To
respond to our customers' needs, our technical assistance group is available 24 hours a day, 7 days a week and accessible by phone, by e-mail and, when required, on site.

Training.We offer an array of training courses to our customers covering product and solutions overview, basic and advanced
configuration and
administration and troubleshooting and maintenance. We present these courses monthly at our corporate and regional headquarters, and we also can deliver customized versions of the courses at customer
sites.

We
had 107 employees dedicated to providing these services as of December 31, 2008. We believe our commitment to servicing our products and customers provides us with a
competitive advantage by helping us to retain customers and to identify new product opportunities.

Sales and Marketing

We market and sell our products and support services indirectly through our distribution partners and directly through our sales force.
Our sales and marketing team consisted of 95 employees and full time contractors as of December 31, 2008.

Marketing and Product Management.In addition to building brand awareness and broadly marketing our products, our marketing team
actively supports
our sales process and works to influence next-generation service/application architectures and requirements globally by actively contributing to industry-related standards organizations,
conferences, trades shows, publications and analyst consulting services.

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Direct Sales.Our direct sales team, with assistance from marketing, sells directly to large, individual service providers and
enterprises worldwide.
We maintain sales offices in Burlington, Massachusetts; Madrid, Spain; Tokyo, Japan and Ipswich, United Kingdom. We also have sales and support personnel
in Argentina, Australia, Belgium, Brazil, Canada, China, Croatia, France, Germany, Hong Kong, Italy, Korea, Malaysia, Mexico, the Netherlands, Peru, Russia, South Africa, Thailand, and throughout the
United States.

Distribution Partners

We enter into non-exclusive distribution or reseller agreements with distribution partners around the globe to acquire new
end user customers. These agreements typically have a duration of one to two years and provide for a full spectrum of sales and marketing services, implementation services, technical and training
support, and warranty protection. They do not contain minimum sales requirements. We may seek to add distribution partners selectively, particularly in additional countries outside the United States,
in order to complement or expand our business.

We
follow a standard contracting process with our distribution partners. The first time a distribution partner places an order for any of our products, we enter into a master agreement
that contains general terms and conditions applicable to all purchases of our products. By entering into this type of distribution partner agreement with us, a distribution partner does not become
obligated to order or purchase any fixed or minimum quantities of our products. Our distribution partners generally order products from us by submitting purchase orders that describe, among other
things, the type and quantities of our products that they desire to order and the delivery date and other applicable delivery terms that are applicable to these products. We typically do not offer
contractual rights of return, stock balancing or price protection to our distribution partners, and actual product returns from distribution partners have been insignificant to date.

As
of December 31, 2008, we had approximately 55 distribution partners and resellers. Our partners include many of the largest networking and telecommunications equipment vendors
in the world, as well as regionally focused system and network integrators.

Customers

Our products and services have been sold to approximately 635 end user customers in 92 countries. These end user customers consist of
legal entities that have either purchased products or services directly from us or have purchased our products through one of our distribution partners. Our end customers include incumbent and
competitive local exchange and long distance providers, international service providers, cable operators, Internet telephony service providers, voice application service providers, wireless service
providers, enterprises, contact centers, universities and
government agencies. In addition to these many different customer profiles, our customers reflect different services and applications, network types, business models and countries.

Revenue
from customers located outside the United States and Canada represented 49% of our total revenue in 2008, 52% of our total revenue in 2007 and 43% of our total revenue in 2006.
The following is a list of our customers who accounted for at least 10% of our net revenue for the applicable period indicated below:

Year Ended December 31,2008

2007

2006Alcatel Lucent17%

Alcatel Lucent17%

Sprint16%Nokia Siemens Networks15%

Nokia Siemens Networks15%

Siemens11%Sprint10%

Sprint13%Ericsson11%


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We
follow a standard contracting process with all of our direct customers. The first time a direct customer places an order for any of our products we enter into a master agreement that
contains general terms and conditions applicable to all purchases or licensing of our products by such direct customer. By entering into an end-user agreement with us, a direct customer
does not become obligated to order or purchase any fixed or minimum quantities of our products. Our direct customers generally order products from us by submitting purchase orders that describe, among
other things, the type and quantities of our products that they desire to order and the delivery date and other applicable delivery terms that are applicable to products.

Research and Development

Continued investment in research and development is critical to our business. We have assembled a team of 124 engineers as of
December 31, 2008, with expertise in various fields of communications and network infrastructure. Our research and development organization is responsible for designing, developing and
enhancing our software products and hardware platforms, performing product testing and quality assurance activities, and ensuring the compatibility of our products with third-party hardware and
software products. We employ advanced software development tools, including automated testing, performance monitoring, source code control and defect tracking systems. In addition, we have invested
significant time and financial resources into the development of our Net-Net family of products, including our Net-Net OS software platform.

Research
and development expense totaled $22.2 million for 2008, $20.1 million for 2007 and $13.0 million for 2006.

Manufacturing

We outsource the manufacturing of our Net-Net products. We subcontract all of the manufacturing of our Net-Net
4000 series of products to Jabil Circuit, Inc. and Benchmark Electronics. We subcontract all of the manufacturing of our Net-Net 9000 series of products to Jabil
Circuit, Inc. and TTM Technologies, Inc. With the exception of Benchmark Electronics, we do not have any written agreement with any of these manufacturers. We submit purchase orders to
these manufacturers that describe, among other things, the type and quantities of our products or components to be manufactured by the applicable manufacturer and the delivery date and other delivery
terms applicable to the products or components. Our manufacturers do not have any written contractual obligation to accept any purchase order that we submit for the manufacture of any of our products
or components. If one of our manufacturers accepts in writing a purchase order submitted by us, the manufacturer is legally obligated to manufacture the product or component covered by such purchase
order and we are obligated to purchase and take delivery of such product or component. Our reliance on outside manufacturers involves a number of potential risks, including the absence of adequate
capacity, the unavailability of, or interruptions in access to, necessary manufacturing processes, and reduced control over delivery schedules. In addition, we cannot be certain or provide any
assurance that our manufacturers will accept all of our purchase orders, or any of them, and agree to manufacture and supply any or all of our manufacturing requirements for our products or any
components. If our manufacturers are unable or unwilling to continue manufacturing our products and components in required volumes, we will have to identify one or more acceptable alternative
manufacturers. The use of new manufacturers may cause significant interruptions in supply if the new manufacturers have difficulty manufacturing products to our specifications.

Although
there are multiple sources for most of the component parts of our products, some of our network processors, traffic managers, microprocessors and network search engines are
sourced from single or, in some cases, limited sources. For example, our contract manufacturers purchase through electronics distributors various types of network processors, traffic managers,
microprocessors and network search engines from various component manufacturers, including Applied Micro Circuits

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Corporation,
Broadcom Corporation, Freescale Semiconductor, Inc., Integrated Device Technology, Inc., Marvell Semiconductor, Inc., Mindspeed Technologies, Inc. and Netlogic
Microsystems, Inc., which are presently our contract manufacturers' sole sources for these particular components. We do not have a written agreement with any of these component manufacturers to
guarantee the supply of the key components used in our products, and we do not require any of our contract manufacturers to have a written agreement with any of these component manufacturers. We
regularly monitor the supply of the component parts and the availability of alternative sources. Also, we have entered into arrangements with a few electronics distributors which require the
electronics distributors to establish and maintain at least three months' inventory of certain key components, and, at the request of our contract manufacturers, to supply all or a portion of the key
components held pursuant to this arrangement to our contract manufacturers for use in the manufacture of our products. Our contractual arrangements with the electronics distributors do not provide for
the electronics distributors to enter into any contract with any of these component manufacturers to guarantee the supply of these key components.
Our contract manufacturers provide forecasts to the electronics distributors of our manufacturers' requirements of these key components. These electronics distributors use the forecasts to source the
key components from time to time, to the extent that these key components are available from the applicable component manufacturers, with the objective of maintaining at all times at least three
months' supply of these key components available for delivery to our contract manufacturers. When our contract manufacturers require certain key components for use in the manufacture of our products,
we direct them to issue purchase orders to the applicable electronics distributor and, if the applicable electronics distributor has the requested quantities of these key components on hand, it will
accept the purchase order issued by our contract manufacturers and supply the quantities of the key components covered by the purchase order. Despite these arrangements, we cannot be certain or
provide any assurance that the applicable component manufacturers will accept all of the purchase orders, or any of them, issued by these electronics distributors and agree to supply any of the
quantities of these components requested by these electronics distributors. Accordingly, we cannot be certain or provide any assurance that these electronics distributors will have at all times at
least three months' inventory of these key components or any quantities of the key components in inventory or that our contract manufacturers will be able to source their requirements of these key
components from other sources in the event that the electronics distributors cannot meet our contract manufacturers' requirements.

If
our supply of any key component is disrupted, we may be unable to deliver our products to our customers on a timely basis, which could result in lost or delayed revenue, injury to our
reputation, increased manufacturing costs and exposure to claims by our customers. Even if alternate suppliers are available, we may have difficulty identifying them in a timely manner, we may incur
significant additional expense in changing suppliers, and we may experience difficulties or delays in the manufacturing of our products.

Competition

The market for SBCs is competitive and continually evolving. While we believe we are currently the market leader, we expect competition
to persist and intensify in the future as the SBC market grows and gains greater attention. We believe the following factors are the principal methods of competition in the SBC
market:



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Our
primary competitors now include Cisco Systems, Genband, Ericsson and Sonus Networks. We believe we compete successfully with all of these companies based upon our experience in
interactive communications networks, the breadth of our applications and standards support, the depth of our border control features, the demonstrated ability of our products to interoperate with key
communications infrastructure elements, and our comprehensive service and support. We also believe our products are priced competitively with other market offerings. As the SBC market opportunity
grows, we expect competition from additional networking and IP communications equipment suppliers, including some of our distribution partners.

Our
current and potential competitors may have significantly greater financial, technical, marketing and other resources than we do and may be able to devote greater resources to the
development, promotion, sale and support of their products. Our competitors may have more extensive customer bases and broader customer relationships than we do, including relationships with our
potential customers. In addition, these companies may have longer operating histories and greater name recognition than we do. Our competitors may be in a stronger position to respond quickly to new
technologies and may be able to market and sell their products more effectively. Moreover, if one or more of our competitors were to merge or partner with another of our competitors, the change in the
competitive landscape could adversely affect our ability to compete effectively.

Intellectual Property

Our success as a company depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely
on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary contractual protections.

As
of December 31, 2008, we have been issued eleven U.S. patents, twenty U.S. utility patent applications are pending, as well as counterparts pending in other jurisdictions
around the world. Our three registered trademarks in the United States are "Acme Packet," "Net-Net" and "Acme Packet Session Aware Networking."

In
addition to the protections described above, we generally control access to and use of our proprietary software and other confidential information through the use of internal and
external controls, including contractual protections with employees, contractors, customers and partners, and our software is protected by U.S. and international copyright laws. We also incorporate a
number of third party software programs into our Net-Net appliances pursuant to license agreements.

We
may not receive competitive advantages from the rights granted under our patents and other intellectual property rights. Our competitors may develop technologies that are similar or
superior to our proprietary technologies, duplicate our proprietary technologies or design around the patents owned or licensed by us. Our existing and future patents may be circumvented, blocked,
licensed to others or challenged as to inventorship, ownership, scope, validity or enforceability. It is possible that literature we may be advised of by third parties in the future could negatively
affect the scope or enforceability of either our present or future patents. Furthermore, our pending and future patent applications may not issue with the scope of claims sought by us, if at all, or
the scope of claims we are seeking may not be sufficiently broad to protect our proprietary technologies. Moreover, we have adopted a strategy of seeking limited patent protection with respect to the
technologies used in or relating to our products. If our products, patents or patent applications are found to conflict with any patents held by third parties, we could be prevented from selling our
products, our patents may be declared invalid or our patent applications may not result in issued patents. In foreign countries, we may not receive effective patent, copyright and trademark
protection. We may be required to initiate litigation in order to enforce any patents issued to us, or to determine the scope or validity of a third party's patent or other proprietary rights. In
addition, in the future we may be subject to lawsuits by third parties seeking to enforce their own intellectual property rights, as described in "Risk FactorsClaims by other parties that
we infringe their proprietary technology could force us to redesign our products or to incur significant costs."

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We license our software pursuant to agreements that impose restrictions on customers' ability to use the software, such as prohibiting reverse engineering and
limiting the use of copies. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute nondisclosure and
assignment of intellectual property agreements and by restricting access to our source code. Other parties may not comply with the terms of their agreements with us, and we may not be able to enforce
our rights adequately against these parties.

Employees

As of December 31, 2008, we had 381 employees and full-time independent contractors, consisting of 95 employees and
full-time independent contractors engaged in sales and marketing, 124 employees engaged in engineering, 107 employees and full-time independent contractors engaged in
professional support services, 28 employees engaged in manufacturing, and 27 employees engaged in finance, administration and operations. A total of 88 of those employees and full-time
independent contractors were located outside of the United States. None of our employees are represented by labor unions or covered by a collective bargaining agreement. We have not experienced any
work stoppages, and we consider our current employee relations to be good.

Item 1A.    Risk Factors

Set forth below and elsewhere in this Annual Report on Form 10-K and in other documents we
file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report on
Form 10-K. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator
of future performance and investors should not use historical trends to anticipate results or trends in future periods.

Risks Relating to Our Business

The worldwide economic downturn, including recent developments in the financial markets in the United States and elsewhere in the world may adversely affect our operating
results and financial condition.

As widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in recent months,
including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of
others. Governments have taken unprecedented actions intended to address extreme market conditions, such as the severe restrictions on credit and declines in real estate values. While currently these
conditions have not impaired our ability to access credit markets and finance operations, there can be no assurance that there will not be a further deterioration in financial markets and confidence
in major economies. These economic developments affect businesses in a number of ways. The current tightening of credit in financial markets adversely affects the ability of our customers and
suppliers to obtain financing for significant purchases and operations, and could result in a decrease in demand for our products and services. Our customers' ability to pay for our solutions may also
be impaired, which may lead to an increase in our allowance for doubtful accounts and write-offs of accounts receivable. For example, during 2008 we had a significant increase in our
allowance for doubtful accounts primarily related to the bankruptcy proceedings of one of our distribution partners. Our global business is also adversely affected by decreases in the general level of
economic activity, such as decreases in business and consumer spending. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic
conditions in the United States and other countries. Should
these economic conditions result in our not meeting our revenue growth objectives, it may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

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Additionally,
the United States recently elected a new President and other government legislators. The economic and taxing policies of the new government may have an adverse impact on
our future financial results. Until the new legislative agenda is finalized and enacted, it is not possible to determine the impact of such changes, if any.

Because we derive a significant portion of our revenue from interactive communications service providers, our operating results will suffer if the interactive communications
industry experiences an economic downturn.

We derive a significant portion of our revenue from the communications industry. Our future success depends upon the continued demand
for communications equipment by service providers, enterprises and contact centers. The communications industry is cyclical and reactive to general economic conditions. Economic conditions worldwide
have from time to time contributed to slowdowns in the communications industries and networking industries at large. In the past, worldwide economic downturns, pricing pressures and deregulation have
led to consolidations and reorganizations. These downturns, pricing pressures and restructurings caused delays and reductions in capital and operating expenditures by our customers. These delays and
reductions, in turn, have reduced demand for communications products like ours. A reoccurrence of these industry patterns, as well as general domestic and foreign economic conditions and other factors
that reduce spending by companies in the communications industry, may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

We rely on many distribution partners to assist in selling our products, and if we do not develop and manage these relationships effectively, our ability to generate revenue
and control expenses will be adversely affected.

As of December 31, 2008, we had approximately 55 distribution partners. Our success is highly dependent upon our ability to
continue to establish and maintain successful relationships with these distribution partners from whom, collectively, we derive a significant portion of our revenue, and who may comprise a
concentrated amount of our accounts receivable at any point in time. Revenue derived through distribution partners accounted for 61% and 59% of our total revenue in 2007 and 2008, respectively, while
two and three distribution partners represented 54% and 32% of our accounts receivable as of December 31, 2007 and 2008, respectively. Given the current global economic conditions, there is a
risk that one or more of our distribution partners could cease operations. For example, one of our distribution partners entered into bankruptcy proceedings in January 2009, which caused us to
increase our allowance for doubtful accounts as of December 31, 2008. Although we have entered into contracts with each of our distribution partners, our contractual arrangements are not
exclusive and do not obligate our distribution partners to order, purchase or distribute any fixed or minimum quantities of our products. Accordingly, our distribution partners, at their sole
discretion, may choose to purchase SBCs from our competitors rather than from us. Under our contracts with our distribution partners, they generally order products from us by submitting purchase
orders that describe, among other things, the type and quantities of our products desired, delivery date and terms applicable to the ordered products. Accordingly, our ability to sell our products and
generate significant revenue through our distribution partners is highly dependent on the continued desire and willingness of our distribution partners to purchase and distribute our products and on
the continued cooperation between us and our distribution partners. Some of our distribution partners may develop competitive products in the future or may already have other product offerings that
they may choose to offer and support in lieu of our products. Divergence in strategy, change in focus, competitive product offerings, potential contract defaults, and changes in ownership or
management of a distribution partner may interfere with our ability to market, license, implement or support our products with that party, which in turn may have a material adverse effect on our
consolidated financial position, results of operations, or cash flows. Some of our competitors may have stronger relationships with our distribution partners than we do, and we have limited control,
if any, as to whether those partners implement our products

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rather
than our competitors' products or whether they devote resources to market and support our competitors' products rather than our offerings.

Moreover,
if we are unable to leverage our sales and support and services resources through our distribution partner relationships, we may need to hire and train additional qualified
sales and support and services personnel. We cannot be assured, however, that we will be able to hire additional qualified sales and support and services personnel in these circumstances, and our
failure to do so may restrict our ability to generate revenue or implement our products on a timely basis. Even if we are successful in hiring additional qualified sales and support and services
personnel, we will incur additional costs and our operating results, including our gross margin, which may have a material adverse effect on our consolidated financial position, results of operations,
or cash flows.

We depend on a limited number of customers for a substantial portion of our revenue in any period, and the loss of, or a significant shortfall in orders from, key customers
could significantly reduce our revenue.

We derive a substantial portion of our total revenue in any period from a limited number of customers as a result of the nature of our
target market and the relatively early stage of our development. During any given period, a small number of customers may each account for 10% or more of our revenue. For example, four such customers
accounted for 56% of our total revenue in 2007 and three such customers accounted for 42% of our total revenue in 2008. Additionally, we do not enter into long-term purchase contracts with
our customers, and we have no contractual arrangements to ensure future sales of our products to our existing customers. Our inability to generate anticipated revenue from our key existing or targeted
customers, or a significant shortfall in sales to them could have a material adverse effect on our consolidated financial position, results of operations, or cash flows. Our operating results in the
foreseeable future will continue to depend on our ability to effect sales to existing and other large customers.

The unpredictability of our quarterly results may adversely affect the trading price of our common stock.

If our quarterly revenue, earnings or other operating results fall below the expectations of securities analysts or investors, the
price of our common stock could decrease substantially. Our operating results can vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control.
Generally, purchases of communications equipment by services providers, enterprises and contact centers have been unpredictable and clustered, rather than predictable and steady, they frequently build
out and update their communications networks in stages. In addition, the following factors, among others, can contribute to the unpredictability of our quarterly operating
results:



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As
with other communications equipment suppliers, we may recognize a substantial portion of our revenue in a given quarter from sales booked and shipped in the last month of that
quarter. As a result, a delay in customer orders is likely to result in a delay in shipments and recognition of revenue beyond the end of a given quarter. Since a relatively small number of customers
may account for a substantial portion of our revenue in any quarter, any such delay in an order from a customer may have a material adverse effect on our consolidated financial position, results of
operations, or cash flows.

Our
operating expenses are largely based on our anticipated organizational and revenue growth. Most of our expenses, such as employee compensation, are relatively fixed in the short
term. As a result, any shortfall in revenue in relation to our expectations, whether for the reasons set forth above, the reasons identified below or any other reason, could cause significant changes
in our operating results from quarter to quarter and could result in lower quarterly earnings.

We
believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is likely that in some future
quarters our operating results will be below the expectations of securities analysts and investors. In this event, the price of our common stock may decrease substantially.

Our dependence on outside contractors for critical manufacturing services could result in product delivery delays and damage our customer relations.

