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



FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2010ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from      to


Commission File Number 001-34115

SONUS NETWORKS, INC.(Exact name of Registrant as specified in its charter)

DELAWARE

04-3387074(State or other jurisdiction
of incorporation or organization)

(I.R.S. employer
identification no.)7 Technology Park Drive, Westford, Massachusetts 01886(Address of principal executive offices, including zip code)


(978) 614-8100(Registrant's telephone number, including area code)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o    No 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 Exchange
Act). Yes o    No ý

As of October 25, 2010, there were 276,469,733 shares of the registrant's common stock, $0.001 par value, outstanding.



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Table of Contents



SONUS NETWORKS, INC.  FORM 10-Q  QUARTER ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS



PagePART I FINANCIAL INFORMATIONItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009 (unaudited)

3Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)

4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (unaudited)

5Notes to Condensed Consolidated Financial Statements (unaudited)

6Item 2.

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

26Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37Item 4.

Controls and Procedures

37PART II OTHER INFORMATIONItem 1.

Legal Proceedings

38Item 1A.

Risk Factors

38Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39Item 6.

Exhibits

40Signatures

41Exhibit Index

42


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PART I FINANCIAL INFORMATION

Item 1.    Financial Statements



SONUS NETWORKS, INC.        Condensed Consolidated Balance Sheets        (in thousands, except share data)        (unaudited)

September 30,
2010

December 31,
2009AssetsCurrent assets:Cash and cash equivalents

$
81,245

$
125,323Marketable securities


247,908


239,223Accounts receivable, net of allowance for doubtful accounts of $392 and $666 at September 30, 2010 and December 31, 2009, respectively


34,710


47,998Inventory, net


26,982


21,925Deferred income taxes


650


562Other current assets


19,657


17,508Total current assets


411,152


452,539Property and equipment, net


16,588


14,646Intangible assets, net


1,928


341Goodwill


5,056


5,053Investments


84,314


49,598Deferred income taxes


960


711Other assets


22,427


17,849$
542,425

$
540,737Liabilities and stockholders' equityCurrent liabilities:Accounts payable

$
19,040

$
5,337Accrued expenses


24,126


19,292Current portion of deferred revenue


56,014


74,748Current portion of long-term liabilities


492


753Total current liabilities


99,672


100,130Deferred revenue


35,818


25,242Long-term liabilities


911


1,127Total liabilities


136,401


126,499Commitments and contingencies (Note 16)Stockholders' equity:Preferred stock, $0.01 par value; 5,000,000 shares authorized, none issued and outstanding





Common stock, $0.001 par value; 600,000,000 shares authorized; 278,145,526 and 276,792,897 shares issued; 275,848,616 and 274,495,987 shares outstanding at
September 30, 2010 and December 31, 2009, respectively


279


277Additional paid-in capital


1,299,983


1,286,326Accumulated deficit


(900,911
)

(878,810
)Accumulated other comprehensive income


6,940


6,712Treasury stock, at cost; 2,296,910 common shares


(267
)

(267
)Total stockholders' equity


406,024


414,238$
542,425

$
540,737


See notes to the condensed consolidated financial statements.

3

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SONUS NETWORKS, INC.        Condensed Consolidated Statements of Operations        (in thousands, except per share data)        (unaudited)

Three months ended September 30,

Nine months ended September 30,2010

2009

2010

2009Revenue:Product

$
19,391

$
33,544

$
92,465

$
89,267Service


23,348


22,621


73,863


69,517Total revenue


42,739


56,165


166,328


158,784Cost of revenue:Product


7,231


10,160


30,358


27,041Service


11,730


10,755


35,501


32,986Total cost of revenue


18,961


20,915


65,859


60,027Gross profit


23,778


35,250


100,469


98,757Operating expenses:Research and development


16,226


14,141


46,272


45,995Sales and marketing


11,836


11,527


37,822


36,018General and administrative


17,157


11,578


38,272


32,259Restructuring


1,114


1,533


1,114


3,510Total operating expenses


46,333


38,779


123,480


117,782Loss from operations


(22,555
)

(3,529
)

(23,011
)

(19,025
)Interest expense


(10
)

(23
)

(53
)

(94
)Interest income


439


787


1,420


3,513Other income (expense), net


1


12


12


24Loss before income taxes


(22,125
)

(2,753
)

(21,632
)

(15,582
)Income tax (provision) benefit


(153
)

(644
)

(469
)

341Net loss

$
(22,278
)
$
(3,397
)
$
(22,101
)
$
(15,241
)Loss per share:Basic and diluted

$
(0.08
)
$
(0.01
)
$
(0.08
)
$
(0.06
)Shares used to compute loss per share:Basic and diluted


275,412


273,907


275,107


273,518


See
notes to the condensed consolidated financial statements.

4

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SONUS NETWORKS, INC.        Condensed Consolidated Statements of Cash Flows        (in thousands)        (unaudited)

Nine months ended September 30,2010

2009Cash flows from operating activities:Net loss

$
(22,101
)
$
(15,241
)Adjustments to reconcile net income (loss) to cash flows provided by operating activities:Depreciation and amortization of property and equipment


8,134


7,497Amortization of intangible assets


413


184Stock-based compensation


12,410


9,889Loss on disposal of property and equipment


81


173Deferred income taxes


60


(137
)Changes in operating assets and liabilities:Accounts receivable


13,471


41,600Inventory


(10,360
)

(4,217
)Other operating assets


1,484


(7,516
)Accounts payable


12,704


(3,212
)Accrued expenses


4,477


(12,999
)Accrued litigation settlements





(9,600
)Deferred revenue


(8,347
)

4,240Net cash provided by operating activities


12,426


10,661Cash flows from investing activities:Purchases of property and equipment


(9,193
)

(4,813
)Purchase of intangible assets


(2,000
)

Purchases of marketable securities


(283,461
)

(179,416
)Sale/maturities of marketable securities


236,698


228,979Net cash provided by (used in) investing activities


(57,956
)

44,750Cash flows from financing activities:Sale of common stock in connection with employee stock purchase plan


1,353


1,119Proceeds from exercise of stock options


327


32Payment of tax withholding obligations related to net share settlements of restricted stock awards


(572
)

(531
)Principal payments of capital lease obligations


(194
)

(189
)Net cash provided by financing activities


914


431Effect of exchange rate changes on cash and cash equivalents


538


856Net increase (decrease) in cash and cash equivalents


(44,078
)

56,698Cash and cash equivalents, beginning of year


125,323


122,207Cash and cash equivalents, end of period

$
81,245

$
178,905Supplemental disclosure of cash flow information:Interest paid

$
53

$
94Income taxes paid

$
1,380

$
753Income tax refunds received

$
476

$
545Supplemental disclosure of non-cash investing activities:Capital expenditures incurred, but not yet paid

$
1,882

$
301Property and equipment acquired under capital lease

$


$
151


See notes to the condensed consolidated financial statements.

5

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1) BASIS OF PRESENTATION

Business

Sonus Networks, Inc. ("Sonus" or the "Company") was incorporated in 1997 and is a leading provider of voice, video and data
infrastructure solutions for wireline and wireless service providers. The Company's infrastructure solutions allow such wireline and wireless operators to build converged voice over Internet Protocol
("IP") networks. Sonus' products include carrier-class infrastructure equipment and software that enables voice services to be delivered over IP packet-based networks. The Company's target customers
include both traditional and emerging communications service providers, including long distance carriers, local exchange carriers, Internet service providers, wireless operators, cable operators,
international telephone companies and carriers that provide services to other carriers.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments,
consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and
the rules and regulations of the U.S. Securities and Exchange Commission ("SEC").

Interim
results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 2009 ("Annual Report") filed on February 25, 2010 with the SEC and Amendment No. 1 to the Annual
Report filed on April 27, 2010 with the SEC.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Sonus and its wholly-owned subsidiaries. Intercompany
transactions and balances have been eliminated in consolidation.

Use of Estimates and Judgments

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Significant estimates and judgments relied upon in preparing these financial statements include revenue recognition for multiple element arrangements, allowances for
doubtful accounts, inventory reserves, expected future cash flows used to evaluate the recoverability of long-lived assets, contingencies associated with revenue contracts, assumptions
used to determine the fair value of stock-based compensation, assumptions used to determine the fair value of purchased intangible assets, contingent liabilities and recoverability of the Company's
net deferred tax assets and related valuation allowance. Sonus regularly assesses these estimates and records changes in estimates in the period in which they become known. Sonus bases its estimates
on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

6

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments, which include cash equivalents, marketable securities, investments,
accounts receivable, accounts payable and long-term liabilities, approximate their fair values.

Operating Segments

The Company operates in a single segment. Operating segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. To date, the chief
operating decision maker has made such decisions and assessed performance at the company level, as one segment. The Company's chief operating decision maker is its President and Chief Executive
Officer.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board ("FASB") issued an update toCertain Arrangements
that Include Software Elements. This update removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. This update will require the Company to account for many of its
multiple-element arrangements as non-software transactions and could impact the timing of revenue recognized in a reporting period. This update is effective for the Company beginning
January 1, 2011, although early adoption is permitted, and adoption can be applied prospectively or retrospectively. The Company is currently evaluating the effect that implementation of this
update will have on its consolidated financial position and results of operations upon adoption.

In
October 2009, the FASB issued an update to the accounting guidance related to the separation criteria used to determine the unit of accounting for multiple-element arrangements. This
update removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an
arrangement involving multiple deliverables contains more than one unit of accounting, replaces references to "fair value" with "selling price" to distinguish from the fair value measurements required
under Accounting Standards Codification ("ASC") 820, provides a hierarchy that entities must use to estimate the selling price, eliminates the use of the residual method for allocation and expands the
ongoing disclosure requirements. This guidance is effective for the Company beginning January 1, 2011, although early adoption is permitted, and adoption can be applied prospectively or
retrospectively. The Company is currently evaluating the effect that implementation of this update will have, if any, on its consolidated financial position and results of operations upon adoption.

