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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 March 31, 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(State or other jurisdiction
of incorporation or organization)

04-3387074(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 April 22, 2010, there were 275,007,680 shares of the registrant's common stock, $0.001 par value, outstanding.



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SONUS NETWORKS, INC.  FORM 10-Q  QUARTER ENDED MARCH 31, 2010

TABLE OF CONTENTS



PagePART I FINANCIAL INFORMATIONItem 1.

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

1Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 (unaudited)

2Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (unaudited)

3Notes to Condensed Consolidated Financial Statements (unaudited)

4Item 2.

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

22Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30Item 4.

Controls and Procedures

30PART II OTHER INFORMATIONItem 1.

Legal Proceedings

31Item 1A.

Risk Factors

31Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31Item 6.

Exhibits

32Signatures

33Exhibit Index

34


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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)

March 31,
2010

December 31,
2009AssetsCurrent assets:Cash and cash equivalents

$
64,861

$
125,323Marketable securities


281,799


239,223Accounts receivable, net of allowance for doubtful accounts of $666 at both March 31, 2010 and December 31, 2009


32,385


47,998Inventory, net


20,119


21,925Deferred income taxes


640


562Other current assets


20,426


17,508Total current assets


420,230


452,539Property and equipment, net


13,518


14,646Intangible assets, net


2,203


341Goodwill


5,059


5,053Investments


66,299


49,598Deferred income taxes


730


711Other assets


17,035


17,849$
525,074

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

$
8,506

$
5,337Accrued expenses


14,265


19,292Current portion of deferred revenue


59,149


74,748Current portion of long-term liabilities


525


753Total current liabilities


82,445


100,130Deferred revenue


24,451


25,242Long-term liabilities


1,145


1,127Total liabilities


108,041


126,499Commitments and contingencies (Note 15)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; 277,303,840 and 276,792,897 shares issued; 275,006,930 and 274,495,987 shares outstanding at
March 31, 2010 and December 31, 2009, respectively


278


277Additional paid-in capital


1,289,415


1,286,326Accumulated deficit


(878,944
)

(878,810
)Accumulated other comprehensive income


6,551


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


(267
)

(267
)Total stockholders' equity


417,033


414,238$
525,074

$
540,737


See notes to the condensed consolidated financial statements.

1

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

Three months ended March 31,2010

2009Revenue:Product

$
36,278

$
19,403Service


26,130


21,609Total revenue


62,408


41,012Cost of revenue:Product


12,301


6,134Service


11,929


11,663Total cost of revenue


24,230


17,797Gross profit


38,178


23,215Operating expenses:Research and development


14,940


16,353Sales and marketing


13,594


12,147General and administrative


10,144


10,495Restructuring





1,984Total operating expenses


38,678


40,979Loss from operations


(500
)

(17,764
)Interest expense


(13
)

(79
)Interest income


515


1,649Other income (expense), net


10


(7
)Income (loss) before income taxes


12


(16,201
)Income tax provision


(146
)

(26
)Net loss

$
(134
)
$
(16,227
)Loss per shareBasic

$


$
(0.06
)Diluted

$


$
(0.06
)Shares used to compute loss per share:Basic


274,701


273,095Diluted


274,701


273,095


See notes to the condensed consolidated financial statements.

2

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

Three months ended March 31,2010

2009Cash flows from operating activities:Net loss

$
(134
)
$
(16,227
)Adjustments to reconcile net loss to cash flows provided by operating activities:Depreciation and amortization of property and equipment


2,458


2,502Amortization of intangible assets


138


96Stock-based compensation


2,486


3,040Loss on disposal of property and equipment


57


2Deferred income taxes





(38
)Changes in operating assets and liabilities:Accounts receivable


15,477


24,885Inventory


2,852


(2,615
)Other operating assets


(2,098
)

(4,148
)Accounts payable


3,547


(3,348
)Accrued expenses


(5,039
)

(8,951
)Deferred revenue


(16,445
)

13,712Net cash provided by operating activities


3,299


8,910Cash flows from investing activities:Purchases of property and equipment


(1,763
)