We outsource the manufacturing of our Net-Net products. We subcontract all of the manufacturing of our Net-Net
4000 series of products to Jabil Circuit, Inc. and Benchmark Electronics. We subcontract all of the manufacturing of our Net-Net 9000 series of products to Jabil
Circuit, Inc. and TTM Technologies, Inc. With the exception of Benchmark Electronics, we do not have any written agreement with any of these manufacturers. We submit purchase orders to
these manufacturers that describe, among other things, the type and quantities of our products or components to be manufactured by the applicable manufacturer and the delivery date and other terms
applicable to the products or components. Our manufacturers do not have any written contractual obligation to accept any purchase order that we submit for the manufacture of any of our products or
components. If one of our manufacturers accepts in writing a purchase order submitted by us, the manufacturer is legally obligated to manufacture the product or component covered by such purchase
order and we are obligated to purchase and take delivery of such product or component. Our reliance on outside manufacturers involves a number of potential risks, including the absence of adequate
capacity, the unavailability of, or interruptions in access to, necessary manufacturing processes, and reduced control over delivery schedules. As a result of the recent global financial market
conditions, it is possible that any of our outside contractors could experience interruptions in production, cease operations or alter our current arrangements. If this were to occur, it could
adversely affect our business. In addition, we cannot be certain or provide any assurance that our manufacturers will accept any or all of our purchase orders and agree to manufacture and supply any
or all of our manufacturing requirements for our products or any components. If our manufacturers are unable or unwilling to continue manufacturing our products and
components in required volumes, we will have to identify one or more acceptable alternative manufacturers. The use of new manufacturers may cause significant interruptions in supply if the new
manufacturers have difficulty manufacturing products to our specifications and may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

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Certain component parts used in the manufacture of our products are sourced from single or limited sources. If our contract manufacturers are unable to obtain these
components on a timely basis, we will not be able to meet our customers' product delivery requirements, which could harm our reputation and adversely affect our operating results.

Certain key components used in the manufacture of our products are sourced from single or, in some cases, limited sources. For example,
the third parties that we hire to manufacture our products, or contract manufacturers, purchase through electronics distributors various types of network processors, traffic managers, microprocessors
and network search engines. Specifically, Applied Micro Circuits Corporation, Broadcom Corporation, Freescale Semiconductor, Inc., Integrated Device Technology, Inc., Marvell
Semiconductor, Inc., Mindspeed Technologies, Inc. and Netlogic Microsystems, Inc., are presently the sole sources for particular components. We do not have a written agreement
with any of these component manufacturers to guarantee the supply of key components used in our products, and we do not require any of our contract manufacturers to have a written agreement with any
of these component manufacturers. We have entered into arrangements under which electronics distributors have agreed to establish and maintain at least three months' inventory of certain key
components, and, at the request of our contract manufacturers, to supply all or a portion of the key components held pursuant to this arrangement to our contract manufacturers for use in the
manufacture of our products. Our contractual arrangements with the electronics distributors do not provide for these electronics distributors to enter into any contract with any component manufacturer
to guarantee the supply of these key components. Our contract manufacturers provide forecasts to the electronics distributors of their requirements of the key components. These electronics
distributors use the forecasts to source these key components from time to time, to the extent that the key components are available from the applicable component manufacturers, with the objective of
maintaining at all times at least three months' supply of the key components available for delivery to our contract manufacturers. When our contract manufacturers require certain key components for
use in the manufacture of our products, we direct them to issue purchase orders to the applicable electronics distributor and, if the applicable electronics distributor has the requested quantities of
these key components available, it will accept the purchase order issued by our contract manufacturers and supply the quantities of the key components covered by the purchase order. Despite these
arrangements, we cannot be certain or provide any assurance that the component manufacturers will accept any or all of the purchase orders, issued by the electronics distributors and agree to supply
any or all of the quantities requested. Accordingly, we cannot be certain or provide any assurance that these electronics distributors will have at all times at least three months' supply of these key
components or any quantities of the key components in inventory or that our contract manufacturers will be able to source their requirements of the key components from other sources in the event that
the electronics distributors cannot meet our contract manufacturers' requirements. Additionally, if our contract manufacturers underestimate our component requirements, they may not have an adequate
supply, which could interrupt manufacturing of our products and result in delays in shipments. If any of our sole or limited source suppliers experience capacity constraints, work stoppages or other
reductions or disruptions in output, they may not be able to meet, or may choose not to meet, our delivery schedules. In light of the recent downturn in the global economic conditions, there is also
the risk that these electronics distributers could experience interruptions in production, case operations, or alter our current arrangements. Also our suppliers may:



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If
our supply of any key components is disrupted, we may be unable to deliver our products to our customers on a timely basis, which could result in lost or delayed revenue, injury to
our reputation, increased manufacturing costs and exposure to claims by our customers. Even if alternate suppliers are available, we may have difficulty identifying them in a timely manner, we may
incur significant
additional expense in changing suppliers, and we may experience difficulties or delays in the manufacturing of our products. For example, we have customized some of our hardware products to
accommodate the design of some key components, and the loss of the sole supplier of a key customized component could require that we redesign related components to accommodate replacement components.
Any failure to meet our customers' delivery requirements could harm our reputation and may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

If the market for our products does not continue to develop as we anticipate, our revenue may decline or fail to grow, which would adversely affect our operating results.

Despite introducing two additional categories of products in 2008, the MSG and the SRP, we derive, and expect to continue to derive, a
significant amount of our revenue from providing SBCs. The market for SBCs is relatively new and still evolving, and it is uncertain whether these products will achieve and sustain high levels of
demand and market acceptance. Our success will depend to a substantial extent on the willingness of interactive communications service providers to continue to implement SBCs.

Some
service providers or enterprises may be reluctant or unwilling to implement SBCs for a number of reasons, including failure to perceive the need for improved quality and security of
interactive communications across IP borders and lack of knowledge about the potential benefits that SBCs may provide. Even if service providers or enterprises recognize the need for improved quality
and security of interactive communications across IP borders, they may not select SBCs such as ours because they choose to wait for the introduction of products and technologies that serve as a
replacement or substitute for, or represent an improvement over, our SBCs.

If
service providers or enterprises do not perceive the benefits of SBCs, the SBC market may not continue to develop or may develop more slowly than we expect, either of which would
adversely affect our revenue. Because the market for SBCs is developing and the manner of its development is difficult to predict, we may make errors in predicting and reacting to relevant business
trends, which may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that could result in decreased revenues and increased cost
of sales.

Many of our customers are large interactive communications service providers that have substantial purchasing power and leverage in
negotiating contractual arrangements with us. These customers may require us to develop additional features and require penalties for
performance obligations, such as delivery, outages and response time. As we seek to sell more products to large service providers, we may be required to agree to additional performance-based terms and
conditions, which may affect the timing of revenue recognition and may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

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If functionality similar to that offered by our SBCs is added to existing network infrastructure elements, organizations may decide against adding our SBCs to their network
which would cause the market for standalone SBC systems to decrease resulting in fewer customers for and decreased sales of standalone SBC systems.

Other providers of network infrastructure elements are offering or proposing to offer functionality aimed at addressing the problems
addressed by our products. The inclusion of, or the announcement of an intent to include, functionality perceived to be similar to that offered by our products in infrastructure elements that are
already generally accepted as necessary components of network architecture may cause the market not to grow as predicted, which would have an adverse effect on our ability to market and sell certain
of our products. Furthermore, even if the functionality offered by other network infrastructure elements is more limited than our products, a significant number of customers may elect to accept such
limited functionality in lieu of adding additional equipment from an additional vendor, which could also have a material adverse effect on the market for standalone SBC systems. Many organizations
have invested substantial personnel and financial resources to design and operate their networks and have established deep relationships with other providers of network infrastructure elements, which
may make them reluctant to add new components to their networks, particularly from new vendors. In addition, an organization's existing vendors or new vendors with a broad product offering may be able
to offer concessions that we are not able to match because we currently offer only a single line of products and may have fewer financial resources than some of our competitors. If organizations are
reluctant to add additional network infrastructure from new vendors or otherwise decide to work with their existing vendors, the revenue derived from our products may prove smaller than predicted
which may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

If the migration to IP network architecture for real-time interactive communications does not continue, the SBC market may not expand as predicted, and our
ability to obtain new customers may decrease.

We derive our revenue by providing SBCs to interactive communications service providers seeking to deliver premium interactive
communications over IP networks. Our success depends on the continued migration of service providers' networks to a single IP network architecture. The migration of voice traffic from the PSTN to IP
networks is in its early stages, and the continued migration to IP networks depends on a number of factors outside of our control. Among other things, existing networks include switches and other
equipment that may have estimated useful lives of twenty years or more and therefore may continue to operate reliably for a lengthy period of time. Other factors that may delay the migration to IP
networks include service providers' concerns regarding initial capital outlay requirements, available capacity on legacy networks, competitive and regulatory issues, and the implementation of an
enhanced services business model. As a result, service providers may defer investing in products such as ours that are designed to migrate interactive communications to IP networks. If the migration
to IP networks does not occur for these or other reasons, or if it occurs more slowly than we expect, the SBC market may not expand as predicted, if at all, and we will not be able to gain new
customers. In addition, even if there is a successful migration to an IP network for interactive communications, new unforeseen technologies may render the SBC unnecessary. As a result, our revenues
would decrease which may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

If we do not timely deliver new and enhanced products that respond to customer requirements and technological changes, interactive communications service providers may not
buy our products and our revenue may decline.

To achieve market acceptance for our products, we must effectively anticipate, and adapt in a timely manner to, customer requirements
and must offer products that meet changing customer

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demands.
Prospective customers may require product features and capabilities that our current products do not have. For example, our most recent product introduction, the Net-Net 4500
series, may not adequately respond to new customer demands, and, therefore, demand for our products may decrease or may fail to increase to the extent contemplated by our business plan. If we fail to
develop products that satisfy customer requirements, our ability to create or increase demand for our products will be adversely affected, and we may lose current and prospective customers which could
have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

The
market for SBCs is characterized by rapid technological change, frequent new product introductions and evolving industry requirements. We may be unable to respond quickly or
effectively to these developments. We may experience difficulties with software development, hardware design, manufacturing or marketing that could delay or prevent our development, introduction or
implementation of new products and enhancements. The introduction of new products by competitors, the emergence of new industry standards, or the development of entirely new technologies to replace
existing product offerings could render our existing or future products obsolete. If our products become technologically obsolete, customers may purchase solutions from our competitors and we may be
unable to sell our products in the marketplace and generate revenue which may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

The long and variable sales and deployment cycles for our products may cause our operating results to vary materially, which could result in a significant unexpected revenue
shortfall in any given quarter.

Our products have lengthy sales cycles, which typically extend from six to twelve months and may take up to two years. A customer's
decision to purchase our products often involves a significant commitment of its resources and a product evaluation and qualification process that can vary significantly in length. The length of our
sales cycles also varies depending on the type of customer to which we are selling, the product being sold and the type of network in which our product will be utilized. We may incur substantial sales
and marketing expenses and expend significant management effort during this time, regardless of whether the customer decides to make a purchase.

Even
after making the decision to purchase our products, our customers may deploy our products slowly. Timing of deployment can vary widely among customers. The length of a customer's
deployment period may directly affect the timing of any subsequent purchase of additional products by that customer.

As
a result of the lengthy and uncertain sales and deployment cycles for our products, it is difficult for us to predict the timing in which our customers may purchase additional
products or features from us, and our operating results may vary significantly from quarter to quarter, which may have a material adverse effect on our consolidated financial position, results of
operations, or cash flows.

If our products do not interoperate with our customers' existing networks, the demand for our products will decrease.

Our products must interface with our customers' existing networks, each of which may have different specifications. An unanticipated
lack of interoperability may result in significant support and repair costs and harm our relations with customers. If our products do not interoperate with those of our customers' networks,
installations could be delayed or orders for our products could be cancelled, which would result in loss of customers which could have a material adverse effect on our consolidated financial position,
results of operations, or cash flows.

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Our international operations expose us to additional business risks and failure to manage these risks may adversely affect our international revenue.

In 2008, 49% of our revenue was attributable to our international customers and we plan to expand our international operations in the
future. The success of our business may depend, in part, on our ability to expand into international markets. Any expansion into international markets will require significant resources and management
attention and will subject us to new regulatory, economic and political risks. We have employees in Argentina, Australia, Belgium, Brazil, Canada, China, Croatia, France, Germany, Hong Kong, India,
Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, New Zealand, Peru, Russia, South Africa, Spain, Taiwan, Thailand and the United Kingdom. Given our limited experience in international markets,
we cannot be sure that any further international expansion will be successful. In addition, we will face new risks in doing business internationally. These risks could reduce demand for our products,
lower the prices at which we can sell our products or otherwise may have a material adverse effect on our consolidated financial position, results of operations, or cash flows. Among the risks we
believe are most likely to affect us are:



The market for SBCs is competitive and continually evolving, and if we are not able to compete effectively, we may not be able to continue to expand our business as expected
and our business may suffer.

Although relatively new, the market for SBCs is competitive and continually evolving. We expect competition to persist and intensify in
the future as the SBC market grows and new and existing competitors devote considerable resources to introducing and enhancing products. Our primary competitors include Cisco Systems and Genband,
through its acquisition of NextPoint Networks. In addition, we compete with some of the companies with which we have distribution partnerships, such as Sonus Networks and Ericsson. We compete on the
basis of customer traction and experience in interactive communications service provider networks, breadth of applications and standards support, depth of border control features, demonstrated ability
of products to interoperate with key communications infrastructure elements, comprehensive service support, and price.

Networking
and telecommunications equipment suppliers without competitive solutions today may introduce solutions in the future, either through internal development or acquisition. For
example, in 2007 Cisco Systems introduced its Unified Border Element. These additional competitors may include some of our distribution partners. Any new entrant would be likely to devote significant
sales and marketing resources to establish its position in the SBC market and may be willing to price its products at a discount or bundle its products with other equipment or services in an attempt
to rapidly gain market share. New product introductions or new market entrants could cause service providers to delay purchase decisions or reopen bidding processes. If new product enhancements and
introductions are superior to ours, and we are unable to make comparable enhancements to our products, our

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competitive
advantage would be compromised which may have a material adverse effect on our consolidated financial position, results of operations, or cash flows

We
may not be able to compete effectively against current and potential competitors, especially those with significantly greater resources and market leverage. Our competitors may have
more extensive customer bases and broader customer relationships than we do, including relationships with our potential customers. In addition, these companies may have longer operating histories and
greater name recognition than we do. These competitors may be in a position to respond more quickly than we do to new or emerging technologies or changes in customer requirements or may foresee the
course of market developments more accurately than we do. As a result, we may experience price reductions for our products, order cancellations and increased expenses which may have a material adverse
effect on our consolidated financial position, results of operations, or cash flows.

Our revenue growth may be constrained by our product concentration and lack of revenue diversification.

We have derived all of our revenue to date from sales of our SBCs, and we expect that our SBCs will account for substantially all of
our revenue for the foreseeable future. Continued market acceptance of these products is critical to our future success. As a result, our consolidated financial position, results of operations, or
cash flows may be materially adversely affected by:



We have incurred operating losses in the past and may not be able to sustain profitability in the future.

While we have generated net income of $28.9 million in 2006, $19.6 million in 2007 and $11.6 million in 2008, we
have incurred significant losses in several fiscal years following our inception, which included net losses of $7.5 million in 2003, $7.0 million in 2004 and $35,000 in 2005. We expect
to continue to incur significant sales and marketing, product development, administrative, and other expenses. We have only a limited operating history on which you can base your evaluation of our
business, including our ability to increase our revenue. We commenced operations in August 2000 and began recognizing revenue in 2003. We will need to generate significant revenue to maintain
profitability, and we cannot be sure that we will remain profitable for any period of time. If we are unable to remain profitable, the market price of our common stock may decrease and may have a
material adverse effect on our consolidated financial position, results of operations, or cash flows.

Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results.

Our future effective tax rates could be subject to volatility or adversely affected by earnings being lower than anticipated in
countries where we have lower statutory rates and higher than anticipated earnings in countries where we have higher statutory rates; by changes in the valuation of our deferred tax assets and
liabilities; by expiration of, or lapses in, the R&D tax credit laws; by transfer pricing adjustments related to certain acquisitions including the license of acquired intangibles under our
intercompany R&D cost sharing arrangement; by tax effects of stock-based compensation; by costs related to intercompany restructurings; or by changes in tax laws, regulations, accounting principles,
or interpretations thereof. In addition, we are subject to the continuous examination of our income tax

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returns
by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision
for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have a material adverse effect on our consolidated financial position, operating results, or
cash flows.

Future interpretations of existing accounting standards could adversely affect our operating results.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards
Board, or FASB, the American Institute of Certified Public Accountants, or AICPA, the Securities and Exchange Commission, or SEC, and various other bodies formed to promulgate and interpret
appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions
completed before the announcement of a change.

For
example, we recognize our product software license revenue in accordance with AICPA Statement of Position, or SOP, 97-2,Software Revenue
Recognition, and related amendments and interpretations contained in SOP 98-9,Software Revenue Recognition with Respect to Certain
Transactions. The AICPA and its Software Revenue Recognition Task Force continue to issue interpretations and guidance for applying the relevant accounting standards to a wide
range of sales contract terms and business arrangements that are prevalent in software licensing arrangements. Future interpretations of existing accounting standards, including
SOP 97-2 and SOP 98-9, or changes in our business practices could result in future changes in our revenue recognition accounting policies that may have a material
adverse effect on our results of operations. We may be required to delay revenue recognition into future periods, which could adversely affect our operating results. In the future we may have to defer
recognition for license fees due to several factors, including whether a transaction involves:



Because
of these factors and other specific requirements under accounting principles generally accepted in the United States for software revenue recognition, we must have very precise
terms in our software arrangements in order to recognize revenue when we initially deliver software or perform services.
Negotiation of mutually acceptable terms and conditions can extend our sales cycle, and we sometimes accept terms and conditions that do not permit revenue recognition at the time of delivery.

Additionally,
in December 2004, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 123(R),Share Based
Payment. SFAS No. 123(R) requires measurement of all employee stock-based compensation awards using a fair-value method and the recording of such expense in
the consolidated financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting related to the income tax effects and disclosure regarding the cash flow
effects resulting from share-based payment arrangements. We have selected the Black-Scholes option-pricing model for valuing our awards and are recognizing compensation costs on a
straight-line basis over our awards' vesting periods. We adopted SFAS No. 123(R) on January 1, 2006, and recognized stock-based compensation expense of $7.4 million,
$6.1 million and $867,000 in 2008, 2007 and 2006, respectively. As of December 31, 2008, there was $17.4 million of unrecognized stock-based compensation expense related to
unvested stock option awards that is expected to be recognized in future periods.

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The loss of key personnel or an inability to attract and retain additional personnel may impair our ability to expand our business.

We are highly dependent upon the continued service and performance of our senior management team and key technical, marketing and
production personnel, including our founders, Andrew D. Ory, who is also our President and Chief Executive Officer, and Patrick MeLampy, who is also our Chief Technology Officer. Neither of these
officers is a party to an employment agreement with us, and either of them therefore may terminate employment with us at any time with no advance notice. The replacement of either of these two
officers likely would involve significant time and costs, and the loss of either of these officers may significantly delay or prevent the achievement of our business objectives. In addition, we
recently appointed Peter J. Minihane as Chief Financial Officer, effective September 18, 2008, which may have an impact on our ability to execute our business strategy.

We
face intense competition for qualified individuals from numerous technology, marketing, financial services, manufacturing and e-commerce companies. For example, our
competitors may be able attract and retain a more qualified engineering team by offering more competitive compensation packages. If we are unable to attract new engineers and retain our current
engineers, we may not be able to develop and service our products at the same levels as our competitors and we may, therefore, lose potential customers and sales penetration in certain markets. Our
failure to attract and
retain suitably qualified individuals could have an adverse effect on our ability to implement our business plan and as a result, our ability to compete effectively in the SBC market would decrease,
which may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

If we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed and our reputation may be damaged.

We significantly expanded our operations during 2006, 2007 and 2008. For example, during the period from December 31, 2006
through December 31, 2008, we increased the number of our employees and full-time independent contractors by 51%, from 252 to 381, and we opened sales offices in Spain, Korea and
the United Kingdom. In addition, our total operating expenses increased by 59% in 2006, 53% in 2007 and 18% in 2008. We anticipate that further expansion of our infrastructure and headcount will be
required to achieve planned expansion of our product offerings, projected increases in our customer base and anticipated growth in the number of product deployments. Our rapid growth has placed, and
will continue to place, a significant strain on our administrative and operational infrastructure. Our ability to manage our operations and growth, especially during the present macroeconomic crisis,
will require us to continue to refine our operational, financial and management controls, human resource policies, and reporting systems and procedures.