(2) REVENUE RECOGNITION

The Company's products are primarily marketed based on the software elements contained therein. In addition, hardware sold generally cannot be used apart from the software. Therefore,
Sonus considers its principal products to be software-related. Sonus recognizes revenue from product sales

7

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(2) REVENUE RECOGNITION (Continued)

when
persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectibility of the related receivable is probable under customary payment
terms. When the Company has future obligations, including a requirement to deliver additional elements that are essential to the functionality of the delivered elements or for which vendor-specific
objective evidence of fair value ("VSOE") does not exist or when customer acceptance is required, Sonus defers revenue recognition and related costs until those obligations are satisfied. The ordering
patterns and sales lead times associated with customer orders may vary significantly from period to period.

Many
of the Company's sales involve complex multiple-element arrangements. When a sale includes multiple elements, such as products, maintenance and/or professional services, Sonus
recognizes revenue using the residual method. Revenue associated with elements for which VSOE has been established is recorded based on the VSOE value; revenue for any undelivered elements that are
considered not essential to the functionality of the product and for which VSOE has been established is deferred based on the VSOE value, and any remaining arrangement fee is then allocated to, and
recognized as, product revenue. VSOE is determined based upon the price charged when the same element is sold separately or established by management having the relevant pricing authority. If Sonus
cannot establish VSOE for each undelivered element, including specified upgrades, it defers revenue on the entire arrangement until VSOE for all undelivered elements is known or all elements are
delivered and all other revenue recognition criteria are met.

Revenue
from maintenance and support services is recognized ratably over the service period. Earned maintenance revenue is deferred until the associated product is accepted by the
customer and all other revenue recognition criteria have been met. Maintenance and support services include telephone support, return and repair support and unspecified rights to product upgrades and
enhancements.

Revenue
from installation services is generally recognized when the service is complete and all other revenue recognition criteria have been met. Revenue from other professional services
for which VSOE has been established is typically recognized as the services are delivered if all other revenue recognition criteria have been met.

Revenue
from consulting, custom development and other professional services-only engagements is recognized as services are rendered provided all other revenue recognition
criteria have been met.

The
Company records deferred revenue for products delivered or services performed for which collection of the amount billed is either probable or has been collected but other revenue
recognition criteria have not been met. Deferred revenue also includes customer deposits and amounts associated with maintenance contracts. Deferred revenue expected to be recognized as revenue more
than one year subsequent to the balance sheet date is reported with long-term liabilities in the condensed consolidated balance sheets.

The
Company defers recognition of incremental direct costs, such as cost of goods, third-party installations and commissions, until recognition of the related revenue. Such costs are
classified as current assets if the deferred revenue is initially classified as current and noncurrent assets if the related deferred revenue is initially classified as long-term.

8

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(2) REVENUE RECOGNITION (Continued)

The
Company sells the majority of its products directly to its service provider customers. For products sold to resellers and distributors with whom the Company has at least eight
quarters of consistent history regarding the potential for product returns or refunds or any form of concession, the Company recognizes revenue on a sell-in basis. For all other resellers
and distributors, the Company recognizes revenue on a sell-through basis.

Beginning
in the fourth quarter of fiscal 2008, the Company concluded that it no longer had sufficient evidence of VSOE on maintenance services for AT&T Inc. ("AT&T"), one of its
largest customers. Therefore, all revenue related to multiple-element arrangements for this customer entered into beginning in the fourth quarter of fiscal 2008 is being recognized ratably over the
maintenance period. Revenue recognition on multiple-element arrangements with this customer will begin when the only undelivered element of the arrangement is maintenance. Beginning in the fourth
quarter of 2008, for orders from AT&T that contain bundled product and maintenance, the Company has allocated a fixed percentage (which represents the maintenance renewal rate for its largest
customers for which the
Company has VSOE) of the arrangement fee to service revenue with the residual amount classified as product revenue. At September 30, 2010, Inventory, net included $3.6 million of
deferred product costs related to arrangements with AT&T in which both the revenue and product costs are being recognized ratably. Other assets include deferred product costs of $1.0 million at
September 30, 2010 and $3.9 million at December 31, 2009 related to arrangements with this customer in which both the revenue and product costs are being recognized ratably.

The
Company excludes any taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction (i.e., sales, use, value added) from its revenue
and costs. Reimbursement received for out-of-pocket expenses is recorded as revenue.

(3) EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. For periods in which the Company reports
net income, diluted net income per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period unless the effect is
antidilutive.

The
calculations of shares used to compute basic and diluted loss per share for the three and nine months ended September 30, 2010 and 2009 are as follows (in thousands):

Three months ended
September 30,

Nine months ended
September 30,2010

2009

2010

2009Weighted average shares outstandingbasic


275,412


273,907


275,107


273,518Potential dilutive common shares











Weighted average shares outstandingdiluted


275,412


273,907


275,107


273,518


Options
to purchase the Company's common stock, unvested shares of restricted stock and performance-based stock awards aggregating approximately 22.8 million shares have not been
included in the computation of diluted loss per share for the three and nine months ended September 30, 2010

9

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(3) EARNINGS (LOSS) PER SHARE (Continued)

because
their effect would have been antidilutive. Options to purchase the Company's common stock and unvested shares of restricted stock aggregating approximately 32.4 million shares of common
stock
have not been included in the computation of diluted loss per share for the three and nine months ended September 30, 2009 because their effect would have been antidilutive.

(4) COMPREHENSIVE LOSS

The Company's comprehensive losses for the three and nine months ended September 30, 2010 and 2009 are as follows (in thousands):

Three months ended
September 30,

Nine months ended
September 30,2010

2009

2010

2009Net loss

$
(22,278
)
$
(3,397
)
$
(22,101
)
$
(15,241
)Other comprehensive income (loss):Foreign currency translation adjustments


256


88


414


77Unrealized loss on available-for-sale marketable securities, net of tax


164


(290
)

(186
)

(896
)Comprehensive loss

$
(21,858
)
$
(3,599
)
$
(21,873
)
$
(16,060
)


10

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(5) CASH EQUIVALENTS, MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS

Cash equivalents and marketable securities are invested in debt and equity instruments, primarily U.S. government-backed, municipal and corporate obligations, which management believes
to be high quality (investment grade) credit instruments.

The
amortized cost, gross unrealized gains and losses and fair value of the Company's marketable debt and equity securities and investments at September 30, 2010 and
December 31, 2009 are comprised of the following (in thousands):

September 30, 2010Amortized
cost

Unrealized
gains

Unrealized
losses

Fair
valueCash equivalents

$
28,372

$


$


$
28,372Marketable securitiesU.S. government agency notes

$
110,065

$
76

$
(6
)
$
110,135Foreign government notes


8,891


14


(4
)

8,901Corporate debt securities


88,497


139


(12
)

88,624Commercial paper


20,986


1





20,987Certificates of deposit


19,250


11





19,261$
247,689

$
241

$
(22
)
$
247,908InvestmentsU.S. government agency notes

$
44,282

$
79

$
(10
)
$
44,351Corporate debt securities


33,464


18


(68
)

33,414Certificates of deposit


6,551





(2
)

6,549$
84,297

$
97

$
(80
)
$
84,314


11

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(5) CASH EQUIVALENTS, MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS (Continued)



December 31, 2009Amortized
cost

Unrealized
gains

Unrealized
losses

Fair
valueCash equivalents

$
95,845

$


$
(2
)
$
95,843Marketable securitiesMunicipal obligations

$
4,999

$


$


$
4,999U.S. government agency notes


86,534


231


(11
)

86,754Corporate debt securities


77,843


294


(67
)

78,070Commercial paper


44,567


15


(5
)

44,577Certificates of deposit


24,801


34


(12
)

24,823$
238,744

$
574

$
(95
)
$
239,223InvestmentsU.S. government agency notes

$
6,444

$
13

$
(2
)
$
6,455Corporate debt securities


43,209


40


(106
)

43,143$
49,653

$
53

$
(108
)
$
49,598


Fair Value Hierarchy

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The
three-tier fair value hierarchy is based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A
financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:



The
following table shows the fair value of the Company's financial assets at September 30, 2010 and December 31, 2009. These financial assets are comprised of the
Company's available-for-sale debt

12

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(5) CASH EQUIVALENTS, MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS (Continued)

and
equity securities and reported under the captions Cash and cash equivalents, Marketable securities and Investments in the condensed consolidated balance sheets (in thousands):

Fair value measurements at
September 30, 2010 using:Total carrying
value at
September 30,
2010

Quoted prices
in active
markets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)Cash equivalents

$
28,372

$
18,373

$
9,999

$
Marketable securitiesU.S. government agency notes

$
110,135

$


$
110,135

$
Foreign government notes


8,901





8,901


Corporate debt securities


88,624


61,579


27,045


Commercial paper


20,987





20,987


Certificates of deposit


19,261





19,261


$
247,908

$
61,579

$
186,329

$
InvestmentsU.S. government agency notes

$
44,351

$


$
44,351

$
Corporate debt securities


33,414


19,751


13,663


Certificates of deposit


6,549





6,549


$
84,314

$
19,751

$
64,563

$



13

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(5) CASH EQUIVALENTS, MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS (Continued)



Fair value measurements at
December 31, 2009 using:Total carrying
value at
December 31,
2009

Quoted prices
in active
markets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)Cash equivalents

$
95,843

$
88,645

$
7,198

$
Marketable securitiesMunicipal obligations

$
4,999

$


$
4,999

$
U.S. government agency notes


86,754





86,754


Corporate debt securities


78,070


54,297


23,773


Commercial paper


44,577





44,577


Certificates of deposit


24,823





24,823


$
239,223

$
54,297

$
184,926

$
InvestmentsU.S. government agency notes

$
6,455

$


$
6,455

$
Corporate debt securities


43,143


21,328


21,815


$
49,598

$
21,328

$
28,270

$



The
Company reviewed the level classifications of its investments at September 30, 2010 compared to December 31, 2009 and determined that there were no significant
transfers between levels in the nine months ended September 30, 2010.