(770
)Purchase of intangible assets


(2,000
)

Purchases of marketable securities


(121,856
)

(11,936
)Sale/maturities of marketable securities


61,493


82,895Increase in restricted cash





(9,500
)Net cash provided by (used in) investing activities


(64,126
)

60,689Cash flows from financing activities:Sale of common stock in connection with employee stock purchase plan


609


529Proceeds from exercise of stock options


35


1Payment of tax withholding obligations related to net share settlements of restricted stock awards


(180
)

(122
)Principal payments of capital lease obligations


(55
)

(64
)Net cash provided by financing activities


409


344Effect of exchange rate changes on cash and cash equivalents


(44
)

(71
)Net increase (decrease) in cash and cash equivalents


(60,462
)

69,872Cash and cash equivalents, beginning of year


125,323


122,207Cash and cash equivalents, end of period

$
64,861

$
192,079Supplemental disclosure of cash flow information:Interest paid

$
13

$
32Income taxes paid

$
518

$
334Income tax refunds received

$
366

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

$
513

$
477Property and equipment acquired under capital lease

$


$
6


See notes to the condensed consolidated financial statements.

3

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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 filed on February 25, 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.

4

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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.

Foreign Currency Translation

The Company recorded net losses on foreign currency remeasurement and transactions of $0.2 million and $0.4 million for
the three months ended March 31, 2010 and 2009, respectively. These amounts include $0.9 million and $0.5 million of losses in the three months ended March 31, 2010 and
2009, respectively, related to the Company's remeasurement of its U.S. dollar foreign subsidiaries. Foreign currency gains and losses are included as a component of General and administrative expenses
in the condensed consolidated statements of operations.

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 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 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

5

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

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 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

6

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(2) REVENUE RECOGNITION (Continued)

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.

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. The Company has and will continue to apply this methodology
on a consistent basis. At March 31, 2010, Other current assets included $0.4 million of deferred product costs related to arrangements with AT&T in which both the revenue and product
costs are being recognized ratably. At March 31, 2010 and December 31, 2009, Other assets included $3.0 million and $3.9 million, respectively,
of deferred product costs 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.

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

The
calculations of shares used to compute basic and diluted earnings (loss) per share for the three months ended March 31, 2010 and 2009 are as follows (in thousands):

Three months ended March 31,2010

2009Weighted average shares outstandingbasic


274,701


273,095Potential dilutive common shares





Weighted average shares outstandingdiluted


274,701


273,095


Options
to purchase the Company's common stock, unvested shares of restricted stock and performance-based stock awards aggregating approximately 26.8 million and
37.0 million shares of common stock have not been included in the computation of diluted loss per share for the three months ended March 31, 2010 and 2009, respectively, because their
effect would have been antidilutive.

(4) COMPREHENSIVE LOSS

The Company's comprehensive loss for the three months ended March 31, 2010 and 2009 is as follows (in thousands):

Three months ended March 31,2010

2009Net loss

$
(134
)
$
(16,227
)Other comprehensive income (loss):Foreign currency translation adjustments


14


(256
)Unrealized loss on available-for-sale marketable securities, net of tax


(175
)

(796
)Comprehensive loss

$
(295
)
$
(17,279
)


(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.

8

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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)

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

March 31, 2010Amortized
cost

Unrealized
gains

Unrealized
losses

Fair
valueCash equivalents

$
41,879

$


$


$
41,879Marketable securitiesU.S. government agency notes

$
112,081

$
162

$
(38
)
$
112,205Corporate debt securities


78,994


163


(43
)

79,114Commercial paper


62,807


6


(1
)

62,812Certificates of deposit


27,650


28


(10
)

27,668$
281,532

$
359

$
(92
)
$
281,799InvestmentsU.S. government agency notes

$
11,551

$


$
(5
)
$
11,546Corporate debt securities


54,768


23


(38
)

54,753$
66,319

$
23

$
(43
)
$
66,299




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


9

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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)

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:

Level 1.Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or
liabilities.

Level 2.Level 2 applies to assets or liabilities for which there are inputs that are directly or indirectly observable in the
marketplace, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent
transactions (less active markets).