We
may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and
controls. If we are unable to manage future expansion, our ability to provide high quality products and services could be harmed, which would damage our reputation and brand and may have a material
adverse effect on our consolidated financial position, results of operations, or cash flows.

Our ability to compete and the success of our business could be jeopardized if we are unable to protect our intellectual property adequately.

Our success depends to a degree upon the protection of our software, hardware designs and other proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret laws, and confidentiality provisions in agreements with employees, distribution partners, consultants and customers to protect our
intellectual property rights. Other parties may not comply with the terms of their agreements with us, and we may not be able to enforce our rights adequately against these parties. In addition,
unauthorized parties may attempt to copy or otherwise obtain and use our

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products
or technology. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in
international countries where the laws may not protect our proprietary rights as fully as in the United States. If competitors are able to use our technology, our ability to compete effectively could
be harmed. For example, if a competitor were to gain use of certain of our proprietary technology, it might be able to manufacture similarly designed and equipped SBCs at a reduced cost, which would
result in a decrease in demand for our products. Furthermore, we have adopted a strategy of seeking limited patent protection both in the United States and in international countries with respect to
the technologies used in or relating to our products. Others may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, we may
need to license these technologies and we may not be able to obtain licenses on reasonable terms, if at all, thereby causing great harm to our business. In addition, if we resort to legal proceedings
to enforce our intellectual property rights, the proceedings could become burdensome and expensive, even if we were to prevail and may have a material adverse effect on our consolidated financial
position, results of operations, or cash flows.

Claims by other parties that we infringe upon their proprietary technology could force us to redesign our products or to incur significant costs.

We may become involved in litigation as a result of allegations that we infringe upon intellectual property rights of others. Any
parties asserting that our products infringe upon their proprietary rights would force us to defend ourselves, and possibly our customers, distribution partners or contract manufacturers, against the
alleged infringement. These claims and any resulting lawsuits, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. Any potential
intellectual property litigation also could force us to do one or more of the following:



Any
lawsuits regarding intellectual property rights, regardless of their success, could be time-consuming, expensive to resolve, would divert our management's time and
attention and may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Compliance with regulations and standards applicable to our products may be time consuming, difficult and costly, and if we fail to comply, our product sales will decrease.

In order to achieve and maintain market acceptance, our products must continue to meet a significant number of regulations and
standards. In the United States, our products must comply with various regulations defined by the Federal Communications Commission, Underwriters Laboratories and others.

As
these regulations and standards evolve, and if new regulations or standards are implemented, we will be required to modify our products or develop and support new versions of our
products, and this will increase our costs. The failure of our products to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or
delay introduction of our products, which could harm our business. User uncertainty regarding future policies may also affect demand for communications products, including our products. Moreover,
distribution partners or

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customers
may require us, or we may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alter our
products to address these requirements and any regulatory changes may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Regulations affecting IP networks could reduce demand for our products.

Laws and regulations governing the Internet and electronic commerce are emerging but remain largely unsettled, even in the areas where
there has been some legislative action. Regulations may focus on, among other things, assessing access or settlement charges, or imposing tariffs or regulations based on the characteristics and
quality of products, either of which could restrict our business or increase our cost of doing business. Government regulatory policies are likely to continue to have a major impact on the pricing of
existing and new network services and, therefore, are expected to affect demand for those services and the communications products, including our products, supporting those services.

Any
changes to existing laws or the adoption of new regulations by federal or state regulatory authorities or any legal challenges to existing laws or regulations affecting IP networks
could materially adversely affect the market for our products. In addition, the convergence of the PSTN and IP networks could become subject to governmental regulation, including the imposition of
access fees or other tariffs, that adversely affects the market for services and equipment, including our products, for interactive communications across IP networks. User uncertainty regarding future
policies may also affect demand for communications products, including our products. Moreover, distribution partners or customers may require us, or we may otherwise deem it necessary or advisable, to
alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alter our products or address any regulatory changes may have a material adverse effect on
our consolidated financial position, results of operations, or cash flows.

We are subject to environmental and occupational health and safety regulations that may increase our costs of operations or limit our activities.

We are subject to environmental and occupational health and safety regulations relating to matters such as reductions in the use of
harmful substances, comprehensive risk management in manufacturing activities and final products, the use of lead-free soldering, and the recycling of products and packaging materials. The
European Parliament and the Counsel of the European Union have published directives on waste electrical and electronic equipment and on the restriction of the use of certain hazardous substances in
electrical and electronic equipment. These directives generally require electronics producers to bear the cost of collection, treatment, recovery and safe disposal of past and future products from
end-users and to ensure that new electrical and electronic equipment does not contain specified hazardous substances. While the cost of these directives to us cannot be determined before
regulations are adopted in individual member states of the European Union, it may be substantial and may divert resources, which could detract from our ability to develop new products. We may not be
able to comply in all cases with applicable environmental and other regulations, and if we do not, we may incur remediation costs or we may not be able to offer our products for sale in certain
countries, which may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Because our products are sophisticated and designed to be deployed in complex environments, they may have errors or defects that we find only after deployment, which could
result in a loss of customers and adversely affect our reputation, future sales and operating results.

Products as complex as ours may contain undetected errors that result in product failures. Our products can be fully tested only when
deployed in large networks with high volumes of traffic. Our

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customers
may discover errors or defects in the software or hardware, or the products may not operate as expected. If we are unable to fix errors or other performance problems identified after
deployment of our products, we could experience:



Any
of these results may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Product liability claims related to our customers' networks could result in substantial costs.

Our products are critical to the business operations of our customers. If one of our products fails, interactive communications service
provider may assert a claim for substantial damages against us, regardless of our responsibility for the failure. Our product liability insurance may not cover claims brought against us. Product
liability claims could require us to spend significant time and money in litigation or to pay significant damages. Any product liability claims, whether or not successful, could seriously damage our
reputation and our business. In addition, if an actual or perceived breach of network security occurs in the network of one of our customers, regardless of whether the breach is attributable to our
products, the market perception of the effectiveness of our products could be harmed and may have a material adverse effect on our consolidated financial position, results of operations, or cash
flows.

We may undertake acquisitions to further expand our business, which may pose risks to our business and dilute the ownership of our existing stockholders.

Our business and our customer base have been built through organic growth. While we do not have any present plans to acquire
businesses, technologies or services, we may enter into such arrangements in the future in order to expand our capabilities, enter new markets, or increase our market share. We do not have any
experience in completing an acquisition. Integrating any newly acquired businesses, technologies or services is likely to be expensive and time consuming. To finance any acquisition, it may require us
to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us and, in the case of equity financings, may result in dilution to
our stockholders. If we do complete any acquisitions, we may be unable to operate the acquired businesses profitably or otherwise implement our strategy successfully. If we are unable to integrate any
newly acquired entities, technologies or services effectively, our business and results of operations will suffer. The time and expense associated with finding suitable and compatible businesses,
technologies or services could also disrupt our ongoing business and divert our management's attention. Future acquisitions by us could also result in large and immediate write-offs or
assumptions of debt and contingent liabilities, any of which may have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

We may need additional capital in the future, which may not be available to us, and if it is available, may dilute your ownership of our common stock.

We may need to raise additional funds through public or private debt or equity financings in order to:



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Any
additional capital raised through the sale of equity may dilute the ownership percentage of our existing stockholders. Capital raised through debt financing would require us to make
periodic interest payments and may impose potentially restrictive covenants on the conduct of our business. Furthermore, additional financings may not be available on terms favorable to us, or at all.
A failure to obtain additional funding could prevent us from making expenditures that may be required to grow or maintain our operations and may have a material adverse effect on our consolidated
financial position, results of operations, or cash flows.

Risks Relating to Ownership of Our Common Stock

The price of our common stock may be volatile.

Prior to October 13, 2006, there was no public trading market for our common stock. The trading market for our common stock is
therefore immature, and the trading price of our common stock may fluctuate substantially. These fluctuations could cause investors to lose part or all of the value of any investment in shares of our
common stock.

The
following factors, most of which are outside of our control, could cause the market price of our common stock to decrease significantly:



In
the past, securities class action litigation often has been initiated against a company following a period of volatility in the market price of the company's securities. If class
action litigation is initiated against us, we will incur substantial costs and our management's attention will be diverted from our operations. All of these factors could cause the market price of our
stock to decline, and investors may lose some or all of the value of their investment.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our
common stock could decline.

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us
and our business. We do not control these analysts. The price of our

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stock
could decline if one or more equity research analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Certain of our directors, executive officers and one principal stockholder own a significant amount of our common stock and could exercise substantial corporate control.

Certain of our directors and executive officers, together with their affiliates, beneficially own, in the aggregate, approximately 32%
of our outstanding shares of common stock based on the number of shares outstanding as of December 31, 2008. In addition, one of our principal stockholders beneficially owns approximately 25%
of our outstanding shares of common stock. As a result, these stockholders, if acting together, may have the ability to determine the outcome of matters submitted to our stockholders for approval,
including the election of directors and any merger, amalgamation, consolidation or sale of all or substantially all of our assets. These persons, acting together, may have the ability to control the
management and affairs of our company. Some of these stockholders also may have interests different than, or adverse from, our other stockholders. Accordingly, even though certain transactions may be
in the best interests of other stockholders, this concentration of ownership may harm the market price of our common stock by:



In
addition, sales or other dispositions of our shares by our principal stockholders may depress our stock price. Sales of a significant number of shares of our common stock in the
public market could harm the market price of our common stock. As additional shares of our common stock become available for resale in the public market, the supply of our common stock will increase,
which could result in a decrease in the market price of our stock.

Our corporate documents and Delaware law will make a takeover of our company more difficult, which may limit the market price of our common stock.

Our restated charter and bylaws and Section 203 of the Delaware General Corporation Law contain provisions that might enable our
management to resist a takeover of our Company. These provisions might discourage, delay or prevent a change in the control of our Company or a change in our management. These provisions could also
discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock. Some provisions in our restated charter and bylaws may deter third parties from acquiring us, which may limit the market
price of our common stock and may not be in the best interests of our stockholders. These include:



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Item 1B.    Unresolved Staff Comments

We did not receive any written comments from the Securities and Exchange Commission prior to the date 180 days before
December 31, 2008 regarding our filings under the Securities Exchange Act of 1934, as amended, that have not been resolved.

Item 2.    Properties

We lease approximately 72,000 square feet of office space in Burlington, Massachusetts pursuant to leases that expire in June 2010. We
also maintain sales offices in Madrid, Spain; Seoul, Korea; Tokyo, Japan and Ipswich, United Kingdom. We believe that our current facilities are suitable and adequate to meet our current needs. We
intend to add additional facilities or expand existing facilities as we add employees, and we believe that suitable additional or substitute space will be available as needed to accommodate any such
expansion of our operations.

Item 3.    Legal Proceedings

We are not currently a party to any material litigation, and we are not aware of any pending or threatened litigation against us that
could have a material adverse effect on our consolidated financial position, results of operations, or cash flows. The software and communications infrastructure industries are characterized by
frequent claims and litigation, including claims regarding patent and other intellectual property rights, as well as improper hiring practices. As a result, we may be involved in various legal
proceedings from time to time.

Item 4.    Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the three months ended December 31, 2008.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information for Common Stock

Our common stock has been quoted on the Nasdaq Global Market under the symbol "APKT" since our initial public offering on
October 13, 2006. Prior to that time, there was no public market for our common stock.

The
following table sets forth for the indicated periods the high and low sales prices of our common stock as reported by the Nasdaq Global Market.

High

Low2007First Quarter

$
21.43

$
13.73Second Quarter

$
15.02

$
11.10Third Quarter

$
16.00

$
10.25Fourth Quarter

$
16.59

$
10.812008First Quarter

$
12.81

$
6.85Second Quarter

$
10.09

$
7.72Third Quarter

$
8.00

$
4.05Fourth Quarter

$
5.72

$
2.83


The
last reported sale price for our common stock on the Nasdaq Global Market was $4.18 per share on March 9, 2009.

Dividend Policy

We have never paid or declared any cash dividends on our common stock. We currently intend to retain any cash flow to finance the
growth and development of our business, and we do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of
the board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments, and other factors the
board deems relevant.

In
February 2008, our board of directors authorized the repurchase of up to $20.0 million of our common stock over the subsequent twelve-month period. In August 2008, our board of
directors expanded the common stock repurchase program by authorizing the repurchase of an additional $35.0 million of our common stock, for an aggregate of $55.0 million. The purchase
of our common stock was executed periodically as market and business conditions warrant on the open market, in negotiated or block trades, or under a Rule 10b5-1 plan, which
permitted shares to be repurchased when we might otherwise be precluded for doing so under insider trading laws.

This
common stock repurchase program did not obligate us to repurchase any dollar amount, or number of shares of common stock, and the program may have been suspended or discontinued at
any time. The common stock repurchase program expired February 28, 2009. Under the program, we repurchased 6,756,680 shares of our common stock for an aggregate purchase price, including
applicable brokers' fees, of $37.5 million.

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Table of Contents

Stockholders

As of February 28, 2009, 2009, there were approximately 124 registered stockholders of record of our common stock.

Stock Performance Graph

The graph set forth below compares the cumulative total stockholder return on our common stock between October 13, 2006 (the
date of our initial public offering) and December 31, 2008, with the cumulative total return of (i) the Nasdaq Telecommunications Index and (ii) the Nasdaq Composite Index, over
the same period. This graph assumes the investment of $100 on October 13, 2006 in our common stock, the Nasdaq Telecommunications Index and the Nasdaq Composite Index, and assumes the
reinvestment of dividends, if any. The graph assumes our closing sales price on October 13, 2006 of $15.91 per share as the initial value of our common stock.

The
comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it
intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from FactSet Research Systems, Inc., a financial data provider and a
source believed to be reliable. FactSet Research Systems, Inc. is not responsible for any errors or omissions in such information.

GRAPHIC

10/13/06

12/31/2007

3/31/08

6/30/2008

9/30/2008

12/31/2008Acme Packet


100.0


79.1


50.2


48.8


36.2


33.6Nasdaq Composite Index


100.0


112.5


96.7


97.3


88.7


66.9Nasdaq Telecommunications Index


100.0


116.2


103.5


105.2


91.0


66.3


Sales of Unregistered Securities

None.

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Table of Contents

Use of Proceeds from Public Offering of Common Stock

In October 2006, we completed an initial public offering, or IPO, of our common stock pursuant to a registration statement on
Form S-1 (Registration No. 333-134683) which the SEC declared effective on October 12, 2006. In connection with the IPO, we sold and issued
9.7 million shares of our common stock, including 1.7 million shares sold by us pursuant to the underwriters' full exercise of their over-allotment option, and another
additional 3.5 million shares of our common stock were sold by our selling stockholders. The offering did not terminate until after the sale of all of the shares registered in the registration
statement. All of the shares of common stock registered pursuant to the registration statement, including the shares sold by the selling shareholders, were sold at a price to the public of $9.50 per
share. The managing underwriters were Goldman, Sachs & Co., JPMorgan, Credit Suisse and Think Equity Partners LLC.

We
raised a total of $92.4 million in gross proceeds from the IPO, or approximately $83.2 million in net proceeds after deducting underwriting discounts and commissions of
$6.5 million and other estimated offering costs of approximately $2.7 million. No payments for such expenses were made directly or indirectly to (i) any of our officers or
directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates. We did not receive any proceeds from the sale of
shares in the IPO by the selling stockholders. None of our net proceeds from the IPO have been utilized to support business operations. Pending such application, we have invested the remaining net
proceeds in money-market mutual funds. None of the remaining net proceeds were paid, directly or indirectly, to directors, officers, persons owning ten percent or more of our equity securities, or any
of our other affiliates. There has been no material change in the planned use of proceeds from our IPO from that described in the final prospectus filed with the SEC pursuant to Rule 424(b).

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In February 2008, our board of directors authorized the repurchase of up to $20.0 million of our common stock over the
subsequent twelve-month period. In August 2008, our board of directors expanded the common stock repurchase program by authorizing the repurchase of an additional $35.0 million of our common
stock for an aggregate of $55.0 million. The purchase of our common stock was executed periodically as market and business conditions warrant on the open market, in negotiated or block trades,
or under a Rule 10b5-1 plan, which permitted shares to be repurchased when we might otherwise be precluded for doing so under insider trading laws.

This
common stock repurchase program did not obligate us to repurchase any dollar amount, or number of shares of common stock, and the program may have been suspended or discontinued at
any time. The common stock repurchase program expired on February 28, 2009. Through February 28, 2009,
we repurchased 6,756,860 shares of our common stock for an aggregate purchase price, including applicable brokers' fees, of $37.5 million pursuant to this stock repurchase program.

The
following table sets forth our purchases of equity securities for the three months ended December 31, 2008:

Period

(a)
Total number
of shares
purchased

(b)
Average
Price Paid
per Share(1)

(c)
Total number of
shares purchased
as part of
publicly announced
plans or
programs

(d)
Approximate dollar
value of shares
that may yet be
purchased under the
plans or
programs
(in thousands)October 1, 2008 - October 31, 2008


1,253,103

$
4.73


1,253,103

$
19,749November 1, 2008 - November 30, 2008


279,200


4.40


279,200


18,522December 1, 2008 - December 31, 2008


344,433


3.03


344,433


17,478Total


1,876,736





1,876,736


---

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Item 6.    Selected Consolidated Financial Data

You should read the following selected consolidated financial data in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the consolidated financial statements and related notes, and the other financial information included in this Annual Report on
Form 10-K.

We
derived the consolidated financial data for the years ended December 31, 2008, 2007 and 2006 and as of December 31, 2008 and 2007 from our consolidated financial
statements, which are included elsewhere in this Annual Report on Form 10-K. We derived the consolidated financial data for the years ended December 31, 2005 and 2004 and as
of December 31, 2006, 2005 and 2004 from audited financial statements which are not included in this Annual Report on Form 10-K. Historical results are not necessarily
indicative of the results to be expected in future periods.

Year Ended December 31,2008

2007

2006

2005

2004(in thousands, except share and per share data)Statement of Operations Data:Revenue:Product

$
91,277

$
94,906

$
71,810

$
31,080

$
14,641Maintenance, support and service


25,081


18,146


12,260


5,040


1,352Total revenue


116,358


113,052


84,070


36,120


15,993Cost of revenue:Product


19,234


18,281


14,624


8,026


5,212Maintenance, support and service


4,710


4,062


2,951


1,201


583Total cost of revenue


23,944


22,343


17,575


9,227


5,795Gross profit


92,414


90,709


66,495


26,893


10,198Operating expenses:Sales and marketing


44,044


35,387


23,759


14,969


8,558Research and development


22,235


20,058


12,988


8,705


5,552General and administrative


11,927


10,732


6,566


3,602


2,341Lease abandonment














848Total operating expenses


78,206


66,177


43,313


27,276


17,299Income (loss) from operations


14,208


24,532


23,182


(383
)

(7,101
)Total other income, net


2,979


6,369


2,239


348


144Income (loss) before provision for (benefit from) income taxes


17,187


30,901


25,421


(35
)

(6,957
)Provision for (benefit from) income taxes


5,615


11,340


(3,443
)




Net income (loss)

$
11,572

$
19,561

$
28,864

$
(35
)
$
(6,957
)Net income (loss) per share applicable to common stockholders:Basic(1)

$
0.20

$
0.33

$
0.57

$
0.00

$
(0.47
)Diluted(1)

$
0.18

$
0.30

$
0.50

$
0.00

$
(0.47
)Weighted average number of common shares used in net income (loss) per share calculation:Basic(1)


58,463,410


59,385,082


50,437,801


15,240,890


14,732,597Diluted(1)


62,920,268


66,016,411


57,418,796


15,240,890


14,732,597


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As of December 31,2008

2007

2006

2005

2004Balance Sheet Data:Cash and cash equivalents

$
125,723

$
136,420

$
118,714

$
15,369

$
16,748Working capital(2)


136,006


153,479


123,299


14,005


15,169Total assets(2)


174,010


184,174


153,305


30,121


25,807Indebtedness














210Convertible preferred stock











33


33Total stockholders' equity


146,811


163,167


130,937


17,723


17,634


---

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

This Annual Report on Form 10-K, including the information incorporated by reference herein,
contains, in addition to historical information, forward-looking statements. We may, in some cases, use words such as "project," "believe," "anticipate," "plan," "expect," "estimate," "intend,"
"continue," "should," "would," "could," "potentially," "will," "may" or similar words and expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements.
Forward-looking statements in this Annual Report on Form 10-K may include statements about:



The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that
could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include our financial performance, difficulties in attracting
and retaining customers, difficulties in meeting customer needs through our development activities, difficulties leveraging market opportunities, the worldwide economic crisis, poor product sales,
long sales cycles, difficulties developing new products, difficulties in our relationships with vendors and partners, risks associated with international operations, difficulty in managing rapid
growth and increased competition, and those factors we discuss in this Annual Report on Form 10K under the caption "Risk Factors." You should read these factors and the other cautionary
statements made in this Annual Report on Form 10-K as being applicable to all related forward-looking statements wherever they appear in this Annual Report on
Form 10-K. These risk factors are not exhaustive and other sections of this Annual Report on Form 10-K may include additional factors which could adversely impact
our business and financial performance.