(6) INVENTORY, NET

Inventory, net, at September 30, 2010 and December 31, 2009 consists of the following (in thousands):

September 30,
2010

December 31,
2009On-hand final assemblies and finished goods inventories

$
16,823

$
11,036Deferred cost of goods sold


24,814


20,13241,637


31,168Less current portion


(26,982
)

(21,925
)Noncurrent portion (included in Other assets)

$
14,655

$
9,243


14

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(7) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets at September 30, 2010 and December 31, 2009 consist of the following (in thousands):

September 30, 2010

Useful life

Cost

Accumulated
amortization

Net
carrying valueIntellectual property

5 years

$
2,999

$
1,071

$
1,928Order backlog

1 year


287


287


$
3,286

$
1,358

$
1,928




December 31, 2009

Useful life

Cost

Accumulated
amortization

Net
carrying valueIntellectual property

5 years

$
999

$
658

$
341Order backlog

1 year


287


287


$
1,286

$
945

$
341


On
January 15, 2010, the Company entered into an intellectual property asset purchase and license agreement with Winphoria, Inc. ("Winphoria") and Motorola, Inc.
("Motorola") to purchase certain of Winphoria's software code and related patents and license certain other related intellectual property from Winphoria and Motorola. The purchase price included an
initial payment of $2.0 million and future potential royalty payments dependent upon future sales of certain of the Company's products over the next five to seven years that include the
Winphoria technology that was purchased or licensed. The identifiable intangible assets acquired were recorded as intellectual property and will be amortized on a straight-line basis over
five years, the expected useful life of the technology. This identifiable intangible asset is included as a component of Intangible assets in the Company's condensed consolidated balance sheet at
September 30, 2010.

The
Company amortizes its intangible assets over the estimated useful lives of the respective assets. Amortization expense related to intangible assets was approximately
$0.1 million in the three months ended September 30, 2010, $31,000 in the three months ended September 30, 2009, $0.4 million in the nine months ended September 30,
2010 and $0.2 million in the nine months ended September 30, 2009.

Estimated
future amortization expense for intangible assets recorded by the Company at September 30, 2010 is as follows (in thousands):

Remainder of 2010

$
1382011


5522012


4382013


4002014


400$
1,928


15

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(7) INTANGIBLE ASSETS AND GOODWILL (Continued)

Goodwill
is recorded when the consideration in a business combination exceeds the fair value of net tangible and identifiable intangible assets acquired. The changes in the carrying
amounts of goodwill during the nine months ended September 30, 2010 and 2009 are as follows (in thousands):

Nine months ended September 30,2010

2009Balance at January 1:Goodwill

$
8,159

$
8,131Accumulated impairment losses


(3,106
)

(3,106
)5,053


5,025Foreign currency translation adjustment


3


21$
5,056

$
5,046Balance at September 30:Goodwill

$
8,162

$
8,152Accumulated impairment losses


(3,106
)

(3,106
)$
5,056

$
5,046


(8) ACCRUED EXPENSES

Accrued expenses at September 30, 2010 and December 31, 2009 consist of the following (in thousands):

September 30,
2010

December 31,
2009Employee compensation and related costs

$
18,013

$
11,892Employee stock purchase plan


163


653Professional fees


945


863Royalties





1,039Income taxes payable


360


648Sales taxes payable


1,371


2,278Other taxes


67


96Restructuring


367


82Other


2,840


1,741$
24,126

$
19,292


16

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(9) RESTRUCTURING ACCRUAL

On August 24, 2010, the Company committed to a restructuring initiative to close its offices in Ottawa,
Canada and in Darmstadt, Germany, to relocate its Freehold, New Jersey facility to a smaller, more cost-effective space in the same area and to reduce its workforce by 12 people, or
approximately 1% of employees worldwide (the "2010 restructuring initiative"). The Company recorded $1.1 million of restructuring expense in both the three and nine months ended
September 30, 2010, representing severance and related expenses for the headcount reduction component of the 2010 restructuring initiative. These headcount reduction actions were completed in
the three months ended September 30, 2010. In connection with the planned facility lease terminations, the Company has accelerated the deprecation of the leasehold improvements and other fixed
assets related to these facilities to the dates that the Company expects to vacate the respective facilities. This accelerated depreciation resulted in approximately $0.7 million of incremental
expense included in the Company's results of operations for both the three and nine months ended September 30, 2010. The Company expects to record expense for the facilities components of the
2010 restructuring initiative, estimated at approximately $2.5 million to $2.8 million, in the fourth quarter of fiscal 2010. The Company expects the payments related to the 2010
restructuring initiative will be completed in the first quarter of fiscal 2011.

The
activity related to the 2010 restructuring initiative during the three months ended September 30, 2010 is as follows (in thousands):

Three months ended September 30, 2010

New
initiatives
charged to
expense

Cash
payments

Foreign
exchange

Balance
September 30,
2010Severance and related costs

$
1,114

$
(757
)
$
10

$
367


(10) STOCK-BASED COMPENSATION PLANS

The Company's 2007 Stock Incentive Plan, as amended (the "2007 Plan"), provides for the award of options to purchase the Company's common stock ("stock options"), stock appreciation
rights, restricted common stock ("restricted stock"), performance-based share awards, restricted stock units and other stock-based awards to employees, officers, directors (including those directors
who are not employees or officers of the Company), consultants and advisors of the Company and its subsidiaries.

The
Company's 2007 Stock Incentive Plan, as amended (the "2007 Plan"), provides for the award of options to purchase the Company's common stock ("stock options"), stock appreciation
rights, restricted common stock ("restricted stock"), performance-based share awards, restricted stock units and other stock-based awards to employees, officers, directors (including those directors
who are not employees or officers of the Company), consultants and advisors of the Company and its subsidiaries.

On
May 18, 2010, Dr. Richard N. Nottenburg, the Company's President and Chief Executive Officer ("Dr. Nottenburg"), and the Company entered into a letter agreement
(the "Retention Agreement") pursuant to which Dr. Nottenburg agreed to stay with the Company while assisting the Company with an orderly transition of his duties and responsibilities. In
connection with the Retention Agreement, on June 15, 2010 Dr. Nottenburg was granted 750,000 shares of restricted stock (the "Retention Shares") under the Company's 2007 Plan, which had
an aggregate grant date fair value of $1.9 million, and he agreed to relinquish his rights to two performance-based stock grants, each in the amount of 250,000 shares of restricted stock. The
Company had previously determined it was not

17

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(10) STOCK-BASED COMPENSATION PLANS (Continued)

probable
that the performance conditions for these two performance-based stock grants would be satisfied; accordingly, no stock-based compensation expense had been recorded.

On
October 8, 2010, Raymond P. Dolan ("Mr. Dolan") accepted an offer of employment as President and Chief Executive Officer of the Company, effective October 12,
2010, succeeding Dr. Nottenburg.

The
Company accelerated the recognition of stock-based compensation expense to reflect the adjusted requisite service period related to the Retention Shares and recognized expense of
$1.6 million in the three months ended September 30, 2010 and $1.9 million in the nine months ended September 30, 2010.

Dr. Nottenburg's
employment letter of May 13, 2008 provided for the acceleration of vesting of stock options and restricted stock on the date Dr. Nottenburg's
employment was terminated, provided that certain conditions were met. The Company adjusted the requisite service period of the stock options and restricted stock outstanding to reflect the expected
accelerated vesting. The Company recognized stock-based compensation expense related to these awards of $2.9 million in the three months ended September 30, 2010 and $3.9 million
in the nine months ended September 30, 2010.

Stock Options

The activity related to the Company's outstanding stock options during the nine months ended September 30, 2010 is as follows:

Number of
Shares

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual Life
(Years)

Aggregate
Intrinsic Value
(in thousands)Outstanding at January 1, 2010


24,081,565

$
4.90Granted


4,006,100

$
3.00Exercised


(191,500
)
$
1.71Forfeited


(633,953
)
$
4.48Expired


(8,226,880
)
$
5.32Outstanding at September 30, 2010


19,035,332

$
4.36


6.32

$
6,088Vested or expected to vest at September 30, 2010


18,350,974

$
4.41


6.19

$
5,717Exercisable at September 30, 2010


12,386,665

$
5.00


4.86

$
1,547


18

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(10) STOCK-BASED COMPENSATION PLANS (Continued)

The
grant date fair values of stock options granted in the three and nine months ended September 30, 2010 were estimated using the Black-Scholes valuation model with the following
assumptions:

Three months
ended
September 30, 2010

Nine months
ended
September 30, 2010Risk-free interest rate


1.56
%
1.56% - 2.65%Expected dividend yield




Weighted average volatility


64.49
%
64.49% - 64.81%Expected life (years)


4.5

4.5


The
weighted average grant date fair values of stock options granted were $1.71 during the three months ended September 30, 2010 and $1.58 during the nine months ended
September 30, 2010.

Restricted Stock Awards

The activity related to the Company's unvested restricted stock awards for the nine months ended September 30, 2010 is as
follows:

Shares

Weighted
Average
Grant-Date
Fair ValueUnvested balance at January 1, 2010


3,444,496

$
3.29Granted


990,000

$
2.48Vested


(719,243
)
$
4.31Forfeited


(480,991
)
$
2.99Unvested balance at September 30, 2010


3,234,262

$
2.86


The
total fair value of shares of restricted stock that vested during the nine months ended September 30, 2010 was $3.1 million.