Level 3.Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that
are
significant to the measurement of the fair value of the assets or liabilities.

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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)

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

Quoted prices
in active
markets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)Cash equivalents

$
41,879

$
41,879

$


$
Marketable securitiesU.S. government agency notes

$
112,205

$


$
112,205

$
Corporate debt securities


79,114


49,072


30,042


Commercial paper


62,812





62,812


Certificates of deposit


27,668





27,668


$
281,799

$
49,072

$
232,727

$
InvestmentsU.S. government agency notes

$
11,546

$


$
11,546

$
Corporate debt securities


54,753


27,363


27,390


$
66,299

$
27,363

$
38,936

$





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

$



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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)

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

(6) INVENTORY, NET

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

March 31,
2010

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

$
10,770

$
11,036Deferred cost of goods sold


17,652


20,13228,422


31,168Less current portion


(20,119
)

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

$
8,303

$
9,243


(7) INTANGIBLE ASSETS AND GOODWILL

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

March 31, 2010

Useful life

Cost

Accumulated
amortization

Net
carrying valueIntellectual property

5 years

$
2,999

$
796

$
2,203Order backlog

1 year


287


287


$
3,286

$
1,083

$
2,203




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 licensed 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
March 31, 2010.

12

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(7) INTANGIBLE ASSETS AND GOODWILL (Continued)

The
Company amortizes its intangible assets over the estimated useful lives of the respective assets. Amortization expense related to intangible assets was approximately $138,000 and
$96,000 in the three months ended March 31, 2010 and 2009, respectively.

Estimated
future amortization expense for intangible assets recorded by the Company at March 31, 2010 is as follows (in thousands):

Remainder of 2010

$
4142011


5512012


4382013


4002014


400$
2,203


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 three months ended March 31, 2010 and 2009 are as follows (in thousands):

Three months ended
March 31,2010

2009Balance at January 1:Goodwill

$
8,159

$
8,131Accumulated impairment losses


(3,106
)

(3,106
)5,053


5,025Foreign currency translation adjustment


6


(5
)Balance at March 31:Goodwill


8,165


8,126Accumulated impairment losses


(3,106
)

(3,106
)$
5,059

$
5,020


13

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(8) ACCRUED EXPENSES

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

March 31,
2010

December 31,
2009Employee compensation and related costs

$
9,704

$
11,892Employee stock purchase plan


167


653Professional fees


1,378


863Royalties





1,039Income taxes payable


254


648Sales taxes payable


600


2,278Other taxes


71


96Restructuring


9


82Other


2,082


1,741$
14,265

$
19,292


(9) RESTRUCTURING ACCRUAL

In the three months ended March 31, 2009, the Company recorded restructuring expenses aggregating $2.0 million related to headcount initiatives implemented as part of the
Company's efforts to right-size the business to align with market opportunities while managing costs to position Sonus for profitable growth. The Company recorded $0.9 million of
severance and related expenses for its January 9, 2009 restructuring initiative, which reduced the Company's workforce by approximately 40 people, or 4% of employees worldwide. The Company
recorded $1.1 million of severance and related expenses for its March 10, 2009 restructuring initiative, which further reduced the Company's workforce by approximately 60 people, or 6%
of employees worldwide.

The
Company expects to complete the payments related to these initiatives in the second quarter of fiscal 2010.

The
activity related to these initiatives during the three months ended March 31, 2010 is as follows (in thousands):

Balance
January 1,
2010

Cash
payments

Balance
March 31,
2010Severance and related costs

$
82

$
(73
)
$
9


(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.