Overview

Acme Packet, Inc. is the leading provider of session border controllers, or SBCs, that enable service providers and enterprises
to deliver secure and high quality interactive communicationsvoice, video and other real-time multimedia sessionsacross defined border points where Internet
Protocol, or IP networks connect, known as network borders. As of December 31, 2008, more than 635 end users in 92 countries have deployed our products. We sell our products and support
services through our

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direct
sales force and approximately 55 distribution partners, including many of the largest networking and telecommunications equipment vendors throughout the world.

Our
headquarters are located in Burlington, Massachusetts. We maintain sales offices in Burlington, Massachusetts; Madrid, Spain; Seoul, Korea; Tokyo, Japan; and Ipswich, United Kingdom.
We also have sales personnel in Argentina, Australia, Belgium, Brazil, Canada, China, Croatia, France, Germany, Hong Kong, India, Italy, Malaysia, Mexico, the Netherlands, New Zealand, Peru, Russia,
South Africa, Taiwan, and Thailand and throughout the United States. In the short-term we expect to selectively add personnel in the United States and internationally to provide additional
geographic sales and technical support coverage.

Initial Public Offering

In October 2006, we completed an initial public offering, or IPO, of our common stock in which we sold and issued 9.7 million
shares of our common stock, including 1.7 million shares sold by us pursuant to the underwriters' full exercise of their over-allotment option, at an issue price of $9.50 per share.
We raised a total of $92.4 million in gross proceeds from the IPO, or $83.2 million in net proceeds after deducting underwriting discounts and commissions of $6.5 million and
other offering costs of $2.7 million. Upon the closing of the IPO, all shares of convertible preferred stock outstanding automatically converted into 32.2 million shares of common stock.

Industry Background

Service providers traditionally have delivered voice and data services over two separate networks: the Public Switched Telephone
Network, or PSTN, and the Internet. The PSTN provides high reliability and security but is costly to operate and is limited in its ability to support high bandwidth video and other interactive
multimedia services. The Internet is capable of cost-effectively transmitting any form of traffic that is IP-based, including interactive voice, video and data, but it
transmits only on a best-efforts basis, because all forms of traffic have the same priority. Therefore, the Internet attempts to deliver all traffic without distinction, which can result
in significantly varying degrees of service quality for the same or similar types of traffic transmissions. Internet-based services are also subject to disruptive and fraudulent behavior, including
identity theft, viruses, unwanted and excessively large input data, known as SPAM, and the unauthorized use and attempts to circumvent or bypass security mechanisms associated with those services,
known as hacking.

Service
providers are beginning to migrate to a single IP network architecture to serve as the foundation for their next-generation voice, video and data service offerings.
In order to provide secure and high quality interactive communications on a converged IP network, service providers must be able to manage and integrate the communications flows that comprise
communication sessions for applications such as interactive video and voice over IP, or VoIP, which allows the routing of voice conversations over the Internet.

Prior
to the advent of the SBC, IP network infrastructure equipment, such as softswitches, routers and data firewalls, was able to initiate and route undifferentiated data but lacked the
ability to target specifically the management of interactive communication sessions. We believe that there is significant demand for SBCs that can facilitate the delivery of secure and high quality
real-time interactive communications across all IP network borders. Infonetics Research, a market research and consulting firm specializing in networking and IP communications, projects
that worldwide revenue for SBCs will increase from $211 million in 2008 to $375 million in 2013.

We
see rapidly emerging opportunities for our solutions within large enterprises, contact centers, and wireless service providers. We believe that Enterprise IP telephony (IPT) is now
mainstream, and that unified communications (UC)or the integration of interactive voice, video, messaging and collaboration applications over IPwill soon follow. Both are
critical components of enterprise IT

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strategies
to improve business agility, increase employee efficiency and responsiveness, build customer satisfaction and loyalty, and reduce overhead costs. We believe that these components are
indispensable tools for success in a newly-competitive global marketplace. The full-scale deployment of enterprise IPT has revealed deficiencies in network and security infrastructure
originally deployed for
data. Consequently, we believe that enterprises will likely be adding further controls to their IPT/UC infrastructure to improve its security, extend its application reach, meet service level
commitments, optimize capital and operating costs, and comply with relevant commercial and government regulations. Enterprises are deploying SBCs to successfully deliver network security,
availability, and performance as well as to achieve control over the four key borders within their IPT/UC infrastructureIP trunking, private network, Internet, and hosted services
interconnect borders. We believe that the majority of large enterprises today having already deployed IP PBXs are about to rapidly embrace SIP trunking to reduce costs and set the foundation for
enabling end-to-end IP UC.

Within
today's modern contact center, the migration of voice services from TDM to IP is now well underway. This migration is essential to the contact center's strategic goals: meeting
customers' growing service expectations, achieving ever-higher performance and quality metrics, improving agent retention rates, growing revenues and reducing capital and operating costs.
However, existing network and security infrastructure that was originally deployed for TDM voice services and data applications have demonstrated deficiencies for IP interactive communications. We
believe that contact center strategists are deploying SBCs to assert control over the four critical IP network borders found in most contact centers: its connections to IP trunking service providers,
to managed private IP networks, to the public Internet, and to virtual contact center locations. With SBCs to reinforce these borders in five key functional areassecurity, application
reach, SLA assurance, cost optimization, and regulatory compliancecontact centers can successfully and safely navigate the transition to an IP infrastructure. Our early customers within
this market have included the contact center operations of our Tier 1 service providers throughout North America, Europe, as well as Central and Latin America.

Key Financial Measures

Some of our key financial measures for 2008 include:



The Acme Packet Strategy

Principal elements of our strategy include:



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Factors That May Affect Future Performance



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Revenue

We derive product revenue from the sale of our Net-Net hardware and the licensing of our Net-Net software. We
generally recognize product revenue at the time of product delivery, provided all other revenue recognition criteria have been met, pursuant to the requirements of Statement of Position, or SOP,
97-2,Software Revenue Recognition, as amended by SOP 98-9,Software Revenue Recognition with
Respect to Certain Transactions. For arrangements that include customer acceptance or other material non-standard terms, we defer revenue recognition until after
delivery, assuming all other criteria for revenue recognition have been met.

We
generate maintenance, support and service revenue from (a) maintenance associated with software licenses, (b) technical support services for our product software,
(c) hardware repair and maintenance
services, (d) implementation, training and consulting services and (e) reimbursable travel and other out-of-pocket expenses paid to us by our customers.

We
offer our products and services indirectly through distribution partners and directly through our sales force. Our distribution partners include networking and telecommunications
equipment vendors throughout the world. Our distribution partners generally purchase our products after they have received a purchase order from their customers and do not maintain an inventory of our
products

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in
anticipation of sales to their customers. Generally, the pricing offered to our distribution partners will be lower than to our direct customers.

The
product configuration, which reflects the mix of session capacity and requested features, determines the price for each SBC sold. Customers can purchase our SBCs in either a
standalone or high availability configuration and can license our software in various configurations, depending on the customers' requirements for session capacity, feature groups and protocols. The
product software configuration mix will have a direct impact on the average selling price of the system sold. As the market continues to develop and grow, we expect to experience increased price
pressure on our products and services.

We
believe that our revenue and results of operations may vary significantly from quarter to quarter as a result of long sales and deployment cycles, variations in customer ordering
patterns, and the application of complex revenue recognition rules to certain transactions. Some of our arrangements with customers include clauses under which we may be subject to penalties for
failure to meet specified performance obligations. We have not incurred any such penalties to date.

Cost of Revenue

Cost of product revenue primarily consists of (a) payments to third party manufacturers for purchased materials and services,
(b) salaries and wages and related benefits, (c) related overhead and (d) provision for inventory obsolescence.

Cost
of maintenance, support and service revenue consists primarily of (a) salaries and wages and related benefits to professional services and technical support personnel,
(b) related overhead, (c) billable and non-billable travel, lodging, and other out-of-pocket expenses, and (d) contract services for repairs
and warranty services.

Gross Profit

Our gross profit has been, and will be, affected by many factors, including (a) the demand for our products and services,
(b) the mix between product and service revenue, (c)the average selling price of our products, which in turn depends, in part, on the mix of product configurations sold, (d) new product
introductions, (e) the mix of sales channels through which our products are sold, (f) the volume and costs of manufacturing of our hardware products and (g) the costs of personnel
for manufacturing support and services.

Operating Expenses

Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel-related
costs are the most significant component of each of these expense categories. During the period from December 31, 2006 through December 31, 2008, we increased the number of our employees
and full-time independent contractors by 51%, from 252 to 381. We expect to selectively hire new employees in the short-term to support our expected growth.

Sales
and marketing expense consists primarily of (a) salaries and related personnel costs, (b) commissions, (c) travel, lodging and other
out-of-pocket expenses, (d) marketing programs such as trade shows and (e) other related overhead. Commissions are recorded as expense when earned by the
employee. We expect sales and marketing expense to modestly increase in absolute dollars and as a percentage of total revenue for the foreseeable future as we expand our sales force to continue to
increase our revenue and market share. However, we anticipate that sales and marketing expense will decrease as a percentage of total revenue in the long term.

Research
and development expense consists primarily of (a) salaries and related personnel costs, (b) payments to suppliers for design and consulting services,
(c) prototype and equipment costs relating

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to
the design and development of new products and enhancement of existing products, (d) quality assurance and testing and (e) other related overhead. To date, all of the costs related to
our research and development efforts have been expensed as incurred. We intend to continue to invest significantly in our research and development efforts, which we believe are essential to
maintaining our competitive
position. We expect research and development expense to modestly increase in absolute dollars and as a percentage of total revenue for the foreseeable future. However, we anticipate that research and
development expense will decrease as a percentage of total revenue in the long term.

General
and administrative expense consists primarily of (a) salaries and wages and personnel costs related to our executive, finance, human resource and information technology
organizations, (b) facilities expenses, (c) accounting and legal professional fees and (d) other related overhead. We expect general and administrative expense to modestly
increase in absolute dollars for the foreseeable future as we invest in infrastructure to support continued growth and incur ongoing expenses related to being a publicly traded company, including
increased audit and legal fees, costs of compliance with securities and other regulations, investor relations expense, and higher insurance premiums.

Stock-Based Compensation

Cost of revenue and operating expenses include stock-based compensation expense. Effective January 1, 2006, we adopted the
requirements of Statement of Financial Accounting Standards, or SFAS, No. 123(R),Share Based Payment. SFAS No. 123(R) addresses all forms
of shared-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123(R) requires us to
expense share-based payment awards with compensation cost for share-based payment transactions measured at fair value. For the years ended December 31, 2008, 2007 and 2006, we recorded expense
of $7.4 million, $6.1 million and $867,000, respectively, in connection with share-based payment awards. Based on share-based awards granted in 2008, 2007 and 2006, a future expense of
non-vested options of $17.4 million is expected to be recognized over a weighted-average period of 2.36 years.

Other Income (Expense), Net

Other income (expense) primarily consists of interest income earned on cash balances. We historically have invested our cash in money
market funds. Other income (expense) also includes gains (losses) from foreign currency translation adjustments of our foreign subsidiaries. The functional currency of our foreign operations in Europe
and Asia is the U.S. dollar. Accordingly, all assets and liabilities of these foreign subsidiaries are re-measured into U.S. dollars using the exchange rates in effect at the balance sheet
date. Revenue and expenses of these foreign subsidiaries are re-measured into U.S. dollars at the average rates in effect during the year. Any differences resulting from the
re-measurement of assets, liabilities and operations of the European and Asian subsidiaries are recorded within other income (expense).

Application of Critical Accounting Policies and Use of Estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation
of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different
assumptions or conditions. There have been no material changes to these estimates for the periods presented in this Annual Report on Form 10-K.

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We
believe that of our significant accounting policies, which are described in note 2 of the notes to our consolidated financial statements included in this Annual Report on
Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in
fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition

We recognize revenue in accordance with SOP 97-2, as amended by SOP 98-9, and Emerging Issues
Task Force, or EITF, Issue No. 03-5,Applicability of AICPA Statement of Position 97-2 to Nonsoftware Deliverables in an Arrangement Containing
More-Than-Incidental Software. We have determined that the software element of our product is "more than incidental" to the products as a whole. As a
result, in accordance with EITF Issue No. 03-5, we are required to recognize revenue under the guidance of SOP 97-2 and SOP 98-9.

In
all of our arrangements, we do not recognize any revenue until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and we deem
collection of the related accounts receivable to be probable. In making these judgments, we evaluate these criteria as follows:



A
substantial percentage of our revenue is generated by multiple-element arrangements, such as products, maintenance, professional services and training. When arrangements include
multiple elements, we allocate the total fee among the various elements using the residual method. Under the residual method, revenue is recognized when vendor-specific objective evidence, or VSOE, of
fair value exists for all of the undelivered elements of the arrangement, but does not exist for one or more of the delivered elements of the arrangement. Each arrangement requires us to analyze the
individual elements in the transaction and to estimate the fair value of each undelivered element, which typically includes maintenance and services. Revenue is allocated to each of the undelivered
elements based on

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its
respective fair value, with the fair value determined by the price charged when that element is sold separately.

Maintenance
and support services include telephone support, return and repair services, and unspecified rights to product upgrades and enhancements, and are recognized ratably over the
term of the service period, which is generally 12 months. Maintenance and support revenue generally is deferred until the related product has been accepted and all other revenue recognition
criteria have been met. Professional services and training revenue is recognized as the related service is performed.

Our
products and services are distributed indirectly through distribution partners and directly through our sales force. Revenue arrangements with distribution partners are recognized
when the above criteria are met and only when we receive evidence that the distribution partner has an order from an end-user customer. We typically do not offer contractual rights of
return, stock balancing or price protection to our distribution partners, and actual product returns from them have been insignificant to date. As a result, we do not maintain reserves for product
returns and related allowances.

Allowance for Doubtful Accounts

We offset gross trade accounts receivable with an allowance for doubtful accounts. The allowance for doubtful accounts is our best
estimate of the amount of probable credit losses in our existing accounts receivable. We review our allowance for doubtful accounts on a regular basis, and all past due balances are reviewed
individually for collectability. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Provisions
for doubtful accounts are recorded in general and administrative expense. If our historical collection experience does not reflect our future ability to collect outstanding accounts receivables, our
future provision for doubtful accounts could be materially affected. To date, we have not incurred any significant write-offs of accounts receivable and have not been required to revise
any of our assumptions or estimates used in determining our
allowance for doubtful accounts. As of December 31, 2008, the allowance for doubtful accounts was $1.3 million.

Stock-Based Compensation

On January 1, 2006, we adopted the provisions of SFAS No. 123(R),Share-
BasedPayment, which requires us to recognize expense related to the fair value of stock-based compensation awards. SFAS No. 123(R) requires nonpublic companies that
used the minimum value method under SFAS No. 123,Accounting for Stock-Based Compensation,for either recognition or pro forma disclosures to
apply SFAS No. 123(R) using the prospective-transition method. As such, we continue to apply Accounting Principles Board (APB) Opinion No. 25,Accounting for
Stock Issued to Employeesto equity awards outstanding at the date of SFAS No. 123(R)'s adoption that were measured using the minimum value method.

Effective
with the adoption of SFAS No. 123(R), we elected to use the Black-Scholes option pricing model to determine the weighted average fair value of stock options granted. In
accordance with SFAS No. 123(R), we recognize the compensation cost of stock-based awards on a straight-line basis over the vesting period of the award.

As
there was no public market for our common stock prior the effective date of the our IPO, we determined the volatility for options granted in 2008, 2007 and 2006 based on an analysis
of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using an average of the historical
volatility measures of this peer group of companies, as well as the historical volatility of our common stock beginning January 2007. The expected life of options has been determined utilizing the
"simplified" method as prescribed by the SEC's Staff Accounting Bulletin No. 107,Share-Based Payment. The risk-free interest

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rate
is based on a treasury instrument whose term is consistent with the expected life of the stock options. We have not paid and do not anticipate paying cash dividends on our common stock;
therefore, the expected dividend yield is assumed to be zero. In addition, SFAS No. 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the
period, whereas, SFAS No. 123 permitted companies to record forfeitures based on actual forfeitures, which was our historical policy under SFAS No. 123. As a result, we applied an
estimated forfeiture rate of 8.27%, 7.00%, and 11.25% for the years ended December 31, 2008, 2007 and 2006, respectively, in determining the expense recorded in the accompanying consolidated
statements of income. We recorded stock-based compensation expense of $7.4 million, $6.1 million and $867,000 for the years ended December 31, 2008, 2007 and 2006, respectively.
As of December 31, 2008, there was $17.4 million of unrecognized compensation expense related to unvested stock option awards that is expected to be recognized over a weighted-average
period of 2.36 years.

Inventory

We recognize inventory losses based on obsolescence and levels in excess of forecasted demand. In these cases, inventory is written
down to its estimated realizable value based on historical usage and expected demand. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic
trends, future demand for our products and technical obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory write-downs could
be required and would be reflected in the cost of revenue in the period the revision is made. To date, we have not been required to revise any of our assumptions or estimates used in determining our
inventory valuations.

When
products have been delivered, but the product revenue associated with the arrangement has been deferred as a result of not meeting the revenue recognition criteria required by
SOP 97-2, we also defer the related inventory costs for the delivered items.

Product Warranties

Substantially all of our products are covered by a standard warranty of 90 days for software and one year for hardware. In the
event of a failure of hardware or software covered by this warranty, we must repair or replace the hardware or software or, if those remedies are insufficient, and at our discretion, provide a refund.
Our customers typically purchase maintenance and support contracts, which encompass our warranty obligations. Our warranty reserve reflects estimated material and labor costs for potential or actual
product issues in our installed base that are not covered under maintenance contracts, but for which we expect to incur an obligation. Our estimates of anticipated rates of warranty claims and costs
are primarily based on historical information and future forecasts. We periodically assess the adequacy of the warranty allowance and adjust the amount as necessary. During the years ended
December 31, 2008 and 2007 we decreased our warranty allowance by $100,000 and $163,000, respectively, as a result of an analysis performed on historical data. If the historical data we use to
calculate the adequacy of the warranty allowance is not indicative of future requirements, additional or reduced warranty reserves may be required.

Some
of our arrangements with customers include clauses whereby we may be subject to penalties for failure to meet certain performance obligations. We have not incurred any such
penalties to date.

Research and Development Expense for Software Products

Research and development expense includes costs incurred to develop intellectual property. The costs for the development of new
software and substantial enhancements to existing software are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. We
have determined that technological feasibility is established at the time a working model of software is completed. Because we believe our current process for developing software will be essentially
completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.

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Income Taxes

We are subject to income taxes in both the United States and international jurisdictions, and we use estimates in determining our
provision for income taxes. We account for income taxes in accordance with SFAS No. 109,Accounting for Income Taxes, which is the asset and
liability method for accounting and reporting for income taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized based on temporary differences between the financial
reporting and income tax basis of assets and liabilities using statutory rates. This process requires us to project our current tax liability and estimate our deferred tax assets and liabilities,
including net operating loss, or NOL, and tax credit carryforwards. In assessing the need for a valuation allowance, we considered our recent operating results, future taxable income projections and
feasible tax planning strategies.

We
adopted the provisions of FIN 48, an interpretation of SFAS No. 109,Accounting for Income Taxes, on January 1,
2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109 and prescribes a recognition
threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At the adoption date and as of December 31, 2008, we had no material
unrecognized tax benefits and no adjustments to liabilities or operations were required.