19

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(10) STOCK-BASED COMPENSATION PLANS (Continued)

Performance-Based Stock Awards

The activity related to the Company's performance stock awards for the nine months ended September 30, 2010 is as follows:

Shares

Weighted Average Grant-Date Fair ValueUnvested balance at January 1, 2010


550,000

$
4.15Granted


484,556

$
2.54Vested





Forfeited


(522,000
)
$
4.27Unvested balance at September 30, 2010


512,556

$
2.50


There
are 197,611 shares of the Company's common stock that are not included in the table above, as the Company has not finalized the performance conditions for these awards. The Company
will begin to record stock-based compensation expense at the time that the performance conditions are defined and when it becomes probable that the respective performance conditions will be achieved.

Stock-Based Compensation

The condensed consolidated statements of operations include stock-based compensation for the three and nine months ended
September 30, 2010 and 2009 as follows (in thousands):

Three months
ended
September 30,

Nine months
ended
September 30,2010

2009

2010

2009Product cost of revenue

$
105

$
67

$
265

$
298Service cost of revenue


396


483


1,219


1,335Research and development


617


774


1,888


2,643Sales and marketing


647


885


2,064


3,419General and administrative


4,947


930


6,974


2,194$
6,712

$
3,139

$
12,410

$
9,889


The
Company included $0.1 million of stock-based compensation in inventory at both September 30, 2010 and December 31, 2009.

There
is no income tax benefit for employee stock-based compensation expense for the nine months ended September 30, 2010 and 2009 due to the income tax valuation allowance
recorded.

At
September 30, 2010, there was $14.2 million, net of expected forfeitures, of unrecognized stock-based compensation expense related to unvested stock option and
restricted stock awards, as well as performance-based stock awards for which the Company believes it is probable the performance conditions will be satisfied. This expense is expected to be recognized
over a weighted average period of approximately two years.

20

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(11) FOREIGN CURRENCY TRANSLATION

Foreign currency gains and losses are included as a component of General and administrative expenses in the condensed consolidated statements of operations.

The
components of foreign currency translation gains (losses) for the three and nine months ended September 30, 2010 and 2009 are as follows (in thousands):

Three months
ended
September 30,

Nine months
ended
September 30,2010

2009

2010

2009Transaction gains (losses)

$
(1,125
)
$
295

$
(528
)
$
(2,240
)Remeasurement gains (losses)


1,205


(182
)

(240
)

1,166$
80

$
113

$
(768
)
$
(1,074
)


(12) MAJOR CUSTOMERS

The following customers each contributed 10% or more of the Company's revenue in at least one of the three or nine month periods ended September 30, 2010 and 2009:

Three months
ended
September 30,

Nine months
ended
September 30,Customer

2010

2009

2010

2009AT&T


22
%

*


16
%

*Citic Telecom 1616, Ltd.


11
%

*


*


*Softbank Telecom


*


17
%

*


*Global Crossing


*


12
%

*


10
%


---

At
September 30, 2010, two customers accounted for 10% or more of the Company's accounts receivable balance, representing approximately 35% in the aggregate of total accounts
receivable. At December 31, 2009, there were no customers that accounted for 10% or more of the Company's accounts receivable balance. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral on accounts receivable. The Company maintains an allowance for doubtful accounts and such losses have historically been within management's
expectations.

(13) GEOGRAPHIC INFORMATION

The Company's classification of revenue by geographic area is determined by the location to which the product is shipped or where the services are performed. The following table
summarizes revenue by

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(13) GEOGRAPHIC INFORMATION (Continued)

geographic
area as a percentage of total revenue for the three and nine months ended September 30, 2010 and 2009:

Three months
ended
September 30,

Nine months
ended
September 30,2010

2009

2010

2009United States


74
%

66
%

66
%

72
%Japan


7


23


15


12Other Asia Pacific


8


1


2


1Europe, Middle East and Africa


5


9


14


13Other


6


1


3


2100
%

100
%

100
%

100
%


Due
to the uneven ordering patterns of customers and the timing of project completions, the domestic and international components as a percentage of the Company's revenue fluctuate from
quarter to quarter and year to year.

(14) INCOME TAXES

The Company's provision for income taxes of $0.5 million for the nine months ended September 30, 2010 and benefit of $0.3 million for the nine months ended
September 30, 2009 reflect the Company's estimates of the effective rates expected to be applicable for the respective full fiscal years, adjusted for any discrete events, which are recorded in
the period that they occur. These estimates are reevaluated each quarter based on the Company's estimated tax expense for the full fiscal year.

During
the fourth quarter of fiscal 2008, the Company concluded that there was insufficient positive evidence to overcome the more objective negative evidence related to its cumulative
losses and other factors. Accordingly, the Company recorded an increase to its valuation allowance on substantially all of its domestic net deferred tax assets. The estimated annual effective rate for
the year ending December 31, 2010 does not include any benefit for projected domestic losses as the Company continues to conclude that a valuation allowance for its domestic losses is
appropriate.

For
the nine months ended September 30, 2009, the Company realized a discrete benefit related to the Company's United Kingdom operations totaling $1.1 million as the result
of a settlement with the taxing authorities.

(15) RELATED PARTIES

Dr. Nottenburg, the Company's former President and Chief Executive Officer who served through October 12, 2010, serves on the Board of Directors of Comverse
Technology, Inc. ("Comverse"), a worldwide provider of software and systems. Comverse has several majority-owned subsidiaries, including Ulticom, Inc. and Verint Systems. All three
companies are vendors of the Company. The Company had well-established and ongoing business relationships with these vendors prior to the appointment of Dr. Nottenburg as the
Company's President and Chief Executive Officer, each effective

22

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(15) RELATED PARTIES (Continued)

June 13,
2008. Costs incurred for purchases from these companies, in the aggregate, were $1.2 million for the three months ended September 30, 2010, $3.4 million for the
nine months ended September 30, 2010, $0.7 million for the three months ended September 30, 2009 and $4.5 million for the nine months ended September 30, 2009. At
both September 30, 2010 and December 31, 2009, the Company had aggregate outstanding accounts payable balances of $0.2 million.

On
October 12, 2010, the Company announced that Dr. Nottenburg had tendered his resignation as a member of the Board of Directors and stepped down as the Company's
President and Chief Executive Officer, each effective October 12, 2010. The Company does not foresee any change in its relationship with Comverse or any of its subsidiaries as a result of
Dr. Nottenburg's departure.

(16) COMMITMENTS AND CONTINGENCIES

2001 IPO Litigation

In November 2001, a purchaser of the Company's common stock filed a complaint in the United States District Court for the Southern
District of New York (the "District Court") against the Company, two of its officers and the lead underwriters alleging violations of the federal securities laws in connection with the Company's
initial public offering ("IPO") and seeking unspecified monetary damages. The purchaser seeks to represent a class of persons who purchased the Company's common stock between the date of the IPO on
May 24, 2000 and December 6, 2000. An amended complaint was filed in April 2002. The amended complaint alleges that the Company's registration statement contained false or misleading
information or omitted to state material facts concerning the alleged receipt of undisclosed compensation by the underwriters and the existence of undisclosed arrangements between the underwriters and
certain purchasers to make additional purchases in the after market. The claims against the Company are asserted under Section 10(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and Section 11 of the Securities Act of 1933, as amended (the "Securities Act"), and against the individual defendants under Sections 11 and 15 of the Securities Act and
Sections 10(b) and 20(a) of the Exchange Act. Other plaintiffs have filed substantially similar class action cases against approximately 300 other publicly-traded companies and their IPO
underwriters which, along with the actions against the Company, have been transferred to a single federal judge for purposes of coordinated case management.

On
July 15, 2002, the Company, collectively with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the consolidated
amended complaints on various legal grounds common to all or most of the issuer defendants. The plaintiffs voluntarily dismissed the claims against many of the individual defendants, including the
Company's officers named in the complaint. On February 19, 2003, the District Court granted a portion of the motion to dismiss by dismissing the Section 10(b) claims against certain
defendants, including the Company, but denied the remainder of the motion as to the defendants.

In
June 2003, a special committee of the Company's Board of Directors authorized Sonus to enter into a proposed settlement with the plaintiffs on terms substantially consistent with the
terms of a Memorandum of Understanding negotiated among representatives of the plaintiffs, the issuer defendants and the insurers for the issuer defendants. In October 2004, the District Court
certified the class in a case against certain defendants. On February 15, 2005, the District Court preliminarily

23

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(16) COMMITMENTS AND CONTINGENCIES (Continued)

approved
the terms of the proposed settlement contingent on modifications to the proposed settlement. On August 31, 2005, the District Court approved the terms of the proposed settlement, as
modified. On April 24, 2006, the District Court held a hearing on a motion to approve the final settlement and took the matter under advisement.

On
December 5, 2006, the United States Court of Appeals for the Second Circuit reversed the District Court's October 2004 order certifying a class. On June 25, 2007, the
District Court entered an order terminating the settlement. On November 13, 2007, the issuer defendants in certain designated "focus cases" filed a motion to dismiss the second consolidated
amended class action complaints that were filed in those cases. On March 26, 2008, the District Court issued an Opinion and Order denying, in large part, the motions to dismiss the amended
complaints in the "focus cases." On April 2, 2009, the plaintiffs filed a motion for preliminary approval of a new proposed settlement between the plaintiffs, the underwriter defendants, the
issuer defendants and the insurers for the issuer defendants. On June 10, 2009, the District Court issued an opinion preliminarily approving the proposed settlement, and scheduling a settlement
fairness hearing for September 10, 2009. On August 25, 2009, the plaintiffs filed a motion for final approval of the proposed settlement, approval of the plan of distribution of the
settlement fund and certification of the settlement classes. A settlement fairness hearing was held on September 10, 2009. On October 5, 2009, the District Court issued an opinion
granting the plaintiffs' motion for final approval of the settlement, approval of the plan of distribution of the settlement fund and certification of the settlement classes. Various notices of appeal
of the District Court's October 5, 2009 order have been filed in the Court of Appeals. All of these appeals but for one have been withdrawn. An Order and Final Judgment was entered on
January 14, 2010. Due to the inherent uncertainties of litigation, the Company is unable to determine the ultimate outcome or potential range of loss, if any.