14

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(10) STOCK-BASED COMPENSATION PLANS (Continued)

Stock Options

The activity related to the Company's outstanding stock options during the three months ended March 31, 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


569,500

$
2.30Exercised


(32,969
)
$
1.05Forfeited


(223,493
)
$
5.48Expired


(1,555,522
)
$
4.12Outstanding at March 31, 2010


22,839,081

$
4.89


4.71

$
2,335Vested or expected to vest at March 31, 2010


22,478,559

$
4.92


4.65

$
2,202Exercisable at March 31, 2010


18,097,320

$
5.25


3.72

$
609


The
grant date fair values of stock options granted in the three months ended March 31, 2010 were estimated using the Black-Scholes valuation model with the following assumptions:

Risk-free interest rate


2.65
%Expected dividend yield


Weighted average volatility


64.81
%Expected life (years)


4.5


The
weighted average grant date fair value of stock options granted during the three months ended March 31, 2010 was $1.23.

The
total intrinsic values of stock options exercised during the three months ended March 31, 2010 and 2009 were approximately $41,000 and $17,000, respectively. The Company
received cash from stock option exercises of approximately $35,000 and $1,000 in the three months ended March 31, 2010 and 2009, respectively.

15

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(10) STOCK-BASED COMPENSATION PLANS (Continued)

Restricted Stock Awards

The activity related to the Company's unvested restricted stock awards for the three months ended March 31, 2010 is as follows:

Shares

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


3,444,496

$
3.29Granted


185,000

$
1.95Vested


(199,546
)
$
5.55Forfeited


(221,809
)
$
2.86Unvested balance at March 31, 2010


3,208,141

$
3.10


The
total fair value of shares of restricted stock that vested during the three months ended March 31, 2010 was $1.1 million.

Performance-based Stock Awards

The activity related to the Company's performance stock awards for the three months ended March 31, 2010 is as follows:

Shares

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


550,000

$
4.15Granted


175,000

$
2.63Vested





Forfeited





Unvested balance at March 31, 2010


725,000

$
3.78


There
are 241,167 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.

16

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(10) STOCK-BASED COMPENSATION PLANS (Continued)

Stock-Based Compensation

The condensed consolidated statements of operations include stock-based compensation for the three months ended March 31, 2010
and 2009 as follows (in thousands):

Three months ended
March 31,2010

2009Product cost of revenue

$
71

$
116Service cost of revenue


419


465Research and development


606


767Sales and marketing


729


1,044General and administrative


661


648$
2,486

$
3,040


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

There
is no income tax benefit for employee stock-based compensation expense for the three months ended March 31, 2010 and 2009 due to the valuation allowance recorded.

At
March 31, 2010, there was $17.8 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 2.5 years.

(11) MAJOR CUSTOMERS

The following customers each contributed 10% or more of the Company's revenue in at least one of the three month periods ended March 31, 2010 and 2009:

Three months ended
March 31,Customer

2010

2009AT&T


15
%

11
%KDDI Corporation


11
%

*


*Represents
less than 10% of revenue.


17

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(11) MAJOR CUSTOMERS (Continued)

At
March 31, 2010, two customers each accounted for 10% or more of the Company's accounts receivable balance, representing approximately 31% 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.

(12) INCOME TAXES

The Company's provision for income taxes of $146,000 and $26,000 for the three months ended March 31, 2010 and 2009, respectively, 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.

(13) GEOGRAPHIC INFORMATION

The Company's classification of revenue by geographic area is determined by the location where the product is shipped to or where the services are performed. The following table
summarizes revenue by geographic area as a percentage of total revenue for the three months ended March 31, 2010 and 2009:

Three months ended
March 31,2010

2009United States


58
%

71
%Japan


21


7Other Asia Pacific


*


2Europe, Middle East and Africa


19


16Other


2


4100
%

100
%


*Represents
less than 1% of revenue.


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.

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(14) RELATED PARTIES

The Company's President and Chief Executive Officer 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 effective June 13, 2008. Costs
incurred for purchases from these companies, in the aggregate, were $1.3 million and $2.2 million for the three months ended March 31, 2010 and 2009, respectively. At
March 31, 2010 and December 31, 2009, the Company had aggregate outstanding accounts payable balances of $0.1 million and $0.2 million, respectively, to these companies.

(15) 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 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 purchases 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, 2001, 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 approved the terms of the proposed settlement contingent on modifications to the
proposed settlement.