Results of Operations

Comparison of Years Ended December 31, 2008 and 2007

Revenue

Year Ended December 31,Period-to-Period
Change2008

2007Amount

Percentage
of Total
Revenue

Amount

Percentage
of Total
Revenue

Amount

Percentage(dollars in thousands)Revenue by Type:Product revenue

$
91,277


78
%
$
94,906


84
%
$
(3,629
)

(4
)%Maintenance, support and service revenue


25,081


22


18,146


16


6,935


38Total revenue

$
116,358


100
%
$
113,052


100
%
$
3,306


3
%Revenue by Geography:United States and Canada

$
59,512


51
%
$
53,748


48
%
$
5,764


11
%International


56,846


49


59,304


52


(2,458
)

(4
)Total revenue

$
116,358


100
%
$
113,052


100
%
$
3,306


3
%Revenue by Sales Channel:Direct

$
47,490


41
%
$
43,728


39
%

3,762


9
%Indirect


68,868


59


69,324


61


(456
)

(1
)Total revenue

$
116,358


100
%
$
113,052


100
%
$
3,306


3
%


The
$3.6 million decrease in product revenue was a result of a decrease in the number of systems sold in 2008 as compared to 2007. We believe that the decrease in systems sold was
the result of temporary delays in the purchasing decisions of our end user customers, which began in the second quarter of 2008, and is not indicative of an overall decline in the worldwide market for
our products. Direct product revenues increased by $930,000, primarily as a result of a $2.1 million increase

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attributable
to our United States and Canadian customers, partially offset by a decrease of $1.2 million in product revenues related to our international customers. Indirect product revenues
decreased $4.6 million, with $4.2 million and $410,000 contributed by our international and United States and Canadian customers, respectively.

While
the decrease in the number of units shipped had an adverse effect on our product revenues in 2008, the decline was partially offset by an increase in the average selling price of
our systems due to changes in our product software configuration mix and an increase in the level of software license upgrades. The product configuration, which reflects the mix of session capacity
and requested features, determines the price for each SBC sold. Customers can license our software in various configurations, depending on the customers' requirements for session capacity, feature
groups and protocols. The product software configuration mix will have a direct impact on the average selling price of the system sold. Systems with higher software content (higher session capacity
and a larger number of feature groups) will generally have a higher average selling price than those systems sold with less software content.

The
$6.9 million increase in maintenance, support and service revenue was attributable primarily to an increase in maintenance and support fees associated with the growth in our
installed product base. Installation and training revenue, including reimbursable travel expenses remained relatively unchanged in 2008 as compared to 2007.

Cost of Revenue and Gross Profit

Year Ended December 31,Period-to-Period
Change2008

2007Amount

Percentage
of Related
Revenue

Amount

Percentage
of Related
Revenue

Amount

Percentage(dollars in thousands)Cost of Revenue:Product

$
19,234


21
%
$
18,281


19
%
$
953


5
%Maintenance, support and service


4,710


19


4,062


22


648


16Total cost of revenue

$
23,944


21
%
$
22,343


20
%
$
1,601


7
%Gross Profit:Product

$
72,043


79
%
$
76,625


81
%
$
(4,582
)

(6
)%Maintenance, support and service


20,371


81


14,084


78


6,287


45Total gross profit

$
92,414


79
%
$
90,709


80
%
$
1,705


2
%


The
$953,000 increase in product cost of revenue was attributable to an increase of $815,000 in reserves for excess and obsolete inventory in 2008 as compared to 2007, higher salaries,
benefits and overhead associated with an increase in manufacturing personnel, including an increase of $364,000 in salaries and related benefits and an increase of $173,000 in stock-based compensation
expense, and an increase in the average cost of systems sold in 2008. The average cost of systems sold varies based on the product platform mix of items sold in a period. These cost increases were
partially offset by the lower number of systems shipped in 2008 as compared to 2007.

The
$648,000 increase in cost of maintenance, support and service revenue was due to higher salaries, benefits and overhead associated with increases in support and training personnel,
including a $444,000 increase in salaries and related benefits and a $114,000 increase in stock-based compensation expense.

Product
gross margin decreased by 2 percentage points, primarily due to a decrease in the number of units sold in 2008 as compared to 2007 which resulted in cost associated with
our internal

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manufacturing
efforts being absorbed by a lower product volume base. The increase in average cost of systems sold in 2008 due to product platform mix was also a factor. We expect our gross margin in
the future to decrease, as we expect to experience increased price pressure on our products as the market for our products continues to develop and grow. We cannot predict our ability to realize
reduced per system costs in the future because we cannot predict the pricing of component parts or the volume of orders to be placed in the future.

Gross
margin on maintenance, support and service revenue increased by 3 percentage points as a result of an increase in maintenance, support and service revenue associated with
the growth in our installed product base without a corresponding increase in costs. We expect cost of product revenue and cost of maintenance, support and service revenue each to increase at
approximately the same rate as the
related revenue for the foreseeable future. As a result, we expect that gross profit on product revenue and gross profit on maintenance, support and service revenue will each increase, but that the
related gross margin will decrease slightly in the long term.

Operating Expenses

Year Ended December 31,Period-to-Period
Change2008

2007Amount

Percentage
of Total
Revenue

Amount

Percentage
of Total
Revenue

Amount

Percentage(dollars in thousands)Sales and marketing

$
44,044


38
%
$
35,387


31
%
$
8,657


24
%Research and development


22,235


19


20,058


18


2,177


11General and administrative


11,927


10


10,732


10


1,195


11Total operating expenses

$
78,206


67
%
$
66,177


59
%
$
12,029


18
%


Of
the $8.7 million increase in sales and marketing expense (a) $5.4 million was attributable to higher salaries, commissions and benefits associated with a 24%
increase in sales and marketing personnel, primarily sales and technical sales support staff, on a worldwide basis, (b) $1.3 million was attributable to an increase in stock-based
compensation expense, (c) $800,000 was attributable to an increase depreciation expense, (d) $348,000 was attributable to an increase in travel expense resulting from the growth in the
number of sales and marketing personnel and (e) the balance was attributable to
increased expenses associated with expanded marketing programs, including trade shows and overhead associated with increases in sales and marketing personnel. We expect sales and marketing expense to
continue to modestly increase in absolute dollars and to increase as a percentage of total revenue for the foreseeable future as we expand our sales force to continue to increase our revenue and
market share. However, we anticipate that sales and marketing expense will decrease as a percentage of total revenue in the long term.

Of
the $2.2 million increase in research and development expense, $2.5 million was attributable to higher salaries and benefits associated with a 9% increase in the number
of employees working on the design and development of new products and enhancement of existing products, quality assurance and testing. The increase in research and development expense also reflected
an increase in depreciation expense of $232,000 associated with our investment in equipment to support new product development. These increases were partially offset by reductions of $312,000 in
outside services and $220,000 in professional search fees. The modest addition of personnel and our continued investment in research and development were driven by our strategy of maintaining our
competitive position by expanding our product offerings and enhancing our existing products to meet the requirements of our customers and market. We expect research and development expense to modestly
increase in absolute dollars and as a

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percentage
of revenue for the foreseeable future. However, we anticipate that research and development expense will decrease as a percentage of total revenue in the long term.

Of
the $1.2 million increase in general and administrative expense, (a) $1.2 million was attributable to an increase in bad debt expense, primarily reflecting the
bankruptcy proceedings of one distribution partner, (b) $305,000 was attributable to increased legal, accounting and professional fees, (c) $196,000 was attributable to an increase in
outside consulting services, and (d) $142,000 was attributable to our search for a new chief financial officer. These increases were partially offset by reductions of $213,000 in stock-based
compensation expense, $152,000 in payment discounts offered to our customers, $123,000 in salaries and related benefits related to a decision by management not to approve annual incentive payments
which was partially offset by an increase of 4% in headcount during 2008, and a net decrease in other miscellaneous general and administrative expenses. We expect general and administrative expense to
continue to increase in absolute dollars for the foreseeable future as we invest in infrastructure to support continued growth and incur additional expenses related to being a publicly traded company,
including increased audit and legal fees, costs of compliance with securities and other regulations, investor relations expense, and higher insurance premiums.

Operating and Other Income

Year Ended December 31,Period-to-Period
Change2008

2007Amount

Percentage
of Total
Revenue

Amount

Percentage
of Total
Revenue

Amount

PercentageIncome from operations

$
14,208


12
%
$
24,532


22
%
$
(10,324
)

(42
)%Interest income


3,225


3


6,420


6


(3,195
)

(50
)Other expense


(246
)




(51
)




(195
)

382Income before provision for (benefit from) income taxes


17,187


15


30,901


27


(13,714
)

(44
)Provision for (benefit from) income taxes


5,615


5


11,340


10


(5,725
)

(50
)Net income

$
11,572


10
%
$
19,561


17
%
$
(7,989
)

(41
)%


The
$10.3 million decrease in income from operations resulted from a $12.0 million increase in operating expenses, offset in part by a $1.7 million increase in total
gross profit.

Interest
income, net, consisted of interest income generated from the investment of our cash balances. The decrease in interest income principally reflected lower average interest rates
during 2008, partially offset by higher average cash balances provided by operating activities.

Other
expense primarily consisted of foreign currency translation adjustments of our foreign subsidiaries and sales consummated in foreign currencies. The increase in expense from 2007
to 2008 primarily reflects fluctuations in the value of the Euro and British Pound in 2008.

For
the year ended December 31, 2008, our effective tax rate was 33%. The lower effective tax rate in 2008 was primarily attributable to increased credits related to our research
and development activities and a lower effective state tax rate.

We
currently expect to realize recorded deferred tax assets as of December 31, 2008 of approximately $7.8 million. Our conclusion that such assets will be recovered is
based upon taxable income previously recorded in the carryback period and our expectation that future earnings will provide sufficient taxable income to realize recorded tax assets. While the
realization of our net recorded deferred tax assets cannot be assured, to the extent that future taxable income against which

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these
tax assets may be applied is not sufficient or carrybacks are eliminated, some or all of our net recorded deferred tax assets would not be realizable. Approximately $4.0 million of the
deferred tax
asset recorded as of December 31, 2008 is attributable to benefits associated with stock-based compensation charges. Under the guidance of SFAS No. 123(R), no valuation allowance has
been recorded against this amount. However, in the future, if the underlying awards expire with an intrinsic value less than the fair value of the awards on the date of grant, some or all of the
benefit may not be realizable.

Comparison of Years Ended December 31, 2007 and 2006

Revenue

Year Ended December 31,Period-to-Period
Change2007

2006Amount

Percentage
of Total
Revenue

Amount

Percentage
of Total
Revenue

Amount

Percentage(dollars in thousands)Revenue by Type:Product revenue

$
94,906


84
%
$
71,810


85
%
$
23,096


32
%Maintenance, support and service revenue


18,146


16


12,260


15


5,886


48Total revenue

$
113,052


100
%
$
84,070


100
%
$
28,982


34
%Revenue by Geography:United States and Canada

$
53,748


48
%
$
47,965


57
%
$
5,783


12
%International


59,304


52


36,105


43


23,199


64Total revenue

$
113,052


100
%
$
84,070


100
%
$
28,982


34
%Revenue by Sales Channel:Direct

$
43,728


39
%
$
43,670


52
%

58


Indirect


69,324


61


40,400


48


28,924


72
%Total revenue

$
113,052


100
%
$
84,070


100
%
$
28,982


34
%


The
$23.1 million increase in product revenue was a result of an increase in the number of systems sold in 2007 which reflected the growth in the worldwide market for our
products. This growth was realized through our indirect sales channels. Indirect product revenues increased $27.2 million, of which $20.6 million was attributable to our international
customers and $6.6 million was attributable to our United States and Canadian customers. Direct product revenues decreased $4.1 million, of which $4.4 million was attributable to
United States and Canadian customers partially offset by an increase of $300,000 from our international customers.

An
increase in the average selling price of our systems due to changes in our product software configuration mix and an increase in the level of software license upgrades also
contributed to the increase in product revenue in 2007. The product configuration, which reflects the mix of session capacity and requested features, determines the price for each SBC sold. Customers
can license our software in various configurations, depending on the customers' requirements for session capacity, feature groups and protocols. The product software configuration mix will have a
direct impact on the average selling price of the system sold. Systems with higher software content (higher session capacity and a larger number of feature groups) will generally have a higher average
selling price than those systems sold with less software content.

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The $5.9 million increase in maintenance, support and service revenue was attributable primarily to the $4.8 million increase in maintenance and
support fees associated with the growth in our installed product base and a $1.1 million increase in installation and training revenue, including reimbursable travel expenses.

Cost of Revenue and Gross Profit

Year Ended December 31,Period-to-Period
Change2007

2006Amount

Percentage
of Related
Revenue

Amount

Percentage
of Related
Revenue

Amount

Percentage(dollars in thousands)Cost of Revenue:Product

$
18,281


19
%
$
14,624


20
%
$
3,657


25
%Maintenance, support and service


4,062


22


2,951


24


1,111


38Total cost of revenue

$
22,343


20
%
$
17,575


21
%
$
4,768


27
%Gross Profit:Product

$
76,625


81
%
$
57,186


80
%
$
19,439


34
%Maintenance, support and service


14,084


78


9,309


76


4,775


51Total gross profit

$
90,709


80
%
$
66,495


79
%
$
24,214


36
%


The
$3.7 million increase in product cost of revenue was attributable to the increase in the number of systems sold in 2007.

The
$1.1 million increase in cost of maintenance, support and service revenue was due to higher salaries, benefits and overhead associated with increases in support and training
personnel, including a $245,000 increase in stock-based compensation expense.

Product
gross margin increased by 1 percentage point, reflecting the increase in the average selling price of our systems as a result of the changes in product configuration mix
reflecting systems sales with a higher software content as noted above, as well as reduced costs per system paid to our contract manufacturers.

Gross
margin on maintenance, support and service revenue increased by 2 percentage points as a result of an increase in maintenance, support and service revenue associated with
the growth in our installed product base without a corresponding increase in costs.

Operating Expenses

Year Ended December 31,Period-to-Period
Change2007

2006Amount

Percentage
of Total
Revenue

Amount

Percentage
of Total
Revenue

Amount

Percentage(dollars in thousands)Sales and marketing

$
35,387


31
%
$
23,759


28
%
$
11,628


49
%Research and development


20,058


18


12,988


15


7,070


54General and administrative


10,732


10


6,566


8


4,166


63Total operating expenses

$
66,177


59
%
$
43,313


51
%
$
22,864


53
%


Of
the $11.6 million increase in sales and marketing expense (a) $7.0 million was attributable to higher salaries, commissions and benefits associated with a 26%
increase in sales and marketing

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personnel,
primarily sales and technical sales support staff, on a worldwide basis, (b) $2.0 million was attributable to an increase in stock-based compensation expense,
(c) $1.5 million was attributable to an increase in travel expense resulting from the growth in the number of sales personnel and (d) the balance was attributable to increased
expenses associated with expanded marketing programs, including trade shows and overhead associated with increases in sales and marketing personnel.

Of
the $7.1 million increase in research and development expense, $3.9 million was attributable to higher salaries and benefits associated with a 34% increase in the number
of employees working on the design and development of new products and enhancement of existing products, quality assurance and testing. The increase in research and development expense also reflected
(a) an increase of $1.8 million in stock-based compensation expense, (b) an increase in depreciation expense of $717,000 associated with our investment in equipment to support new
product development and (c) an increase of $284,000 for outside consulting services. The addition of personnel and our continued investment in research and development were driven by our
strategy of maintaining our competitive position by expanding our product offerings and enhancing our existing products to meet the requirements of our customers and market.

Of
the $4.2 million increase in general and administrative expense, (a) $919,000 was attributable to higher salaries and benefits related to a 37% increase in general and
administrative headcount, (b) $836,000 was attributable to an increase in stock-based compensation expense, (c) $827,000 was attributable to an increase in facilities costs, including
rent, utilities and depreciation expense, associated with the overall increase in our employee headcount, (d) $570,000 was attributable to higher insurance premiums associated with being a
publicly traded company and (e) $360,000 was attributable to increased legal, accounting and professional fees.

Operating and Other Income

Year Ended December 31,Period-to-Period
Change2007

2006Amount

Percentage
of Total
Revenue

Amount

Percentage
of Total
Revenue

Amount

Percentage(dollars in thousands)Income from operations

$
24,532


22
%
$
23,182


28
%
$
1,350


6
%Interest income


6,420


6


2,256


2


4,164


185Other expense


(51
)




(17
)




(34
)

200Income before provision for (benefit from) income


30,901


27


25,421


30


5,480


22Provision for (benefit from) income taxes


11,340


10


(3,443
)

(4
)

14,783


(429
)Net income

$
19,561


17
%
$
28,864


34
%
$
(9,303
)

(32
)%


The
$1.4 million increase in income from operations resulted from a $24.2 million increase in gross profit, offset in part by a $22.9 million increase in total
operating expenses.

Interest
income, net, consisted of interest income generated from the investment of our cash balances. The increase in interest income principally reflected higher average cash balances
during 2007, as a result of our initial public offering in October 2006 and cash provided by operating activities, as well as higher interest rates during 2007.

Other
expense primarily consisted of foreign currency translation adjustments of our foreign subsidiaries.

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For
the year ended December 31, 2007, our effective tax rate was 37%. In the year ended December 31, 2006, we recorded a net benefit from income taxes in the amount of
$3.4 million. The lower effective tax rate in 2006 was due to the utilization of previously unrecognized NOLs to offset our federal obligations. During 2006, based on a number of factors,
including recent operating results, future taxable income projections and feasible tax planning strategies, we determined that in addition to the utilization of the remaining portion of our NOL
carryforwards to reduce taxable income in 2006, it was more likely than not that we would realize all of our deferred tax assets, and therefore we reduced our deferred tax asset valuation allowance by
$4.8 million. This benefit of the release in the valuation allowance was recognized through a reduction of income tax expense. As a result, our effective tax rate for 2006 decreased to an
effective tax benefit of 14%.

Liquidity and Capital Resources

Resources

Since 2005, we have funded our operations principally with cash provided by operations, which was driven by growth in revenue. In
October 2006, we completed an initial public offering, or IPO, of our common stock in which we sold and issued 9.7 million shares of our common stock, including 1.7 million shares sold
by us pursuant to the underwriters' full exercise of their over-allotment option, at an issue price of $9.50 per share. We raised a total of $92.4 million in gross proceeds from the
IPO, or $83.2 million in net proceeds after deducting underwriting discounts and commissions of $6.5 million and other offering costs of $2.7 million.

Key
measures of our liquidity are as follows:

As of and for the Year Ended
December 31,2008

2007

2006(in thousands)Cash and cash equivalents

$
125,723

$
136,420

$
118,714Accounts receivable, net(1)


26,163


27,597


13,719Working capital(1)


136,006


153,497


123,299Cash provided by operating activities


28,671


16,403


26,331Cash (used in) provided by financing activities


(35,326
)

6,619


83,483


---

Cash and cash equivalents.Our cash and cash equivalents at December 31, 2008 were held for working capital purposes and were
invested
primarily in money market funds. We do not enter into investments for trading or speculative purposes. Restricted cash, which totaled $333,000, $333,000 and $479,000 at December 31, 2008, 2007,
and 2006, respectively, and is not included in cash and cash equivalents, was held in certificates of deposit as collateral for letters of credit related to the lease agreements for our corporate
headquarters in Burlington, Massachusetts and our sales office in Madrid, Spain.

Accounts receivable, net.Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating
activities.
The fluctuations vary depending on the timing of our

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shipping
and billing activity, cash collections, and changes to our allowance for doubtful accounts. In some situations we receive cash payment from a customer prior to the time we are able to
recognize revenue on a transaction. We record these payments as deferred revenue, which has a positive effect on our accounts receivable balances. We use days sales outstanding, or DSO, calculated on
a quarterly basis, as a measurement of the quality and status of our receivables. We define DSO as (a) accounts receivable, net of allowance for doubtful accounts, divided by total revenue for
the most recent quarter, multiplied by (b) 90 days. DSO was 77 days at December 31, 2008 and 79 days at December 31, 2007. The slight decrease in DSO at
December 31, 2008 was primarily attributable to the timing of shipments during the three months ended December 31, 2008.