On
October 5, 2007, Vanessa Simmonds, a purported shareholder, filed a complaint in the United States District Court for the Western District of Washington (the "Western District
Court") for recovery of short-swing profits under Section 16(b) of the Exchange Act against the underwriters of the IPO in 2000. On February 28, 2008, the plaintiff filed an amended
complaint asserting substantially similar claims as set forth in the initial complaint. The amended complaint seeks recovery against the underwriters for profits they received from the sale of the
Company's common stock in connection with the IPO. The Company was named as a nominal defendant but has no liability for the asserted claims. No Sonus officers or directors were named in the amended
complaint. Between October 2, 2007 and October 12, 2007, the plaintiff also filed fifty-four separate lawsuits naming 54 additional issuers as nominal defendants and ten
underwriters as defendants. These 54 cases, along with the complaint filed by the plaintiff with respect to Sonus' IPO, were reassigned to a single federal judge in the Western District Court, as
related cases. On March 12, 2009, the Western District Court entered its judgment and granted the moving issuers' motion to dismiss, finding plaintiff's demand letters were insufficient to put
the issuers on notice of the claims asserted against them. The Western District Court
also granted the underwriters' motion to dismiss as to the claims arising from the non-moving issuers' IPOs, finding plaintiff's claims were time-barred under the applicable
statute of limitations.

On
March 31, 2009, plaintiff-appellant appealed the judgment to the United States Court of Appeals for the Ninth Circuit. The underwriter defendants filed a cross-appeal in each
of the cases wherein the issuers moved for dismissal (including the appeal relating to the Sonus IPO). Briefing

24

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(16) COMMITMENTS AND CONTINGENCIES (Continued)

before
the United States Court of Appeals for the Ninth Circuit was complete as of November 17, 2009 and the United States Court of Appeals for the Ninth Circuit heard oral argument on
October 5, 2010. The Company does not currently expect that this claim will have a material impact on its financial position or results of operations.

Other

In addition, the Company is often a party to disputes and legal proceedings that it considers routine and incidental to its business.
Management does not expect the results of any of these actions to have a material adverse effect on the Company's business, results of operations or financial condition.

(17) SUBSEQUENT EVENT

On October 8, 2010, Mr. Dolan accepted an offer of employment as the Company's new President and Chief Executive Officer, effective October 12, 2010. As of
October 12, 2010, Mr. Dolan also joined the
Board of Directors by action of the Board of Directors. On October 10, 2010, Dr. Nottenburg tendered his resignation as a member of the Board of Directors and stepped down as the
Company's President and Chief Executive Officer, each effective October 12, 2010.

25

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Table of Contents

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q and, in particular, this Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains forward-looking statements which are subject to a number of risks and uncertainties. The words "anticipates", "believes", "could",
"envisions", "estimates", "expects", "intends","may", "plans", "seeks", "will" and other similar language whether in the negative or affirmative are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words. These forward-looking statements are based on our current expectations, assumptions, estimates, forecasts and projections
about the operating environment, economies and markets in which we operate, and we do not undertake an obligation to update our forward-looking statements to reflect new information, future events or
circumstances. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, the factors set
forth in our Annual Report on Form 10-K for the year ended December 31, 2009 and the additional factors set forth in Item 1A. "Risk Factors" of Part II of this
Quarterly Report on Form 10-Q. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may materially adversely affect our
business, results of operations, financial
condition and/or liquidity. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes for the periods
specified.

Overview

We are a leading provider of voice infrastructure solutions for wireline and wireless service providers. Our products are a new
generation of carrier-class infrastructure equipment and software that enables voice services to be delivered over Internet Protocol ("IP") packet-based networks. Our target customers include both
traditional and emerging communications service providers, including long distance carriers, local exchange carriers, Internet service providers, wireless operators, cable operators, international
telephone companies and carriers that provide services to other carriers. IP packet-based networks, which transport traffic in small bundles, or "packets," offer a significantly more flexible,
cost-effective and efficient means for providing communications services than existing circuit-based networks which were designed years ago to primarily deliver telephone calls.

Our
voice infrastructure solutions allow wireline and wireless operators to build converged voice over IP ("VoIP") networks. Our products are built on the same distributed,
IP-based principles embraced by the IP Multimedia Subsystem ("IMS") architecture, as defined by the Third Generation Partnership Project ("3GPP"). This IMS architecture is being accepted
by network operators globally as the common approach for building converged voice, data, wireline and wireless networks. Since the IMS architecture is based primarily on IP packets and the Session
Initiation Protocol ("SIP"), which has been the foundation of our products since our formation, we are uniquely positioned to offer an intuitive evolution from a distributed softswitch architecture to
IMS architecture with little or no impact on existing Sonus equipment or services. Additionally, the Sonus all-IP architecture is positioned to take advantage of the fourth generation
wireless standard long-term evolution ("LTE") implementations as they emerge. Our investment in product development is focused on delivering high-growth solutions that leverage
these IMS and LTE architectures.

On
May 17, 2010, we announced the general availability of our NBS 5200 Network Border Switch (the "NBS 5200") as the first product on our next-generation ConnexIP
platform. The NBS 5200 complements our NBS 9000 as part of our Session Border Control ("SBC") solutions portfolio and provides SBC functionality, including media interworking, advanced routing and
policy engine, and multi-access security gateway functionality. The ConnexIP platform is a platform for connecting, managing and securing IP session-based communications and represents a key element
in our strategy to bring industry-leading performance and carrier-grade reliability to the session management market, and represents a new foundation for the next generation of our
IP-based products.

26

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We
sell our products primarily through a direct sales force and, in some markets, through or with the assistance of resellers and distributors. Customers' decisions to purchase our
products to deploy in commercial networks involve a significant commitment of resources and a lengthy evaluation, testing and product qualification process. Our revenue and results of operations may
vary significantly and unexpectedly from quarter to quarter as a result of long sales cycles, our expectation that customers will tend to sporadically place large orders with short lead times and the
application of complex revenue recognition rules to certain transactions, which may result in customer shipments and orders from multiple quarters being recognized as revenue in one quarter. We expect
to recognize revenue from a limited number of customers for the foreseeable future.

We
continue to focus on the key elements of our strategy, designed to capitalize on our technology and market lead, and build a premier franchise in packet-based voice infrastructure
solutions. We are currently focusing our major efforts on the following aspects of our business:



On
August 24, 2010, we committed to a restructuring initiative to close our offices in Ottawa, Canada and in Darmstadt, Germany, to relocate our Freehold, New Jersey facility to a
smaller, more cost-effective space in the same area, and to reduce our workforce by 12 people, or approximately 1% of employees worldwide (the "2010 restructuring initiative"). We recorded
$1.1 million of restructuring expense in both the three and nine months ended September 30, 2010, representing severance and related expenses for the headcount reduction component of the
2010 restructuring initiative. We expect to record expense for the facilities components of the 2010 restructuring initiative, estimated at approximately $2.5 million to $2.8 million, in
the fourth quarter of fiscal 2010. We expect the payments related to the 2010 restructuring initiative will be completed in the first quarter of fiscal 2011. In connection with our planned facility
lease terminations, we have accelerated the depreciation of the leasehold improvements and other fixed assets related to these facilities to the dates that we expect to vacate the respective
facilities. This accelerated depreciation resulted in approximately $0.7 million of incremental expense included in our results of operations for both the three and nine months ended
September 30, 2010.

On
May 20, 2010, we announced that Richard N. Nottenburg ("Dr. Nottenburg") planned to step down as President and Chief Executive Officer and a director of the Company by
the end of March 2011. On October 8, 2010, Raymond P. Dolan ("Mr. Dolan") accepted an offer of employment as our President and Chief Executive Officer, effective October 12, 2010,
succeeding Dr. Nottenburg. The costs related to Dr. Nottenburg's departure are included as a component of our General and administrative expenses in the three and nine months ended
September 30, 2010.

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We
reported losses from operations of $22.6 million in the three months ended September 30, 2010, $3.5 million in the three months ended September 30, 2009,
$23.0 million in the nine months ended September 30, 2010 and $19.0 million in the nine months ended September 30, 2009.

We
reported net losses of $22.3 million in the three months ended September 30, 2010 and $22.1 million in the nine months ended September 30, 2010. We
reported net losses of $3.4 million in the three months ended September 30, 2009 and $15.2 million in the nine months ended September 30, 2009.

Our
revenue decreased by $13.4 million in the three months ended September 30, 2010 compared to the three months ended September 30, 2009. However, our revenue
increased $7.5 million in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.

Our
gross profit decreased $11.5 million, to $23.8 million, in the three months ended September 30, 2010 compared to the three months ended September 30,
2009, primarily the result of product and customer mix related to product revenue, combined with higher fixed costs related to both our product and service revenue. Our gross profit was
$100.5 million in the nine months ended September 30, 2010, an increase of $1.7 million compared to the nine months ended September 30, 2009, which is primarily
attributable to our higher service revenue in the current year against our fixed service cost base, partially offset by higher third party service costs, and product and customer mix related to
product revenue.

Operating
expenses were $46.3 million in the three months ended September 30, 2010 and $38.8 million in the three months ended September 30, 2009. Operating
expenses were $123.5 million in the nine months ended September 30, 2010 and $117.8 million in the nine months ended September 30, 2009. The increase in the three months
ended September 30, 2010 compared to the same prior year period is primarily attributable to higher general and administrative expenses and research and development expenses. The increase in
general and administrative expenses is primarily attributable to higher personnel-related costs. Higher research and development expenses primarily reflect our increased investment in product
development for both our new and existing product offerings and higher facilities costs. The increase in the nine months ended September 30, 2010 compared to the same prior year period is
primarily attributable to higher general and administrative expenses and sales and marketing expenses. The increase in general and administrative expenses is primarily attributable to higher
personnel-related costs. The increase in sales and marketing expenses is primarily attributable to higher expense related to increased new market evaluation equipment activity, higher professional
fees and higher employee-related expense.

Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and
judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. We consider the following accounting policies to be both
those most important to the portrayal of our financial condition and those that require the most subjective judgment. If actual results differ significantly from management's estimates and
projections, there could be a material effect on our financial statements. The significant accounting policies that we believe are the most critical include the following:



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For
a complete discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009, which was filed with the SEC on February 25, 2010. There were no significant changes to our critical accounting policies from December 31, 2009 through
September 30, 2010.

Results of Operations

Three and Nine Months Ended September 30, 2010 and 2009

Revenue.Revenue for the three and nine months ended September 30, 2010 and 2009 was as follows (in thousands, except
percentages):

Increase (decrease) from prior yearThree months ended September 30,

2010

2009

$

%Product

$
19,391

$
33,544

$
(14,153
)

-42.2
%Service


23,348


22,621


727


3.2
%Total revenue

$
42,739

$
56,165

$
(13,426
)

-23.9
%




Increase (decrease)
from prior yearNine months ended September 30,

2010

2009

$

%Product

$
92,465

$
89,267

$
3,198


3.6
%Service


73,863


69,517


4,346


6.3
%Total revenue

$
166,328

$
158,784

$
7,544


4.8
%


Product
revenue is comprised of sales of our voice infrastructure products, including our GSX9000 and GSX4000 Open Services Switches, NBS Network Border Switch, PSX Policy &
Routing Server, SGX Signaling Gateway, ASX Call Feature Server, IMX Service Delivery Platform, Sonus Insight Management System, ASX Access Gateway Control Function, Insight xAuthority Provisioning
System, our new ConnexIP platform and related product offerings.

The
decrease in product revenue in the three months ended September 30, 2010 compared to the three months ended September 30, 2009 is primarily attributable to the
reduction in projects completed in the quarter and for which revenue criteria were met, partially offset by an increase in product revenue from AT&T Inc. ("AT&T") of approximately
$3 million and approximately $4 million of product revenue in the
aggregate from four new customers (customers from whom we recognized revenue for the first time in the period). We recognized approximately $1 million of product revenue in the aggregate from
one new customer in the three months ended September 30, 2009.

The
increase in product revenue in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 resulted from approximately
$9 million of additional product revenue from AT&T, partially offset by approximately $6 million of lower product revenue from other customers. For the nine months ended
September 30, 2010, we recognized approximately $20 million of product revenue in the aggregate from twelve new customers. We recognized approximately $8 million

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of
product revenue in the aggregate from six new customers in the nine months ended September 30, 2009.

Beginning
in the fourth quarter of fiscal 2008, we concluded that we no longer had sufficient evidence of VSOE on maintenance services for AT&T, one of our largest customers. Therefore,
all revenue related to multiple-element arrangements for this customer entered into during that quarter and subsequent periods is being recognized ratably over the maintenance period. Revenue
recognition on multiple-element arrangements with AT&T will begin when the only undelivered element of the arrangement is maintenance. Beginning in the fourth quarter of 2008, for orders from AT&T
that contain bundled product and maintenance, we have allocated a fixed percentage (which represents the maintenance renewal rate for our largest customers for which we have VSOE) of the arrangement
fee to service revenue with the residual amount classified as product revenue. The increase in product revenue recognized from AT&T in both the three and nine months ended September 30, 2010
compared to the same prior year periods is primarily due to fiscal 2010 orders being recognized as revenue over a shorter period than orders placed in fiscal 2009, coupled with revenue recognized in
fiscal 2010 that includes ratable revenue recognition from orders which commenced revenue recognition in the periods prior to fiscal 2010.

Service
revenue is primarily comprised of hardware and software maintenance and support ("maintenance revenue") and network design, installation and other professional services
("professional services revenue"). The slight increase in service revenue in the three months ended September 30, 2010 compared to the three months ended September 30, 2009 is
attributable to $1.6 million of higher maintenance revenue, partially offset by $0.9 million of lower professional services revenue. The increase in service revenue in the nine months
ended September 30, 2010 compared to the nine months ended September 30, 2009 is attributable to $4.9 million of higher maintenance revenue, partially offset by
$0.6 million of lower professional services revenue.

We
currently believe that our fiscal 2010 revenue will range between $225 million and $245 million.

AT&T
contributed approximately 22% of our revenue in the three months ended September 30, 2010 and approximately 16% of our revenue in the nine month periods ended
September 30, 2010. Citic Telecom 1616, Ltd. contributed approximately 11% of our revenue in the three months ended September 30, 2010. Softbank Telecom contributed approximately
17% of our revenue in the three months ended September 30, 2009. Global Crossing contributed approximately 12% of our revenue in the three months ended September 30, 2009 and
approximately 10% of our revenue in the nine months ended September 30, 2009. There were no other customers that contributed 10% or more of our revenue in the three or nine months ended
September 30, 2010 or 2009.

International
revenue was approximately 26% of our revenue in the three months ended September 30, 2010 and approximately 34% of our revenue in the three months ended
September 30, 2009. International revenue was approximately 34% of our revenue in the nine months ended September 30, 2010 and approximately 28% of our revenue in the nine months ended
September 30, 2009. Due to the uneven ordering patterns of customers and the timing of project completions, we expect that the domestic and international components as a percentage of our
revenue will fluctuate from quarter to quarter and year to year.

Our
deferred product revenue was $48.9 million at September 30, 2010 and $47.7 million at December 31, 2009. Our deferred service revenue was
$42.9 million at September 30, 2010 and $52.3 million at December 31, 2009. Our deferred revenue balance may fluctuate as a result of the timing of revenue recognition,
customer payments, maintenance contract renewals, contractual billing rights and maintenance revenue deferrals included in multiple element arrangements.

Cost of Revenue/Gross Profit.Our cost of revenue consists of sales of inventory produced by third party manufacturers, amounts
paid for royalties,
manufacturing and professional services personnel,

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amortization
of purchased software and inventory obsolescence. Our cost of revenue and gross profit as a percentage of revenue ("gross margin") for the three and nine months ended September 30,
2010 and 2009 were as follows (in thousands, except percentages):

Increase (decrease)
from prior yearThree months ended September 30,

2010

2009

$

%Cost of revenueProduct

$
7,231

$
10,160

$
(2,929
)

-28.8
%Service


11,730


10,755


975


9.1
%Total cost of revenue

$
18,961

$
20,915

$
(1,954
)

-9.3
%Gross marginProduct


62.7
%

69.7
%Service


49.8
%

52.5
%Total gross margin


55.6
%

62.8
%




Increase from
prior yearNine months ended September 30,

2010

2009

$

%Cost of revenueProduct

$
30,358

$
27,041

$
3,317


12.3
%Service


35,501


32,986


2,515


7.6
%Total cost of revenue

$
65,859

$
60,027

$
5,832


9.7
%Gross marginProduct


67.2
%

69.7
%Service


51.9
%

52.6
%Total gross margin


60.4
%

62.2
%


The
decrease in product gross margin in the three months ended September 30, 2010 compared to the three months ended September 30, 2009 was primarily due to changes in
product and customer mix, which decreased our product gross margin by approximately three percentage points, and the impact of higher manufacturing-related costs, which decreased our product gross
margin by approximately four percentage points. The decrease in product gross margin in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 was
primarily due to product and customer mix, which decreased our product gross margin by approximately two percentage points.

The
decrease in service gross margin in the three months ended September 30, 2010 compared to the three months ended September 30, 2009 is primarily attributable to
increases in third party costs, which reduced our service gross margin by approximately one percentage point, and higher fixed costs, which reduced our service gross margin by approximately two
percentage points. The decrease in service gross margin in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 is primarily attributable to
increases in third party costs, which reduced our service gross margin by approximately one percentage point, partially offset by higher service revenue against our fixed cost base. Our higher fixed
cost base in fiscal 2010 compared to fiscal 2009 is primarily related to our employee incentive program.

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Our service cost of revenue is relatively fixed in advance of any particular quarter and therefore, changes in service revenue will have a significant impact on
service gross margins.

We
currently believe that our gross margin over time will remain within our long-term financial model of 58% to 62%.

Research and Development Expenses.Research and development expenses consist primarily of salaries and related personnel expenses
and prototype costs
related to the design, development, testing and enhancement of our products. Research and development expenses for the three and nine months ended September 30, 2010 and 2009 were as follows
(in thousands, except percentages):

Increase from
prior year2010

2009

$

%Three months ended September 30,

$
16,226

$
14,141

$
2,085


14.7
%Nine months ended September 30,

$
46,272

$
45,995

$
277


0.6
%


The
increase in the three months ended September 30, 2010 compared to the same prior year quarter is primarily comprised of $1.0 million of increased expense for product
development for both our new and existing product offerings and related activities and $0.8 million of higher facilities costs, including incremental depreciation expense related to our
facilities restructuring plans. Our employee-related costs increased by $0.3 million in the three months ended September 30, 2010 compared to the three months ended September 30,
2009. This amount is comprised of $1.2 million of increased employee-related expense related to our employee incentive program, partially offset by $0.9 million of lower salary, fringe
benefits, stock-based compensation and related expenses in the aggregate.

The
increase in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 is primarily attributable to increased expense for product
development for both our new and existing product offerings and related activities totaling $3.2 million and higher facilities costs totaling $1.1 million, including incremental
depreciation expense related to our facilities restructuring plans. These amounts were partially offset by $4.0 million of lower employee-related costs, including lower salary and related costs
as a result of our 2009 and 2008 restructuring initiatives. As a result of these initiatives, we reduced our worldwide research and development headcount by approximately 140 people through the third
quarter of 2009. The savings from these headcount reductions were partially offset by an increase of approximately 130 employees at our development center in India compared to such number of employees
at September 30, 2009, as well as $2.3 million of incremental expense related to our employee incentive program.