Operating activities.Cash provided by operating activities primarily consists of net income adjusted for certain non-cash items
including depreciation and amortization, impairment losses on property and equipment, deferred income taxes, the provision for bad debts, stock-based compensation expense, and the effect of changes in
working capital and other activities. Cash provided by operating activities in 2008 was $28.7 million and consisted of $11.6 million of net income, non-cash adjustments of
$9.8 million (consisting primarily of $5.0 million of depreciation and amortization, $7.4 million of stock-based compensation expense, $1.1 million in provisions for bad
debt, and a $857,000 impairment loss on property and equipment, partially offset by $1.4 million related to the tax savings to the company from the exercise, by employees, of stock options and
an increase in our deferred income taxes of $3.2 million), and $7.3 million provided by working capital and other activities. Cash provided by working capital and other activities
primarily reflected an increase in deferred revenue of $9.3 million, an increase of $613,000 in other current assets and a $325,000 increase in accounts receivable, reflecting an overall
decrease in revenue in the fourth quarter of 2008 compared to 2007, partially offset by an increase of $1.2 million in inventory and a decrease of $1.7 million in accounts payable and
accrued expenses.

Equity financing activities.As previously discussed, we completed an IPO of our common stock in October 2006, resulting in net
proceeds of
$83.2 million. In addition, we received proceeds from the issuance of restricted common stock and exercises of common stock options in the amounts of $759,000 in 2008, $1.7 million in
2007 and $213,000 in 2006.

Net
cash used in financing activities in 2008 also included $37.5 million related to the repurchase of 6,756,680 shares of our common stock, inclusive of brokers' fees. In
February 2008, our board of directors authorized the repurchase of up to $20.0 million of our common stock over the subsequent twelve-month period. In August 2008, our board of directors
expanded the common stock repurchase
program by authorizing the repurchase of an additional $35.0 million of our common stock for an aggregate of $55.0 million. The purchase of our common stock was executed periodically as
market and business conditions warranted on the open market, in negotiated or block trades, or under a Rule 10b5-1 plan, which permitted shares to be repurchased when we might
otherwise be precluded for doing so under insider trading laws.

This
common stock repurchase program did not obligate us to repurchase any dollar amount, or number of shares of common stock, and the program could have been suspended or discontinued
at any time. The common stock repurchase program expired on February 28, 2009. We did not repurchase any shares of our common stock subsequent to December 31, 2008.

Anticipated Cash Flows.We believe our existing cash and cash equivalents and our cash flow from operating activities will be
sufficient to meet our
anticipated cash needs for at least the next twelve months. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new
products and enhancements, and our expansion of sales and marketing and product development activities. To the extent that our cash and cash equivalents and cash flow from operating activities are
insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We

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also
may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies and products that will complement our existing
operations. In the event additional funding is required, and given the current condition of the global financial markets, we may not be able to obtain bank credit arrangements or effect an equity or
debt financing on terms acceptable to us or at all.

Income Taxes.We currently expect to realize recorded deferred tax assets as of December 31, 2008 of $7.8 million. Our
conclusion that
such assets will be recovered is based upon its expectation that our future earnings will provide sufficient taxable income to realize recorded tax assets. While the realization of our net recorded
deferred tax assets cannot be assured, to the extent that future taxable income against which these tax assets may be applied is not sufficient or carrybacks are limited, some or all of our net
recorded deferred tax assets would not be realizable. Approximately $3.9 million of the deferred tax asset recorded as of December 31, 2008 is attributable to benefits associated with
stock-based compensation charges. Under the guidance of SFAS No. 123(R), no valuation allowance has been recorded against this amount. However, in the future, if the underlying awards expire
with an intrinsic value less than the fair value of the awards on the date of grant, some or all of the benefit may not be realizable.

As
of December 31, 2008, we had state research and development tax credits of $1.1 million of which approximately $1.0 million related to excess tax deductions has
been excluded from the above table, the benefit of these credits will be realized as an increase in additional paid in capital when it results in a reduction in state taxable income in accordance with
SFAS No. 123(R). These state tax credits begin to expire in 2021, and are subject to review and possible adjustment by the taxing authorities. During 2008, we both generated and utilized all of
our U.S. federal research and development tax credits. The Internal Revenue Code contains provisions that limit the NOL and tax credit carryforwards available to be used in any given year in the event
of certain circumstances, including significant changes in ownership interests, as defined.

Effective
January 1, 2007, we adopted the provisions of FIN 48, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to
be sustained upon examination by taxing authorities. At the adoption date and as of December 31, 2008 and 2007, we had no material unrecognized tax benefits and no adjustments to liabilities,
retained earnings or operations were required.

Interest
costs related to unrecognized tax benefits and penalties, if any, are included in the provision for (benefit from) income taxes in the accompanying consolidated statements of
operations. We do not have any accrued interest or penalties related to uncertain tax provisions as of December 31, 2008.

As
of December 31, 2008, all of the federal tax returns we have filed for tax years 2005 through and including 2007 remain subject to examination by tax authorities. Tax years
2005 through and including 2007 are subject to examination by the state taxing authority as of December 31, 2008. There are no income tax examinations currently in process.

Requirements

Capital expenditures.We have made capital expenditures primarily for equipment to support product development, evaluation systems for
sales
opportunities, and other general purposes to support our growth. Our capital expenditures totaled $4.0 million in 2008, $5.5 million in 2007, and $6.4 million in 2006. We are not
currently party to any purchase contracts related to future capital expenditures.

Contractual obligations and requirements.Our only significant contractual obligation relates to the lease of our corporate
headquarters in
Burlington, Massachusetts and our office facilities in Madrid

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Spain.
The following table sets forth our commitments to settle contractual obligations in cash after December 31, 2008:

Total

1 year or less

2-3 years

4-5 years

More than
5 years(in thousands)Operating leases obligations

$
2,093

$
1,342

$
751

$


$



Off-Balance-Sheet Arrangements

As of December 31, 2008, we did not have any significant off-balance-sheet arrangements, as defined in
Item 303(a)(4)(ii) of Regulation S-K as promulgated by the SEC.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business
Combinations(SFAS No. 141R). This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which SFAS No. 141
called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141R requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions
specified in SFAS No. 141R. SFAS No. 141R replaces the cost allocation process required by SFAS No. 141, which required the cost of an acquisition to be allocated to the
individual assets acquired and liabilities assumed based on their estimated fair values. SFAS No. 141R retains the guidance in SFAS No. 141 for identifying and recognizing intangible
assets separately from goodwill. SFAS No. 141R will now require acquisition costs to be expensed as incurred, restructuring costs associated with a business combination must generally be
expensed prior to the acquisition date and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS
No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008, which is the Company's 2009 fiscal year. Earlier adoption is prohibited. The adoption of SFAS No, 141R may have a significant impact on our accounting for future
acquisitions.

In
December 2007, the FASB released SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51.SFAS No. 160 was issued to improve the relevance comparability, and transparency of financial information provided in financial statements by establishing
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008 and will be applied prospectively, except for the presentation and disclosure requirements which will be applied retrospectively. The adoption of SFAS No. 160 is not
expected to have a material effect on our consolidated financial position or results of operations.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.SFAS No. 161 requires disclosure of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted
for and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning
after November 15, 2008, with early adoption permitted. The adoption of SFAS No. 161 is not expected to have a material adverse effect on our consolidated financial position, results of
operations, or cash flows.

In
May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162
identifies the sources of generally accepted accounting principles in the

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United
States. SFAS No. 162 is effective sixty days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The adoption of SFAS No. 162 is not expected to have a
material effect on our consolidated financial position and results of operations.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and
rates. Our market risk exposure is primarily a result of fluctuations in foreign exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.

Foreign Currency Exchange Risk

To date, substantially all of our international customer agreements have been denominated in U.S. dollars. Accordingly, we have limited
exposure to foreign currency exchange
rates and do not enter into foreign currency hedging transactions. The functional currency of our international operations in Europe and Asia is the U.S. dollar. Accordingly, all operating assets and
liabilities of these international subsidiaries are re-measured into U.S. dollars using the exchange rates in effect at the balance sheet date. Revenue and expenses of these international
subsidiaries are re-measured into U.S. dollars at the average rates in effect during the year. Any differences resulting from the re-measurement of assets, liabilities and
operations of the European and Asian subsidiaries are recorded within other income in the consolidated statements of income. If the foreign currency exchange rates fluctuated by 10% as of
December 31, 2008, our foreign exchange exposure would have fluctuated by approximately $22,000.

Interest Rate Risk

At December 31, 2008, we had unrestricted cash and cash equivalents totaling $125.7 million. These amounts were invested
primarily in money market funds. The unrestricted cash and cash equivalents were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the
short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest
rates. Declines in interest rates, however, would reduce future interest income.

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Table of Contents

Item 8.    Financial Statements and Supplementary Data

ACME PACKET, INC.        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Page No.Report of Independent Registered Public Accounting Firm


66Consolidated Balance Sheets as of December 31, 2008 and 2007


67Consolidated Statements of Income for the Years Ended December 31, 2008, 2007 and
2006


68Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2008,
2007 and 2006


69Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006.


70Notes to Consolidated Financial Statements


71


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders of
Acme Packet, Inc.

We
have audited the accompanying consolidated balance sheets of Acme Packet, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Acme Packet, Inc. at
December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Acme Packet, Inc.'s internal control over financial
reporting as of December 31, 2008, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated March 11, 2009 expressed an unqualified opinion thereon.

Boston, Massachusetts
March 11, 2009

/s/ Ernst & Young LLP


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ACME PACKET, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

December 31,2008

2007ASSETSCurrent assets:Cash and cash equivalents

$
125,723

$
136,420Accounts receivable, net of allowance of $1,281 and $574, respectively


26,163


27,597Inventory


7,008


5,784Deferred tax asset


1,262


1,346Other current assets


1,362


2,095Total current assets


161,518


173,242Property and equipment, net


5,485


7,343Restricted cash


333


333Deferred tax asset


6,540


3,242Other assets


134


14Total assets

$
174,010

$
184,174LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
3,364

$
4,659Accrued expenses and other current liabilities


6,865


8,510Deferred revenue, current portion


15,283


6,594Total current liabilities


25,512


19,763Deferred rent


96


265Deferred Revenue, net of current portion


1,591


979Commitments and contingencies (Note 6)Stockholders' equity:Undesignated preferred stock, $0.001 par value:Authorized5,000,000 shares; Issued and outstanding0 shares





Common stock, $0.001 par value:Authorized150,000,000 shares; Issued 61,446,077 and 60,429,772 shares at December 31, 2008 and 2007, respectively


61


60Additional paid-in capital


152,567


142,974Treasury stock, at cost6,756,680 shares at December 31, 2008


(37,522
)

Retained earnings


31,705


20,133Total stockholders' equity


146,811


163,167Total liabilities and stockholders' equity

$
174,010

$
184,174


See
accompanying notes.

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ACME PACKET, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share data)

Years Ended December 31,2008

2007

2006Revenue:Product

$
91,277

$
94,906

$
71,810Maintenance, support and service


25,081


18,146


12,260Total revenue


116,358


113,052


84,070Cost of revenue(1):Product


19,234


18,281


14,624Maintenance, support and service


4,710


4,062


2,951Total cost of revenue


23,944


22,343


17,575Gross profit


92,414


90,709


66,495Operating expenses(1):Sales and marketing


44,044


35,387


23,759Research and development


22,235


20,058


12,988General and administrative


11,927


10,732


6,566Total operating expenses


78,206


66,177


43,313Income from operations


14,208


24,532


23,182Other income (expense):Interest income


3,225


6,420


2,256Other expense


(246
)

(51
)

(17
)Total other income, net


2,979


6,369


2,239Income before provision for (benefit from) income taxes


17,187


30,901


25,421Provision for (benefit from) income taxes


5,615


11,340


(3,443
)Net income

$
11,572

$
19,561

$
28,864Net income per share (Note 2):Basic

$
0.20

$
0.33

$
0.57Diluted

$
0.18

$
0.30

$
0.50Weighted average number of common shares used in the calculation of net income per share:Basic


58,463,410


59,385,082


50,437,801Diluted


62,920,268


66,016,411


57,418,796


---

Cost of product revenue

$
440

$
267

$
27Cost of maintenance, support and service revenue


408


294


49Sales and marketing


3,686


2,377


337Research and development


2,083


2,118


296General and administrative


781


994


158


See
accompanying notes.

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Table of Contents

ACME PACKET, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except share data)

Convertible
Preferred Stock

Common Stock



Treasury StockNumber of
Shares

$0.001
Par
Value

Number of
Shares

$0.001
Par
Value

Additional
Paid-in
Capital

Number of
Shares

Value

Retained
Earnings
(Deficit)

Total
Stockholders'
EquityBalance at December 31, 2005


32,190,359

$
33


15,853,171

$
16

$
45,966




$


$
(28,292
)
$
17,723Conversion of preferred stock in connection with the Company's initial public offering


(32,190,359
)

(33
)

32,190,359


33














Issuance of common stock in connection with the Company's initial public offering, net of issuance costs of $2,727








9,721,179


9


83,150











83,159Exercise of stock options








801,276


1


212











213Stock-based compensation expense














867











867Tax benefit related to exercise of stock options














111











111Net income























28,864


28,864Balance at December 31, 2006








58,565,985


59


130,306








572


130,937Issuance of common stock pursuant to the exercise of common stock warrants








112,571

















Repurchase and retirement of common stock








(30,208
)

(1
)

(7
)










(8
)Exercise of common stock options








1,781,424


2


1,739











1,741Stock-based compensation expense














6,050











6,050Tax benefit related to exercise of stock options














4,886











4,886Net Income























19,561


19,561Balance at December 31, 2007








60,429,772


60


142,974








20,133


163,167Repurchase of common stock

















(6,756,680
)

(37,522
)




(37,522
)Repurchase and retirement of common stock








(1,458
)




(1
)










(1
)Exercise of common stock options








1,017,763


1


758











759Stock-based compensation expense














7,398











7,398Tax benefit related to exercise of stock options














1,438











1,438Net Income























11,572


11,572Balance at December 31, 2008




$



61,446,077

$
61

$
152,567


(6,756,680
)
$
(37,522
)
$
31,705

$
146,811


See accompanying notes.

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ACME PACKET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Years Ended December 31,2008

2007

2006Operating activitiesNet income

$
11,572

$
19,561

$
28,864Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


5,043


4,976


3,481Impairment of property and equipment


857





Provision for bad debts


1,109


139


343Stock-based compensation expense


7,398


6,050


867Deferred income taxes


(3,222
)

192


(4,780
)Tax benefit related to exercise of stock options


(1,438
)

(4,886
)

(111
)Change in operating assets and liabilities:Accounts receivable


325


(14,017
)

(7,381
)Inventory


(1,224
)

1,427


(3,930
)Other current assets


613


45


(1,103
)Accounts payable


(1,295
)

(695
)

2,731Accrued expenses, other current liabilities and deferred rent


(368
)

4,821


3,830Deferred revenue


9,301


(1,210
)

3,520Net cash provided by operating activities


28,671


16,403


26,331Investing activitiesPurchases of property and equipment


(4,042
)

(5,462
)

(6,412
)Decrease (increase) in other assets





146


(57
)Net cash used in investing activities


(4,042
)

(5,316
)

(6,469
)Financing activitiesProceeds from sale of common stock in connection with the Company's initial public offering, net of issuance costs








83,159Repurchase of common stock


(37,523
)

(8
)

Proceeds from exercise of stock options


759


1,741


213Tax benefit related to exercise of stock options


1,438


4,886


111Net cash (used in) provided by financing activities


(35,326
)

6,619


83,483Net (decrease) increase in cash and cash equivalents


(10,697
)

17,706


103,345Cash and cash equivalents at beginning of year


136,420


118,714


15,369Cash and cash equivalents at end of year

$
125,723


136,420

$
118,714Supplemental disclosure of cash flow informationCash paid for income taxes

$
6,480

$
7,641

$
345


See
accompanying notes.

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Table of Contents

ACME PACKET, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        Years Ended December 31, 2008, 2007 and 2006        (in thousands,
except share and per share data)

1. Business Description

Acme Packet, Inc. (the Company) was incorporated in the State of Delaware on August 3, 2000. The Company provides session border controllers that enable service providers,
enterprises, and contact centers to deliver secure and high quality interactive communicationsvoice, video and other real-time multimedia sessionsacross Internet
Protocol network borders. The Company is headquartered in Burlington, Massachusetts and has sales offices there, as well as in Europe, Latin America and Asia.

2. Summary of Significant Accounting Policies

The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the consolidated
financial statements.

Principles of Consolidation

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

Management's Estimates and Uncertainties

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period.

Significant
estimates and judgments relied upon by management in preparing these financial statements include revenue recognition, allowances for doubtful accounts, reserves for excess
and obsolete inventory, expensing and capitalization of research and development costs for software, stock-based
compensation expense, warranty allowances, and the recoverability of the Company's net deferred tax assets and related valuation allowance.

Although
the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become
known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management's
estimates if these results differ from historical experience or other assumptions prove not to be substantially accurate, even if such assumptions are reasonable when made.

The
Company is subject to a number of risks similar to those of other companies of similar size in its industry, including, but not limited to, rapid technological changes, competition
from substitute products and services from larger companies, limited number of suppliers, customer concentration, government regulations, management of international activities, protection of
proprietary rights, patent litigation, and dependence on key individuals.

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ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)

Prior Year Financial Statement Reclassifications

Certain amounts totaling $2,401 and $618 related to advance billings for maintenance contract renewals previously recorded as an
increase to "accounts receivable" and "deferred revenue" in the consolidated balance sheets as of December 31, 2007 and 2006, respectively, have been reclassified in order to conform to the
current year presentation. These amounts have been removed from both account balances because as of those dates, no amounts have been collected from the customer and neither party has completed its
obligations pursuant to the arrangement. Additionally, these reclassifications had a corresponding effect to the changes in the "accounts receivable" and "deferred revenue" in the accompanying
consolidated statements of cash flows for the years ended December 31, 2007 and 2006, but had no impact on the previously reported cash provided by operating activities. This reclassification
had no impact on previously reported results of operations.

Cash and Cash Equivalents and Restricted Cash

Cash equivalents consist of highly liquid investments with original maturities of 90 days or less. Cash equivalents are carried
at cost, which approximate their fair market value. Cash and cash equivalents consisted of the following:

December 31,2008

2007Cash

$
4,738

$
5,838Money market funds


120,985


130,582Total cash and cash equivalents

$
125,723

$
136,420


As
of December 31, 2008 and 2007, the Company had restricted cash in the amount of $333 as collateral related to its facility leases. The Company's restriction with respect to
this amount expires in June 2010 for the Burlington, Massachusetts leases and July 2011 for the Madrid, Spain lease, respectively.

Revenue Recognition

The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) 97-2,Software Revenue Recognition,SOP 98-9,Software Revenue Recognition With Respect to
Certain Transactions,and the Emerging Issues Task Force (EITF) Issue No. 03-5,Applicability of AICPA Statement of Position
97-2 to Nonsoftware Deliverables in an Arrangement Containing More-Than-Incidental Software. The Company has determined that the software
element of its product is "more than incidental" to its products as a whole. As a result, in accordance with EITF Issue No. 03-5, the Company is required to recognize revenue under
the guidance of SOP 97-2 and SOP 98-9.

In
accordance with these standards, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection of
the related

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ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)

accounts
receivable is deemed probable. In making these judgments, management evaluates these criteria as follows:



A
substantial amount of the Company's sales involve multiple element arrangements, such as products, maintenance, professional services, and training. When arrangements include multiple
elements, the Company allocates the total fee among the various elements using the residual method. Under the residual method, revenue is recognized when vendor specific objective evidence (VSOE) of
fair value exists for all of the undelivered elements of the arrangement, but does not exist for one or more of the delivered elements of the arrangement. Each arrangement requires the Company to
analyze the individual elements in the transaction and to estimate the fair value of each undelivered element, which typically represents maintenance and services. Revenue is allocated to each of the
undelivered elements based on its respective fair value, with the fair value determined by the price charged when that element is sold separately.

Maintenance,
support, and service revenue include sales of maintenance and other services, including professional services, training, and reimbursable travel.

Maintenance
and support services include telephone support, return and repair services, and unspecified rights to product upgrades and enhancements, and are recognized ratably over the
term of the service period, which is generally 12 months. Maintenance and support revenue is generally deferred until the related product has been accepted and all other revenue recognition
criteria have been met.

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ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)

Professional
services and training revenue is recognized as the related service has been performed.

The
Company's products and services are marketed indirectly by distribution partners and directly by the Company's sales force. Revenue generated through arrangements with distribution
partners is recognized when the above criteria are met and only when the Company receives evidence that the distribution partner has an order from an end-user customer. The Company
typically does not offer contractual rights of return, stock balancing or price protection to its distribution partners, and actual product returns from them have been insignificant to date. As a
result, the Company does not maintain reserves for product returns and related allowances.

In
accordance with EITF Issue No. 00-10,Accounting for Shipping and Handling Fees, the Company has classified the
reimbursement by customers of shipping and handling costs as revenue and the associated cost as cost of revenue. Reimbursed shipping and handling costs, included in service revenue and costs of
service revenue, totaled approximately $96, $52 and $82 for the years ended December 31, 2008, 2007 and 2006, respectively.

In
accordance with EITF Issue No. 01-14,Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred, the Company included approximately $441, $641 and $516 of out-of-pocket expenses in service
revenue and cost of service revenue in the years ended December 31, 2008, 2007 and 2006, respectively.

Allowance for Doubtful Accounts

The Company reduces gross trade accounts receivable by an allowance for doubtful accounts. The allowance for doubtful accounts is the
Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company reviews its allowance for doubtful accounts on a regular basis and all past
due balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is
considered remote. Provisions for doubtful accounts are recorded in general and administrative expenses.

Below
is a summary of the changes in the Company's allowance for doubtful accounts for the years ended December 31, 2008, 2007 and 2006:

Balance at
Beginning of
Period

Provision

Write-offs

Balance at
End of
PeriodYear ended December 31, 2008

$
574

$
1,109

$
(402
)
$
1,281Year ended December 31, 2007


695


139


(260
)

574Year ended December 31, 2006


433


343


(81
)

695


Inventory

Inventory is stated at the lower of cost, determined on a first-in, first-out basis, or market, and consists
primarily of finished products.

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Table of Contents

ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)

The
Company provides for inventory losses based on obsolescence and levels in excess of forecasted demand. In these cases, inventory is reduced to estimated realizable value based on
historical usage and expected demand. Inherent in the Company's estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for the Company's
products, and technical obsolescence of products.

When
products have been delivered, but the product revenue associated with the arrangement has been deferred as a result of not meeting the revenue recognition criteria required by
SOP 97-2, the Company includes the costs for the delivered items in inventory until recognition of the related revenue occurs.

Property and Equipment

Property and equipment is stated at cost. Depreciation and amortization is expensed using the straight-line method over the
estimated useful lives of the assets as follows:

Assets Classification

Estimated Useful LifeComputer hardware and software

3 yearsFurniture and fixtures

3 yearsOffice and engineering equipment

3 yearsEvaluation systems

2 yearsLeasehold improvements

Shorter of asset's useful life or
remaining life of the lease


Evaluation
systems are carried at the lower of their depreciated value or their net realizable value.

Property
and equipment consists of the following:

December 31,2008

2007Computer hardware and software

$
5,220

$
4,376Furniture and fixtures


1,529


1,521Office and engineering equipment


6,919


5,457Evaluation systems


5,159


8,375Leasehold improvements


1,128


1,10019,955


20,829Less accumulated depreciation and amortization


(14,470
)

(13,486
)Property and equipment, net

$
5,485

$
7,343


Depreciation
and amortization expense was $5,043, $4,976 and $3,481 for the years ended December 31, 2008, 2007 and 2006, respectively.

Expenditures
for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its
property

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Table of Contents

ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)

and
equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable. In these instances, the Company recognizes an impairment loss
when it is probable that the estimated cash flows are less than the carrying value of the asset. The Company recognized impairment losses on its evaluation systems and certain pieces of its
engineering equipment of $857 during the year ended December 31, 2008. No other impairment losses have been recorded to date.

Financial Instruments

Financial instruments consist of cash equivalents, restricted cash and accounts receivable. The estimated fair value of these financial
instruments approximates their carrying value due to the short-term nature of these instruments.

Concentrations of Credit Risk and Off-Balance Sheet Risk

The Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts, or other
international hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk consist mainly of cash and cash equivalents and accounts receivable. The
Company maintains its cash and cash equivalents principally in accredited financial institutions of high credit standing. The Company routinely assesses the credit worthiness of its customers. The
Company generally has not experienced any material write-offs related to receivables from individual customers or groups of customers. The Company does not require collateral. Due to these
factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company's accounts receivable.

The
Company had certain customers whose revenue individually represented 10% or more of the Company's total revenue, as follows:

Years Ended
December 31,2008

2007

2006Customer A


17
%

17
%

*Customer B


15


15


11
%Customer C


10


13


16Customer D


*


11


*






76

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Table of Contents

ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)



The
Company had certain customers whose accounts receivable balances individually represented 10% or more of the Company's total accounts receivable, as follows:

December 31,2008

2007Customer C


25
%

*Customer A


20


21
%Customer D


12


22Customer B


*


11






Product Warranties

Substantially all of the Company's products are covered by a standard warranty of 90 days for software and one year for
hardware. In the event of a failure of product or software covered by this warranty, the Company must repair or replace the software or product or, if those remedies are insufficient, and at the
discretion of the Company, provide a refund. The Company's customers typically purchase maintenance and support contracts, which encompass its warranty obligations. The Company's warranty reserve
reflects estimated material and labor costs for potential or actual product issues in its installed base that are not covered under maintenance contracts but for which the Company expects to incur an
obligation. The Company's estimates of anticipated rates of warranty claims and costs are primarily based on historical information and future forecasts. The Company periodically assesses the adequacy
of the warranty allowance and adjusts the amount as necessary. If the historical data used to calculate the adequacy of the warranty allowance is not indicative of future requirements, additional or
reduced warranty reserves may be required.

The
following is a summary of changes in the amount reserved for warranty costs for the years ended December 31, 2008 and 2007:

Balance at December 31, 2006

$
461Provision


617Uses/Reductions


(810
)Balance at December 31, 2007


268Provision


282Uses/Reductions


(390
)Balance at December 31, 2008

$
160


Stock-Based Compensation

At December 31, 2008, the Company had three stock-based compensation plans, which are more fully described in Note 5.

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Table of Contents

ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)

On
January 1, 2006, the Company adopted the provisions of SFAS No. 123(R),Share-Based Payment, which requires the Company
to recognize expense related to the fair value of stock-based compensation awards. SFAS No. 123(R) requires nonpublic companies that used the minimum value method under SFAS No. 123, Accounting for Stock-Based
Compensation, for either recognition or pro forma disclosures to apply SFAS No. 123(R) using the
prospective-transition method. As such, the Company continues to apply Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to
Employees,to equity awards outstanding at the date of SFAS No. 123(R)'s adoption that were measured using the minimum value method.

Effective
with the adoption of SFAS No. 123(R), the Company elected to use the Black-Scholes option pricing model to determine the weighted average fair value of stock options
granted. In accordance with SFAS No. 123(R), the Company recognizes the compensation cost of stock-based awards on a straight-line basis over the vesting period of the award. In
addition, SFAS 123(R) requires the benefits of tax deductions in excess of recognized stock-based compensation to be reported as a financing activity rather than an operating activity in the
statements of cash flows. This requirement reduces net operating cash flows and increases net financing cash flows in certain periods.

As
there was no public market for its common stock prior to October 13, 2006, the effective date of the Company's IPO, the Company determined the volatility for options granted in
2006 based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using an
average of the historical volatility measures of this peer group of companies as well as the historical volatility of the Company's common stock beginning in January 2007. The expected life of options
has been determined utilizing
the "simplified" method as prescribed by the SEC's Staff Accounting Bulletin No. 107,Share-Based Payment. The risk-free interest
rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. The Company has not paid and does not anticipate paying cash dividends on its common stock;
therefore, the expected dividend yield is assumed to be zero. In addition, SFAS No. 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the
period, whereas, SFAS No. 123 permitted companies to record forfeitures based on actual forfeitures, which was the Company's historical policy under SFAS No. 123. As a result, the
Company applied an estimated forfeiture rates derived from an analysis of historical data of 8.27%, 7.00% and 11.25% for the years ended December 31, 2008, 2007 and 2006, respectively, in
determining the expense recorded in the accompanying consolidated statements of income. The weighted-average fair values of options granted were $3.17, $7.62 and $5.43 for the years ended
December 31, 2008, 2007 and 2006, respectively. The weighted-average assumptions utilized to determine such values are presented in the following table:

Years Ended December 31,2008

2007

2006Risk-free interest rate


3.05
%

4.56
%

4.79
%Expected volatility


46.56
%

56.28
%

81.44
%Expected life


4.76 years


5.41 years


6.25 yearsDividend yield











78

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Table of Contents

ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)

During the year ended December 31, 2008, the Company issued 179,000 restricted stock units (RSUs) to certain of its employees at a fair value of $7.51 per share pursuant to the
2006 Equity Incentive Plan. The RSUs granted contain time-based vesting and performance-based vesting criteria. Of the time-based RSUs granted, 131,500 will vest in three equal
installments, commencing on February 12, 2009 and becoming fully vested on February 12, 2011. The remaining 47,500 are performance-based RSUs and will vest only if certain Company growth
rates are met by December 31, 2009, as determined by the Company's Board of Directors, the Board, and the recipient remains associated with the Company at the time such determination is made.
The Company is accounting for the performance-based RSUs in accordance with SFAS No. 123(R), and has deferred all compensation cost until such time that it is probable that the performance
criteria will be met.

The
Company recorded stock-based compensation expense of $7,398, $6,050 and $867 for the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31 2008,
there was $17,444 of unrecognized stock-based compensation expense related to stock-based awards that is expected to be recognized over a weighted-average period of 2.36 years.

See
Note 5 for a summary of the stock option and restricted stock unit activity under the Company's stock-based compensation plans for the year ended December 31, 2008.

Research and Development

Research and development expense includes costs incurred to develop intellectual property and are charged to expense as incurred. The
costs for the development of new software and substantial enhancements to existing software are expensed as incurred until technological feasibility has been established, at which time any additional
costs would be capitalized. The Company has determined that technological feasibility is established at the time a working model of software is completed. Because the Company believes its current
process for developing software will be essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.

Comprehensive Income

SFAS No. 130,Reporting Comprehensive Income,establishes standards for
reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders' equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources. The comprehensive income for all periods presented does not differ from the reported net income.

Net Income Per Share

The Company calculates net income per share in accordance with SFAS No. 128,Earnings Per
Share(SFAS No. 128). Through December 31, 2006, the Company calculated net income per share in accordance with SFAS No. 128, as clarified by EITF Issue
No. 03-6,Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share. EITF
Issue No. 03-6 clarifies the use of the "two-class" method of calculating earnings per share as originally prescribed in SFAS No. 128. EITF Issue
No. 03-6 provides guidance on how to determine whether a security should be

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Table of Contents

ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)

considered
a "participating security" for purposes of computing earnings per share and how earnings should be allocated to a participating security when using the two-class method for
computing basic earnings per share. The Company determined that its convertible preferred stock represented a participating security and therefore adopted the provisions of EITF Issue
No. 03-6 for all periods prior to December 31, 2006.

Under
the two-class method, basic net income per share is computed by dividing the net income applicable to common stockholders by the weighted-average number of common
shares outstanding for the fiscal period. Diluted net income per share is computed using the more dilutive of (a) the two-class method or (b) the if-converted
method. The Company allocates net income first to preferred stockholders based on dividend rights under the Company's charter and then to common stockholders based on ownership interests. Diluted net
income per share gives effect to all potentially dilutive securities, including stock options, using the treasury stock method. For the year ended December 31, 2006, the Company used the
if-converted method to compute net income per share as the effect was more dilutive than the two-class method.

Commencing
on January 1, 2007, EITF Issue No. 03-6 no longer applied due to the conversion of all shares of convertible preferred stock outstanding into shares
of the Company's common stock, upon the completion of the Company's IPO.

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Table of Contents

ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)

The
calculation of basic and diluted net income per share is as follows:

Years Ended December 31,2008

2007

2006Numerator:Net income, as reported

$
11,572

$
19,561

$
28,864Denominator:Weighted-average number of shares of common stock


58,493,883


59,516,103


50,734,071Less: Weighted-average number of unvested restricted common shares outstanding


(30,473
)

(131,021
)

(296,270
)Weighted-average number of common shares used in calculating basic net income per common share


58,463,410


59,385,082


50,437,801Weighted-average number of common shares issuable upon exercise of outstanding stock options, based on treasury stock method


4,408,953


6,471,886


6,559,725Weighted-average number of unvested restricted common shares outstanding


30,473


127,251


296,270Weighted-average number of common shares issuable upon vesting of outstanding restricted stock units


17,432





Weighted-average number of common shares issuable upon exercise of common stock warrant





32,192


125,000Weighted-average number of common shares used in computing diluted net income per common share


62,920,268


66,016,411


57,418,796Net income per common share:Basic

$
0.20

$
0.33

$
0.57Diluted

$
0.18

$
0.30

$
0.50


In
the computation of diluted weighted-average shares outstanding, 4,433,175, 1,764,420 and 260,753 weighted-average common share equivalents underlying outstanding stock options have
been excluded from the computation as of December 31, 2008, 2007 and 2006, respectively, as their effect would have been antidilutive.

Impairment of Long-Lived Assets

The Company accounts for its long-lived assets in accordance with SFAS No. 144,Accounting
for the Impairment or Disposal of Long-Lived Assets. This statement requires that long-lived assets and certain identifiable intangible assets be
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. During this review, the Company re-evaluates the
significant assumptions used in determining the original cost and estimated lives of long-lived assets. Although the assumptions may vary from asset to asset, they generally include
operating results, changes in the use of the asset, cash flows and other indicators of

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Table of Contents

ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)

value.
Management then determines whether the remaining useful life continues to be appropriate or whether there has been an impairment of long-lived assets. If impairment exists, the
Company would adjust the carrying value of the asset to fair value. Any write-downs are treated as permanent reductions in the carrying amount of the assets.

For
the years ended December 31, 2007 and 2006, the Company has not identified any impairment of its long-lived assets. For the year ended December 31, 2008,
the company determined that there had been an impairment to certain of its evaluation systems which are included in property and equipment. Accordingly, the Company recognized impairment losses on its
evaluation systems and certain pieces of its engineering equipment of $857 which were recorded in the accompanying consolidated statement of income for the year ended December 31, 2008

Capitalized Internal-Use Software

The Company capitalizes certain costs incurred to purchase or create internal-use software in accordance with
SOP 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. To date, such costs have included
external direct costs of materials and services incurred in the implementation of internal-use software and are included within computer hardware and software. Once the capitalization
criteria of SOP 98-1 have been met, such costs are classified as software and are amortized on a straight-line basis over three years once the software has been put into
use. Subsequent additions, modifications, or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not
perform. Software maintenance and training costs are expensed in the period in which they are incurred.

Foreign Currency Translation

The financial statements of the Company's international subsidiaries are translated in accordance with SFAS No. 52, Foreign Currency
Translation. The functional currency of the Company's international subsidiaries in the United Kingdom, Japan, and Hong Kong is the
U.S. dollar. Accordingly, all operating assets and liabilities of these international subsidiaries are re-measured into U.S. dollars using the exchange rates in effect at the balance sheet
date. Revenue and expenses of these foreign subsidiaries are re-measured into U.S. dollars at the average rates in effect during the year. Any differences resulting from the
re-measurement of assets, liabilities, and operations of the United Kingdom, Japan, and Hong Kong subsidiaries are recorded within other income (expense) in the accompanying consolidated
statements of income. During the years ended December 31, 2008, 2007 and 2006 the Company recorded foreign exchange losses of $246, $51, and $17, respectively, in other income (expense).

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,Accounting for Income
Taxes, which is the asset and liability method for accounting and reporting for income taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized
based on temporary differences between the financial reporting and income tax basis of assets and liabilities using statutory rates. In

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Table of Contents

ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)

addition,
SFAS No. 109 requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized.

The
Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 48,Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. At the adoption date and as of December 31, 2008 and 2007, the Company had no material unrecognized tax benefits and no adjustments to liabilities, retained
earnings or operations were required.

Advertising Expense

Advertising expense primarily includes promotional expenditures and is expensed as incurred, as such efforts have not met the
direct-response criteria required for capitalization. Amounts incurred for advertising expense were not material for the years ended December 31, 2008, 2007, and 2006.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business
Combinations(SFAS No. 141R). This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which SFAS No. 141
called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141R requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions
specified in SFAS No. 141R. SFAS No. 141R replaces the cost allocation process required by SFAS No. 141, which required the cost of an acquisition to be allocated to the
individual assets acquired and liabilities assumed based on their estimated fair values. SFAS No. 141R retains the guidance in SFAS No. 141 for identifying and recognizing intangible
assets separately from goodwill. SFAS No. 141R will now require acquisition costs to be expensed as incurred, restructuring costs associated with a business combination must generally be
expensed prior to the acquisition date and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS
No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008, which is the Company's 2009 fiscal year. Earlier adoption is prohibited. The adoption of SFAS No. 141R may have a significant impact on the Company's accounting for
future acquisitions.

In
December 2007, the FASB released SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51.SFAS No. 160 was issued to improve the

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Table of Contents

ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

2. Summary of Significant Accounting Policies (Continued)

relevance
comparability, and transparency of financial information provided in financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary
and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and will be applied prospectively, except for the presentation
and disclosure requirements which will be applied retrospectively. The adoption of SFAS No. 160 is not expected to have a material effect on the Company's consolidated financial position or
results of operations.

In
March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.SFAS No. 161 requires disclosure of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted
for and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning
after November 15, 2008, with early adoption permitted. The adoption of SFAS No. 161 is not expected to have a material effect on the Company's consolidated financial position and
results of operations.

In
May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162
identifies the sources of generally accepted accounting principles in the United States. SFAS No. 162 is effective sixty days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The
adoption of SFAS No. 162 is not expected to have a material effect on the Company's consolidated financial position and results of operations.

3. Income Taxes

Income before the provision for (benefit from) income taxes consists of the following:

Years Ended December 31,2008

2007

2006Domestic

$
16,634

$
30,514

$
25,185Foreign


553


387


236Total

$
17,187

$
30,901

$
25,421


84

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Table of Contents

ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

3. Income Taxes (Continued)

The
provision for (benefit from) income taxes in the accompanying consolidated financial statements consists of the following:

Years Ended December 31,2008

2007

2006Current provision:Federal

$
8,162

$
9,946

$
1,115State


527


1,095


159Foreign


148


107


63Total

$
8,837

$
11,148

$
1,337Deferred provision (benefit):Federal

$
(2,955
)
$
(204
)
$
(3,361
)State


(267
)

396


(1,419
)Total

$
(3,222
)
$
192

$
(4,780
)Total provision (benefit):

$
5,615

$
11,340

$
(3,443
)


A
reconciliation of the U.S. federal statutory rate to the Company's effective tax rate is as follows:

Years Ended December 31,2008

2007

2006U.S. federal statutory rate


35.0
%

35.0
%

35.0
%State taxes, net


1.2


3.1


0.4Permanent differences


3.1


0.6


1.4Research and development tax credits


(4.7
)

(2.2
)

(2.8
)Other


(1.9
)

0.2


Change in valuation allowance








(47.5
)Effective tax rate


32.7
%

36.7
%

(13.5
)%


The
Company currently expects to realize recorded deferred tax assets as of December 31, 2008 of $7,802. The Company's conclusion that such assets will be recovered is based upon
its expectation that future earnings of the Company will provide sufficient taxable income to realize recorded tax assets. While the realization of the Company's net recorded deferred tax assets
cannot be assured, to the extent that future taxable income against which these tax assets may be applied is not sufficient or carrybacks are limited, some or all of the Company's net recorded
deferred tax assets would not be realizable. Approximately $3,943 of the deferred tax asset recorded as of December 31, 2008 is attributable to benefits associated with stock-based compensation
charges. Under the guidance of SFAS No. 123(R), no valuation allowance has been recorded against this amount. However, in the future, if the underlying awards expire with an intrinsic value
less than the fair value of the awards on the date of grant, some or all of the benefit may not be realizable.

85

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ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

3. Income Taxes (Continued)

As
of December 31, 2008, all of the federal tax returns the Company has filed for tax years 2005 through 2007 remain subject to examination by tax authorities. Tax years 2005
through 2007 are subject to examination by the state taxing authority as of December 31, 2008. There are no income tax examinations currently in process.