Some
aspects of our research and development efforts require significant short-term expenditures, the timing of which can cause significant variability in our expenses. We
believe that rapid technological innovation is critical to our long-term success, and we are tailoring our investments to meet the requirements of our customers and market. We believe that
our research and development expenses for fiscal 2010 will increase from fiscal 2009 levels due to our increased focus on new product development, partially offset by lower development costs as a
result of the recent migration of many of our research and development activities to our development center in India.

Sales and Marketing Expenses.Sales and marketing expenses consist primarily of salaries and related personnel costs,
commissions, travel and
entertainment expenses, promotions, customer evaluations inventory and other marketing and sales support expenses. Sales and marketing expenses

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for
the three and nine months ended September 30, 2010 and 2009 were as follows (in thousands, except percentages):

Increase from
prior year2010

2009

$

%Three months ended September 30,

$
11,836

$
11,527

$
309


2.7
%Nine months ended September 30,

$
37,822

$
36,018

$
1,804


5.0
%


The
increase in sales and marketing expense in the three months ended September 30, 2010 compared to the three months ended September 30, 2009 is primarily attributable to
higher travel and related expenses aggregating $0.4 million, including expenses related to our entry into new markets, and $0.3 million of higher expense related to increased new market
evaluation equipment activity, partially offset by $0.3 million of lower employee-related expenses and $0.1 million of net decreases in other costs.

The
increase in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 is primarily attributable to $0.9 million of higher
expense related to increased new market evaluation equipment activity, $0.9 million of higher professional fees related primarily to new market opportunities and $0.8 million of higher
employee-related expense. These increases were partially offset by $0.4 million of reductions in marketing promotional event expenses, $0.3 million of lower facilities costs and
$0.1 million of net decreases in other costs. The increase in employee-related expense includes $1.2 million of higher sales commission expense resulting from higher revenue,
$0.5 million of higher travel expense and $0.5 million of net increases in other employee-related costs, partially offset by $1.4 million of lower stock-based compensation
expense.

We
believe that our sales and marketing expenses will increase in fiscal 2010 from fiscal 2009 levels, primarily attributable to higher personnel and related costs.

General and Administrative Expenses.General and administrative expenses consist primarily of salaries and other
employee-related costs for executive
and administrative personnel, recruiting expenses, allowance for doubtful accounts and professional fees. General and administrative expenses for the three and nine months ended September 30,
2010 and 2009 were as follows (in thousands, except percentages):

Increase from
prior year2010

2009

$

%Three months ended September 30,

$
17,157

$
11,578

$
5,579


48.2
%Nine months ended September 30,

$
38,272

$
32,259

$
6,013


18.6
%


On
May 18, 2010, Dr. Nottenburg, the Company's President and Chief Executive Officer and the Company entered into a letter agreement (the "Retention Agreement") pursuant to
which Dr. Nottenburg agreed to stay with the Company while assisting the Company with an orderly transition of his duties and responsibilities. On October 8, 2010, Mr. Dolan
accepted an offer of employment as our President and Chief Executive Officer, effective October 12, 2010, and joined our Board of Directors by action of the Board of Directors, effective
October 12, 2010, succeeding Dr. Nottenburg. We accelerated the recognition of expense for both the stock-based awards and cash payments related to Dr. Nottenburg's departure
pursuant to the terms of his Retention Agreement.

The
increase in the three months ended September 30, 2010 compared to the three months ended September 30, 2009 is primarily attributable to $7.6 million of higher
employee-related expense and $0.2 million of net increases in other costs, partially offset by $2.2 million of lower legal-related and professional fees. The increase in employee-related
expense is comprised of $6.0 million resulting from accelerated expense recognition for Dr. Nottenburg's stock-based awards and cash payments due him

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pursuant
to the Retention Agreement, $1.5 million related to our employee incentive program and $0.1 million of net increases in other employee-related costs.

The
increase in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 is primarily attributable to $9.4 million of higher
employee-related expense and $0.7 million of net increases in other costs, partially offset by lower expenses that include $3.3 million of lower legal-related and professional fees,
$0.5 million of lower bad debt expense and $0.3 million of lower foreign currency translation expense. The increase in employee-related expense includes $6.7 million resulting
from accelerated expense recognition for Dr. Nottenburg's stock-based awards and cash payments due him pursuant to the Retention Agreement, $2.2 million related to our employee incentive
program and $0.5 million of net increases in other employee-related costs.

We
believe that our General and administrative expenses in fiscal 2010 will increase compared to fiscal 2009 levels, the net result of expense related to the provisions of the Retention
Agreement, partially offset by lower expected professional fees and personnel-related expenses.

Restructuring.On August 24, 2010, we committed to a restructuring initiative to close our offices in Ottawa, Canada and in
Darmstadt,
Germany, to relocate our Freehold, New Jersey facility to a smaller, more cost-effective space in the same area, and to reduce our workforce by 12 people, or approximately 1% of employees
worldwide (the "2010 restructuring initiative"). We recorded $1.1 million of restructuring expense in both the three and nine months ended September 30, 2010, representing severance and
related expenses for the headcount reduction component of the 2010 restructuring initiative. We will record expense for the facilities components of the 2010 restructuring initiative, estimated at
approximately $2.5 million to $2.8 million in the aggregate, upon consummation of each lease contract termination agreement with the respective landlords, which we expect will occur in
the fourth quarter of fiscal 2010. We currently expect the payments related to the 2010 restructuring initiative will be completed in the first quarter of fiscal 2011.

In
the three months ended September 30, 2009, we recorded $1.5 million of restructuring expense related to our August 12, 2009 headcount reduction restructuring
initiative, which reduced our then-current workforce by approximately 93 people, or 10% of our employees worldwide. In the nine months ended September 30, 2009, we recorded
restructuring expenses aggregating $3.5 million related to three restructuring initiatives implemented as part of our efforts to right-size the business to align with market
opportunities while managing costs to
position the Company for profitable growth. Of this amount, $1.5 million relates to the August 12, 2009 headcount reduction restructuring initiative described above, $0.9 million
was recorded for severance and related expenses for our January 9, 2009 restructuring initiative, which reduced our workforce by approximately 40 people, or 4% of employees worldwide, and
$1.1 million was recorded for severance and related expenses for our March 10, 2009 restructuring initiative, which further reduced our workforce by approximately 60 people, or 6% of
employees worldwide.

Interest Income, net.Interest income and interest expense for the three months and nine months ended September 30, 2010 and
2009 were as
follows (in thousands, except percentages):

(Decrease) from
prior yearThree months ended September 30,

2010

2009

$

%Interest income

$
439

$
787

$
(348
)

-44.2
%Interest expense


(10
)

(23
)

(13
)

-56.5
%Interest income, net

$
429

$
764

$
(335
)

-43.8
%


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(Decrease) from
prior yearNine months ended September 30,

2010

2009

$

%Interest income

$
1,420

$
3,513

$
(2,093
)

-59.6
%Interest expense


(53
)

(94
)

(41
)

-43.6
%Interest income, net

$
1,367

$
3,419

$
(2,052
)

-60.0
%


Interest
income consists of interest earned on our cash equivalents, marketable securities and long-term investments. Interest expense primarily relates to interest on
capital lease obligations. The reduction in interest income, net, in the three and nine months ended September 30, 2010 compared to the same prior year periods is primarily attributable to a
lower average portfolio yield.

Income Taxes.Our provision for income taxes was $0.5 million for the nine months ended September 30, 2010 and our
income tax benefit
was $0.3 million for the nine months ended September 30, 2009. These amounts reflect our estimates of the effective rates expected to be applicable for the respective full fiscal years,
adjusted for any discrete events, which are recorded in the period that they occur. These estimates are reevaluated each quarter based on our estimated tax rate for the full fiscal year.

During
the fourth quarter of fiscal 2008, we concluded that there was insufficient positive evidence to overcome the more objective negative evidence related to our cumulative losses and
other factors. Accordingly, we recorded an increase to our valuation allowance on substantially all of our domestic net deferred tax assets. The estimated annual effective rate for the year ending
December 31, 2010 does not include any benefit for our projected domestic losses as we continue to conclude that a valuation allowance for our domestic losses is appropriate.

The
provision for income taxes for the nine months ended September 30, 2010 represents forecasted tax expense on the earnings of our foreign operations. Our effective tax rate for
the nine months ended September 30, 2009 was less than the statutory federal and state rates primarily due to our inability to recognize tax benefits on domestic losses incurred.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on
our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Liquidity and Capital Resources

At September 30, 2010, our cash, cash equivalents, marketable securities and investments totaled $413.5 million.

Our
operating activities provided $12.4 million in the nine months ended September 30, 2010 and $10.7 million of cash in the nine months ended September 30,
2009.

Cash
provided by operating activities in the nine months ended September 30, 2010 was primarily the result of lower accounts receivable and other operating assets and higher
accounts payable and accrued expenses. These amounts were partially offset by increases in inventory, both current and noncurrent, and decreases in deferred revenue, both current and noncurrent. The
decrease in accounts receivable was mainly driven by our continued focus on cash collections. Our accounts payable increase is primarily attributable to purchases of materials in the latter part of
the quarter for which payments are due to the vendors in the fourth quarter of 2010. The increase in accrued expenses is primarily attributable to employee compensation and related costs, including
accruals related to Dr. Nottenburg's Retention Agreement and the implementation in 2010 of our Company-wide employee incentive program, partially offset by payments for previously
accrued royalty payments, lower taxes payable and

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the
completion of employee stock purchases under our Amended and Restated 2000 Employee Stock Purchase Plan ("ESPP"). Our higher inventory levels are primarily related to our new NBS 5200 product and
preparation for product end-of-life purchases by our customers. The decrease in deferred revenue is primarily the result of the completion of projects for which the revenue had
been deferred at December 31, 2009, partially offset by new orders in 2010 for which revenue recognition criteria had not been met as of September 30, 2010. Our net loss, adjusted for
non-cash items such as depreciation, amortization and stock-based compensation, used $1.0 million of cash.