The
approximate income tax effect of each type of temporary difference and carryforward as of December 31, 2007 and 2008 is as follows:

December 31,2008

2007Stock-based compensation

$
3,943

$
1,707Depreciation


1,371


777Inventory and warranty reserves


1,312


863Allowance for doubtful accounts


488


221Accrued vacation expense


379


357Sales tax reserve


38


272Other temporary differences


271


391Net deferred tax asset

$
7,802

$
4,588


The
Company is required to compute income tax expense in each jurisdiction in which it operates. This process requires the Company to project its current tax liability and estimate its
deferred tax assets and liabilities, including net operating loss (NOL) and tax credit carryforwards. In assessing the need for a valuation allowance, the Company considered its recent operating
results, future taxable income projections and feasible tax planning strategies.

As
of December 31, 2008, the Company had state research and development tax credits of $1,108 of which approximately $1,029 related to excess tax deductions has been excluded from
the above table,
the benefit of these credits will be realized as an increase in additional paid in capital when it results in a reduction in state taxable income in accordance with SFAS 123R. These state tax
credits begin to expire in 2021, and are subject to review and possible adjustment by the taxing authorities. During 2008, the Company both generated and utilized all of its U.S. federal research and
development tax credits.

The
Company's current intention is to reinvest the total amount of its unremitted earnings in the local international jurisdiction or to repatriate the earnings only when
tax-effective. As such, the Company has not provided for U.S. taxes on the unremitted earnings of its international subsidiaries.

86

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ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

4. Stockholders' Equity

On October 13, 2006, the Company completed its IPO of common stock in which the Company sold and issued 9,721,179 shares of the Company's common stock, including 1,721,179 shares
sold by the Company pursuant to the underwriters' full exercise of their over-allotment option, at an issue price of $9.50 per share. The Company raised a total of $92,351 in gross
proceeds from the IPO, or $83,159 in net proceeds after deducting underwriting discounts and commissions of $6,475 and other estimated offering costs of approximately $2,717. Upon the closing of the
IPO, all shares of convertible preferred stock outstanding automatically converted into 32,190,359 shares of common stock.

Restricted Stock

The Company has a Stock Restriction and Repurchase Agreement for key employees and consultants to the Company. Under the terms of the
agreement, shares of common stock issued or sold to an employee or consultant are subject to a vesting schedule commencing on the date shares are distributed to the employee. Vesting occurs
periodically at specified time intervals and specified percentages. All shares of common stock become fully vested within four years of the date of distribution. Any unvested shares are subject to
repurchase at the discretion of the Company, at the initial purchase price. A summary of the status of the Company's unvested restricted shares of common stock outstanding, as of December 31,
2008 and the changes during the year then ended are as follows:

Number of
Shares

Weighted-Average
Grant Date
Fair ValueUnvested shares at December 31, 2007


67,987

$
0.45Granted





Vested


(61,936
)

0.43Forfeited


(1,458
)

0.65Unvested shares at December 31, 2008


4,593

$
0.68


Warrants

In connection with an equipment financing in 2001, the Company issued a warrant to the lender to purchase up to 125,000 shares of
Series B Preferred Stock at an exercise price of $1.39 per share. Upon completion of the Company's IPO in October 2006, these warrants automatically converted into warrants to purchase shares
of the Company's common stock. On April 5, 2007, the holder of the warrant exercised all outstanding warrants in a cashless exercise. As a result, the Company issued 112,571 shares of the
Company's common stock to satisfy the exercise of all remaining warrants.

Common Stock Repurchase Program

In February 2008, the Board authorized the repurchase of up to $20,000 of the Company's common stock over the subsequent twelve-month
period. In August 2008, the Board expanded the common stock repurchase program by authorizing the repurchase of an additional $35,000 of the Company's common stock for an aggregate of $55,000. The
purchase of the Company's common stock was executed periodically as market and business conditions warranted on the open market, in

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ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

4. Stockholders' Equity (Continued)

negotiated
or block trades, or under a Rule 10b5-1 plan, which permitted shares to be repurchased when the Company might otherwise be precluded for doing so under insider trading
laws.

This
common stock repurchase program did not obligate the Company to repurchase any dollar amount, or number of shares of common stock, and the program could have been suspended or
discontinued at any time. The common stock repurchase program remained in effect through February 28, 2009. The Company repurchased 6,756,680 shares of its common stock for an aggregate
purchase price, including applicable brokers' fees, of $37,522 during the year ended December 31, 2008. The Company did not repurchase any additional shares of its common stock subsequent to
December 31, 2008.

5. Equity Incentive Plans

The Company has in effect the Acme Packet, Inc. 2000 Equity Incentive Plan (the 2000 Plan) under which it may grant incentive stock options (ISOs), nonqualified stock options
(NSOs), restricted stock, and stock grants to purchase up to 12,200,000 shares of common stock. Under the 2000 Plan, ISOs may not be granted at less than fair market value on the date of the grant and
all options generally vest over a four-year period and certain options are subject to accelerated vesting based on certain future events. These options expire ten years after the grant
date. Effective upon the consummation of the IPO in 2006, no further awards were made pursuant to the 2000 Plan, but any outstanding awards under the 2000 Plan remain in effect and continue to be
subject to the terms of the 2000 Plan.

The
Company also has in effect the 2006 Equity Incentive Plan, which allows the Company to grant ISOs, NSOs, restricted stock, restricted stock units and stock grants to employees,
consultants, and directors of the Company. Under the 2006 Equity Incentive Plan, stock options may not be granted at less than fair market value on the date of grant, and all options generally vest
over a four-year period. These options generally expire seven years after the grant date. The Company initially reserved for issuance an aggregate of 3,000,000 shares of common stock under
the 2006 Equity Incentive Plan plus an additional annual increase to be added automatically on January 1 of each year, from 2006 and until 2016, equal to the lesser of (i) 3,000,000
shares of common stock or (ii) five percent of the Company's outstanding equity on a fully diluted basis as of the end of the immediately preceding year. The Board may waive the annual
increase, in whole or in part. In November 2006 the Board waived the annual increase for 2007 pursuant to this provision. In January 2008, the number of shares of common stock reserved for future
issuance under the 2006 Equity Incentive Plan was increased by 3,000,000 shares pursuant to this provision. As of December 31, 2008, 1,197,937 shares were available for future issuance under
the 2006 Equity Incentive Plan.

Additionally,
the Company has in effect the 2006 Director Option Plan, under which no options may be granted to eligible directors at less than fair market value on the date of grant,
and all options vest over a one year period from the grant date. These options expire ten years after the grant date. The Company initially reserved for issuance an aggregate of 300,000 shares of
common stock under the 2006 Director Plan plus an additional annual increase to be added automatically on January 1 of each year of 75,000 shares of common stock. The Board may waive the annual
increase, in whole or in part.

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ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

5. Equity Incentive Plans (Continued)

In
November 2006 the Board waived the annual increase for 2007 pursuant to this provision. In January 2008, the number of shares of common stock reserved for future issuance under the 2006 Director
Plan was increased by 75,000 shares pursuant to this provision. As of December 31, 2008, 287,500 shares were available for future issuance under the 2006 Director Option Plan.

A
summary of stock option activity under the Company's stock-based compensation plans for the year ended December 31, 2008 is as follows:

Number
of Shares

Exercise Price
Per Share

Weighted-Average
Exercise Price
Per Share

Weighted-Average
Remaining
Contractual
Life (Years)

Aggregate
Intrinsic
Value(2)Outstanding at December 31, 2007


9,214,845

$
0.20 - 18.36

$
5.08Granted


2,158,000


3.82 - 10.03


7.39Canceled


(274,740
)

0.30 - 16.86


10.95Exercised


(1,017,763
)

0.20 - 5.50


0.75




$
7,290Outstanding at December 31, 2008


10,080,342

$
0.20 - 18.36

$
5.85


6.16

$
20,827Exercisable at December 31, 2008


4,997,615

$
0.20 - 18.36

$
3.90


5.92

$
16,015Vested or expected to vest at December 31, 2008(1)


9,061,316

$
0.20 - 18.36

$
5.69


6.13

$
19,604


---

During
the year ended December 31, 2008, the Company issued 179,000 restricted stock units (RSUs) to certain of its employees at a fair value of $7.51 per share pursuant to the
2006 Equity Incentive Plan. The RSUs granted contain time-based vesting and performance-based vesting criteria. Of the time-based RSUs granted, 131,500 will vest in three equal
installments, commencing on February 12, 2009 and becoming fully vested on February 12, 2011. The remaining 47,500 are performance-based RSUs and will vest only if certain Company growth
rates are met by December 31, 2009, as determined by the Company's Board of Directors, and the recipient remains associated with the Company at the time such determination is made. The Company
is accounting for the performance-based RSUs in accordance with SFAS No. 123(R), and has deferred all compensation cost until such time that it is probable that the performance criteria will be
met. A summary of the status of

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Table of Contents

ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

5. Equity Incentive Plans (Continued)

the
Company's unvested RSUs outstanding as of December 31, 2008, and the changes during the year then ended, is presented below:

Number
of Shares

Market Price
Per Share

Weighted-Average
Grant Date Fair Value
Per Share

Weighted-Average
Remaining
Contractual
Life (Years)

Aggregate
Intrinsic
Value(2)Unvested at December 31, 2007




$


$
Granted


179,000


7.51


7.51Vested








Forfeited








Unvested at December 31, 2008


179,000

$
7.51

$
7.51


1.09

$
942Vested or expected to vest at December 31, 2008(1)


151,598

$
7.51

$
7.51


1.05

$
797


---

6. Commitments and Contingencies

Operating Leases

The Company conducts its operations in leased office facilities under various operating leases that expire through 2011. Certain of the
Company's operating leases include escalating payment amounts. In accordance with SFAS No. 13,Accounting for Leases, the Company is recognizing
the related rent expense on a straight-line basis over the term of the lease. As of December 31, 2008 and 2007, the Company has deferred rent of approximately $265 and $372
respectively, of which $170 and $107, respectively, is classified as a current liability and included in accrued expense in the accompanying consolidated balance sheets. Total rent expense under these
operating leases was approximately $1,185, $1,115 and $1,052, for the years ended December 31, 2008, 2007 and 2006, respectively.

Future
minimum lease payments under non-cancelable operating leases at December 31, 2008 were as follows:

Years Ending December 31:2009

$
1,3422010


7112011


40Total minimum lease payments

$
2,093


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ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

6. Commitments and Contingencies (Continued)

Litigation

From time to time and in the ordinary course of business, the Company may be subject to various claims, charges, and litigation. At
December 31, 2008 and 2007, the Company did not have any pending claims, charges, or litigation that it expects would have a material adverse effect on its consolidated financial position,
results of operations, or cash flows.

Other

Certain of the Company's arrangements with customers include clauses whereby the Company may be subject to penalties for failure to
meet certain performance obligations. The Company has not incurred any such penalties to date.

7. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

December 31,2008

2007Accrued compensation and related benefits

$
4,302

$
5,176Accrued sales and use taxes


490


1,839Accrued income taxes payable





148Accrued warranty


160


268Other accrued liabilities


1,913


1,079Total

$
6,865

$
8,510


8. Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements,which defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value
measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement. SFAS No. 157 was effective for the Company beginning
January 1, 2008 and for interim periods within that year. In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2,Effective Date of
FASB Statement No. 157, which delayed for one year the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that
are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). As required, the Company adopted SFAS No. 157 for its financial assets on
January 1, 2008. Adoption did not have a material impact on the Company's financial position or results of operations. The adoption of SFAS No. 157 as it pertains to
non-financial assets and liabilities did not have a material impact on the Company's financial statements.

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ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

8. Fair Value Measurements (Continued)

SFAS
No. 157 establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure
fair value in the following categories.



The
fair values of all the Company's investment instruments have been valued using Level 1 inputs as described above.

The
Company also adopted the provisions of SFAS No. 159,The Fair Value Option for Financial Assets and Liabilities,in 2008. SFAS
No. 159 allows companies to choose to measure eligible assets and liabilities at fair value with changes in value recognized in earnings. Fair value treatment may be elected either upon initial
recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to re-measure any of its
existing financial assets or liabilities under the provisions of this statement.

9. Segment Information

SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information, establishes standards for reporting information
about operating segments in annual financial statements and requires selected information of these segments be presented in interim financial reports issued to stockholders. 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 making
decisions on how to allocate resources and assess performance. The Company's chief decision maker, as defined under SFAS No. 131, is the chief executive officer. The Company views its
operations and manages its business as one operating segment.

For
the years ended December 31, 2008, 2007 and 2006, operations related to the Company's international subsidiaries are not material to the accompanying consolidated financial
statements taken as a whole.

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ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

9. Segment Information (Continued)

Geographic Data

Net sales to unaffiliated customers by geographic area were as follows:

Years Ended December 31,2008

2007

2006United States and Canada

$
59,512

$
53,748

$
47,965International


56,846


59,304


36,105Total

$
116,358

$
113,052

$
84,070


During
the year ended December 31, 2008, 2007 and 2006, no one international country contributed more then 10% of the Company's total revenue.

As
of December 31, 2008 and 2007, property and equipment at locations outside the U.S. was not material.

10. 401(k) Plan

The Company maintains the Acme Packet, Inc. 401(k) Pension and Profit Sharing Plan (the 401(k) Plan) under Section 401(k) of the Internal Revenue Code covering all eligible
employees. Employees of the Company may participate in the 401(k) Plan after reaching the age of 21. The Company may make discretionary matching contributions and profit sharing contributions, as
determined annually by the Board. Employee contributions vest immediately, while Company matching contributions vest ratably over four years. To date, the Company has not made any discretionary
contributions to the 401(k) Plan.

11. Quarterly Financial Data (unaudited)

Three Months EndedMarch 31,
2007

June 30,
2007

September 30,
2007

December 31,
2007Total revenue

$
25,091

$
27,024

$
29,563

$
31,374Gross profit


19,791


21,543


23,753


25,622Income from operations


5,329


5,588


6,550


7,065Net income


4,292


4,617


5,495


5,157Net income per share:Basic

$
0.07

$
0.08

$
0.09

$
0.09Diluted

$
0.06

$
0.07

$
0.08

$
0.08


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ACME PACKET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2008, 2007 and 2006

(in thousands, except share and per share data)

11. Quarterly Financial Data (unaudited) (Continued)



Three Months EndedMarch 31,
2008

June 30,
2008

September 30,
2008

December 31,
2008Total revenue

$
31,680

$
25,661

$
28,436

$
30,581Gross profit


25,767


20,084


22,630


23,933Income from operations


6,967


629


2,677


3,935Net income


5,038


816


2,034


3,684Net income per share:Basic

$
0.08

$
0.01

$
0.03

$
0.07Diluted

$
0.08

$
0.01

$
0.03

$
0.06


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Table of Contents

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

(1)   Evaluation of Disclosure Controls and Procedures.

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

We
carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level in enabling us to record, process, summarize
and report information required to be included in our periodic SEC filings as of December 31, 2008.

(2)   Management's Annual Report on Internal Control over Financial Reporting.

We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in
Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our Chief Executive Officer (our
principal executive officer) and Chief Financial Officer (our principal accounting and financial officer), and effected by our board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal
control over financial reporting includes those policies and procedures that:



Our
internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial
statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the

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risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We
have assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2008. In making this assessment, we used the criteria set forth in
the Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we believe that, as of
December 31, 2008, our internal control over financial reporting is effective at a reasonable assurance level based on these criteria.

Our
independent registered public accounting firm, Ernst & Young LLP, issued an attestation report on the Company's internal control over financial reporting. See
Section (4) below.

(3)   Changes in Internal Controls over Financial Reporting.

During the quarter ended December 31, 2008, there were no changes in our internal control over financial reporting that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.

(4)   Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders of
Acme Packet, Inc.

We
have audited Acme Packet, Inc.'s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Acme Packet, Inc.'s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's
Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We
conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.

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Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, Acme Packet, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO
criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Acme Packet, Inc. as of
December 31, 2008 and 2007, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008 of
Acme Packet, Inc. and our report dated March 11, 2009 expressed an unqualified opinion thereon.

Boston, Massachusetts
March 11, 2009

/s/ Ernst & Young LLP


Item 9B.    Other Information

None.

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Table of Contents

PART III

Item 10.    Directors, Executive Officers, and Corporate Governance

Incorporated by reference from the information in our proxy statement for the 2009 Annual Meeting of Stockholders, which we will file
with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.

Item 11.    Executive Compensation

Incorporated by reference from the information in our proxy statement for the 2009 Annual Meeting of Stockholders, which we will file
with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Incorporated by reference from the information in our proxy statement for the 2009 Annual Meeting of Stockholders, which we will file
with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.

Item 13.    Certain Relationships and Related Transactions and Director Independence

Incorporated by reference from the information in our proxy statement for the 2009 Annual Meeting of Stockholders, which we will file
with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.

Item 14.    Principal Accounting Fees and Services

Incorporated by reference from the information in our proxy statement for the 2009 Annual Meeting of Stockholders, which we will file
with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.

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Table of Contents

PART IV



Item 15.    Exhibits, Financial Statements and Schedules

(a)(1)    Financial
Statements.

The
response to this portion of Item 15 is set forth under Item 8 above.

(a)(2)    Financial
Statement Schedules.

All
schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto set forth under
Item 8 above.

(a)(3)    Exhibits.

EXHIBIT INDEX

Exhibit No.

Description3.1(1)

Amended and Restated Certificate of Incorporation of the Registrant3.2(2)

Second Amended and Restated Bylaws of the Registrant4.1(1)

Specimen certificate evidencing shares of common stock10.1(1)

Northwest Park Lease, dated August 9, 2004, by and between Seventy One Limited Liability Company and the Registrant10.2(1)

Northwest Park Lease, dated July 10, 2006, by and between the Registrant and MTP Limited Partnership10.3(1)

Amended and Restated 2000 Equity Incentive Plan10.4(1)

2006 Equity Incentive Plan10.5(1)

2006 Director Stock Option Plan10.5(1)

Incentive Stock Option Agreement, dated December 23, 2005, by and between the Registrant and Patrick MeLampy10.6(1)

Incentive Stock Option Agreement, dated December 23, 2005, by and between the Registrant and Dino DiPalma10.7(1)

Incentive Stock Option Agreement, dated November 23, 2005, by and between the Registrant and Dino DiPalma10.8(1)

Incentive Stock Option Agreement, dated January 19, 2005, by and between the Registrant and Dino DiPalma10.9(1)

Incentive Stock Option Agreement, dated August 16, 2004, by and between the Registrant and Dino DiPalma10.10(1)

Incentive Stock Option Agreement, dated January 14, 2004, by and between the Registrant and Dino DiPalma10.11(1)

Incentive Stock Option Agreement, dated September 17, 2002, by and between the Registrant and Dino DiPalma10.12(1)

Incentive Stock Option Agreement, dated September 17, 2002, between the Registrant and Seamus Hourihan10.13(1)

Incentive Stock Option Agreement, dated December 23, 2005, by and between the Registrant and Andrew Ory10.14(4)

Transition/Separation Agreement dated as of February 7, 2008 between the Registrant and Keith Seidman10.15(5)

Letter Agreement dated as of August 29, 2008 between the Registrant and Peter J. Minihane10.16(1)

Amended and Restated Registration Rights Agreement, dated June 8, 2004, by and between the Registrant and the shareholders named therein14.1(3)

Code of Business Conduct and Ethics


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Table of Contents

Exhibit No.

Description21.1

Subsidiaries of the Registrant23.1

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act32.1

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act


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100

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SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ACME PACKET, INC.(Registrant)Date: March 13, 2009

By:

/s/ ANDREW D. ORY Andrew D. Ory President and Chief Executive OfficerDate: March 13, 2009

By:

/s/ PETER J. MINIHANE Peter J. Minihane Chief Financial Officer and Treasurer


Pursuant
to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities and dates indicated.

Signature

Title

Date/s/ ANDREW D. ORY Andrew D. Ory

President and Chief Executive Officer; Director (Principal Executive Officer)

March 13, 2009/s/ PETER J. MINIHANE Peter J. Minihane

Chief Financial Officer
(Principal Accounting and Financial Officer)

March 13, 2009/s/ GARY J. BOWEN Gary J. Bowen

Director

March 13, 2009/s/ DAVID ELSBREE David Elsbree

Director

March 13, 2009/s/ ROBERT HOWER Robert Hower

Director

March 13, 2009/s/ PATRICK J. MELAMPY Patrick J. MeLampy

Director

March 13, 2009/s/ ROBERT G. ORY Robert G. Ory

Director

March 13, 2009/s/ MICHAEL THURK Michael Thurk

Director

March 13, 2009


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