Cash
provided by operating activities during the nine months ended September 30, 2009 was primarily the result of a net decrease in accounts receivable, which was mainly driven by
strong cash collections, partially offset by increases in inventory and other operating assets, as well as a net reduction in our operating liabilities. The increase in operating assets was primarily
attributable to higher deferred costs, including cost of goods, royalties, commissions and third party installation costs, for which the related revenue had not yet been recognized. The decrease in
our operating liabilities was primarily attributable to the payment of litigation settlements and related costs, lower employee compensation and related costs, including reductions for the payment of
incentives to our executives and employees under our employee incentive programs, the completion of employee stock purchases under our ESPP and lower taxes payable, accrued royalties and professional
fees. Our net loss (adjusted for non-cash items such as depreciation, amortization and stock-based compensation) contributed $2.4 million to the cash provided by operating
activities.

Our
investing activities used $58.0 million of cash in the nine months ended September 30, 2010, compared to $44.8 million of cash provided by investing activities
in the nine months ended September 30, 2009. Our net investment in marketable securities in the nine months ended September 30, 2010 was $46.8 million, compared to
$49.6 million of net sales and maturities of marketable securities and investments in the nine months ended September 30, 2009. In addition, during the nine months ended
September 30, 2010, we used $9.2 million of cash for purchases of property and equipment and $2.0 million to purchase intangible assets. In the first quarter of fiscal 2009, we
had placed $9.5 million into escrow related to a litigation settlement that was released in the second quarter of fiscal 2009. We used $4.8 million for purchases of property and
equipment in the nine months ended September 30, 2009.

Our
financing activities provided $0.9 million of cash in the nine months ended September 30, 2010, including $1.4 million of proceeds from the sale of common stock
in connection with our ESPP and $0.3 million from the exercise of stock options. These amounts were partially offset by $0.6 million used to pay withholding obligations related to the
net share settlement of restricted stock awards upon vesting and $0.2 million used for payments on our capital leases for office equipment. Our financing activities provided $0.4 million
of cash in the nine months ended September 30, 2009, including $1.1 million of proceeds from the sale of common stock in connection with our ESPP and $32,000 from the exercise of stock
options. These amounts were partially offset by $0.5 million used to pay withholding obligations related to the net share settlement of restricted stock awards upon vesting and
$0.2 million used for payments on our capital leases for office equipment.

Based
on our current expectations, we believe our cash, cash equivalents, marketable securities and long-term investments will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least the next 12 months. It is difficult to predict future liquidity requirements with certainty. The rate at which we will consume
cash will be dependent on the cash needs of future operations, including changes in working capital, which will, in turn, be directly affected by the levels of demand for our products, the timing and
rate of expansion of our business, the resources we devote to developing our products and any litigation settlements. We anticipate devoting substantial capital resources to continue our research and
development efforts, to maintain our sales, support and marketing operations and for other general corporate activities, as well as to vigorously

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defend
against existing and potential litigation. See Note 16 to our condensed consolidated financial statements for a description of legal contingencies.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board ("FASB") issued an update toCertain Arrangements
that Include Software Elements. This update removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. This update will require us to account for many of our multiple-element
arrangements as non-software transactions and could impact the timing and revenue recognized in a reporting period. This update is effective for us beginning January 1, 2011,
although early adoption is permitted, and adoption can be applied prospectively or retrospectively. We are currently evaluating the effect that implementation of this update will have on our
consolidated financial position and results of operations upon adoption.

In
October 2009, the FASB issued an update to the accounting guidance related to the separation criteria used to determine the unit of accounting for multiple-element arrangements. This
update
removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting, replaces references to "fair value" with "selling price" to distinguish from the fair value measurements required under
Accounting Standards Codification ("ASC") 820, provides a hierarchy that entities must use to estimate the selling price, eliminates the use of the residual method for allocation and expands the
ongoing disclosure requirements. This guidance is effective for us beginning January 1, 2011, although early adoption is permitted, and adoption can be applied prospectively or retrospectively.
We are currently evaluating the effect that implementation of this update will have, if any, on our consolidated financial position and results of operations upon adoption.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of market risks, including changes in interest rates affecting the return on our investments and foreign
currency fluctuations. We do not believe that a hypothetical 10% adverse movement in interest rates and foreign currency exchange rates would have a materially different impact from what was disclosed
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Item 4.    Controls and Procedures

Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures.Our management (with the participation of our Chief Executive Officer and Chief
Financial Officer)
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), as of September 30, 2010.

Disclosure
controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and
procedures are effective as of September 30, 2010.

Changes in Internal Control over Financial Reporting.No changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) were identified in connection with the evaluation as of September 30, 2010 referenced above that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings

We are a party to the legal proceedings described in Part I, Item 3, "Legal Proceedings" of our Annual Report on
Form 10-K for the year ended December 31, 2009 and Note 16 of this Quarterly Report on Form 10-Q. There were no material developments to these legal
proceedings in the three or nine months ended September 30, 2010.

Item 1A.    Risk Factors

Investing in our common stock involves a high degree of risk. Set forth below and elsewhere in this report and
in other documents we file with the Securities and Exchange Commission are descriptions of certain risks and uncertainties that could cause our actual results to differ materially from the results
contemplated by the forward-looking statements contained in this report.

The following risk factor has been updated since the filing of our Annual Report on Form 10-K for the year ended December 31, 2009:

If we fail to hire and retain needed personnel, the implementation of our business plan could slow or our future growth could halt.

Our business depends upon highly skilled technical, managerial, engineering, sales, marketing and customer support personnel.
Competition for these personnel is intense, especially once the economy begins to recover. Any failure to hire, assimilate in a timely manner and retain needed qualified personnel, particularly
engineering and sales personnel, could impair our growth and make it difficult to meet key objectives, such as timely and effective product introductions.

Our
future success depends upon the continued services of our executive officers who have critical industry experience and relationships that we rely on to implement our business plan.
With the exception of our key employees based in the European Union, none of our officers or key employees is bound by an employment agreement for any specific term. The loss of the services of any of
our officers or key employees could delay the development and introduction of, and negatively impact our ability to sell our products or achieve our business objectives.

We
have had three key executive departures in fiscal 2010, including the departure of our then-current President and Chief Executive Officer on October 12, 2010 and
our Vice President of Sales on September 30, 2010. There is always a risk of uncertainty and instability relating to our ability to find highly qualified successors and to transition the duties
and responsibilities of any departing key executive in an orderly manner.

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We have not announced any currently effective authorization to repurchase shares of our common stock. However, upon vesting of
restricted stock awards, employees are permitted to return to us a portion of the newly-vested shares to satisfy the tax withholding obligations that arise in connection with such vesting. The
following table summarizes repurchases of our common stock during the third quarter of fiscal 2010, which represent shares returned to satisfy tax withholding obligations:

Issuer Purchases of Equity Securities

Period

Total Number
of Shares
Purchased

Average
Price Paid
per Share

Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans
or Programs

Approximate Dollar
Value of Shares That
May Yet be Purchased
Under the Plans or
ProgramsJuly 1, 2010 to July 31, 2010


1,984

$
2.90





August 1, 2010 to August 31, 2010


68,958

$
3.01





September 1, 2010 to September 30, 2010


29,378

$
3.46





Total


100,320

$
3.14








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Item 6.    Exhibits

Exhibit Number

Description10.1

Lease, dated August 11, 2010, by and between Michelson Farm-Westford Technology Park IV Limited Partnership and Sonus Networks, Inc. with respect to the property located at 4 Technology Park Drive, Westford,
Massachusetts10.2

First Amendment to Lease, dated October 27, 2010, by and between Michelson Farm-Westford Technology Park IV Limited Partnership and Sonus Networks, Inc. with respect to the property located at 4 Technology
Park Drive, Westford, Massachusetts10.3

Lease and Sublease Termination Agreement, dated August 11, 2010, by and among Michelson Farm-Westford Technology Park V and VIII Limited Partnership, Teradyne, Inc. and Sonus Networks, Inc. with respect
to the properties located at 7 and 9 Technology Park Drive, Westford, Massachusetts10.4
(a)
Employment Agreement between Sonus Networks, Inc. and Raymond P. Dolan, accepted on October 8, 201031.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

Dated: November 2, 2010

SONUS NETWORKS, INC.By:

/s/ WAYNE PASTORE Wayne Pastore Senior Vice President and Chief Financial Officer
(Principal Financial Officer)Dated: November 2, 2010

SONUS NETWORKS, INC.By:

/s/ ELMER LAI Elmer Lai Vice President, Finance, Corporate Controller
and Chief Accounting Officer
(Principal Accounting Officer)


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EXHIBIT INDEX

Exhibit Number

Description10.1

Lease, dated August 11, 2010, by and between Michelson Farm-Westford Technology Park IV Limited Partnership and Sonus Networks, Inc. with respect to the property located at 4 Technology Park Drive, Westford,
Massachusetts10.2

First Amendment to Lease, dated October 27, 2010, by and between Michelson Farm-Westford Technology Park IV Limited Partnership and Sonus Networks, Inc. with respect to the property located at 4 Technology
Park Drive, Westford, Massachusetts10.3

Lease and Sublease Termination Agreement, dated August 11, 2010, by and among Michelson Farm-Westford Technology Park V and VIII Limited Partnership, Teradyne, Inc. and Sonus Networks, Inc. with respect
to the properties located at 7 and 9 Technology Park Drive, Westford, Massachusetts10.4
(a)
Employment Agreement between Sonus Networks, Inc. and Raymond P. Dolan, accepted on October 8, 201031.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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