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(15) COMMITMENTS AND CONTINGENCIES (Continued)

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. 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 for recovery of
short-swing profits under Section 16(b) of the Exchange Act against the underwriters in 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 United States District Court for the Western
District of Washington, as related cases. On March 12, 2009, the 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 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 before the United States Court of Appeals for the Ninth Circuit was complete as of
November 17,

20

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(15) COMMITMENTS AND CONTINGENCIES (Continued)

2009.
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, we are often a party to disputes and legal proceedings that we consider routine and incidental to our business. Management
does not expect the results of any of these actions to have a material adverse effect on our business, results of operations or financial condition.

21

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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 "could", "expects", "may",
"anticipates", "believes", "intends", "estimates", "plans", "envisions", "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, 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 with little or no impact on existing Sonus equipment or services. Additionally, the Sonus all-IP architecture is positioned to take advantage of wireless 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.

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.

22

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Table of Contents

We
reported losses from operations of $0.5 million and $17.8 million for the three months ended March 31, 2010 and 2009, respectively. We reported net losses of
$0.1 million and $16.2 million for the three months ended March 31, 2010 and 2009, respectively.

Our
higher revenue in the current year period was a significant factor in our lower reported net loss for the three months ended March 31, 2010 compared to the three months ended
March 31, 2009. This higher revenue resulted in higher gross profit of $38.2 million in the three months ended March 31, 2010, compared to $23.2 million in the same prior
year quarter.

Operating
expenses were $38.7 million in the three months ended March 31, 2010. This amount compares to $41.0 million, including $2.0 million of restructuring
expense, in the three months ended March 31, 2009. Lower research and development expenses and general and administrative expenses in the three months ended March 31, 2010 were partially
offset by higher sales and marketing expenses. These higher sales and marketing expenses were primarily attributable to higher sales commissions resulting from our higher revenue in the current year
quarter. Our personnel-related costs, with the exception of sales commissions which are a function of our revenue levels, have been reduced primarily as a result of our fiscal 2009 and 2008 headcount
restructuring initiatives (the "restructuring initiatives"), including two such restructuring initiatives in the three months ended March 31, 2009. As a result of these restructuring
initiatives, we reduced our total headcount by approximately 240 employees, or approximately 25% of our total worldwide workforce. However, while we have eliminated jobs in some areas of the business,
we continue to hire for positions in certain geographies, such as for our development center in India, to support our business plans.

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:



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

23

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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:



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 during the three months ended March 31,
2010.

Results of Operations

Three Months Ended March 31, 2010 and 2009

Revenue.Revenue for the three months ended March 31, 2010 and 2009 was as follows (in thousands, except percentages):

Three months ended
March 31,

Increase
from prior year2010

2009

$

%Product

$
36,278

$
19,403

$
16,875


87.0
%Service


26,130


21,609


4,521


20.9
%Total revenue

$
62,408

$
41,012

$
21,396


52.2
%


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, the Insight xAuthority Provisioning
System and related product offerings.

One
of the primary factors contributing to the increase in product revenue in the three months ended March 31, 2010 compared to the three months ended March 31, 2009 is the
low revenue in the prior year quarter (our lowest in several years), which was due primarily to declines in the global economy which resulted in reduced telecommunications spending and reduced demand
for our products and
services. The increase in product revenue primarily resulted from the completion of a number of customer projects for which the revenue recognition criteria were met in the three months ended
March 31, 2010, resulting in approximately $14 million of revenue. Six of these projects were related to deployments for new customers, which contributed approximately $9 million
of product revenue, with the remaining $5 million in product revenue related to longer-term projects (generally, greater than one year) for existing customers. The remaining
increase is attributable to an increase in product revenue from AT&T Inc. ("AT&T").

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

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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. We have and will continue to apply this methodology on a consistent basis. Product revenue recognized from AT&T increased approximately
$3 million in the three months ended March 31, 2010, compared to the three months ended March 31, 2009, primarily due to fiscal 2010 orders being recognized as revenue over a
shorter period than orders placed in fiscal 2009.

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"). Higher maintenance revenue accounted for $1.8 million of the increase in service revenue in the three months ended March 31, 2010 compared to the same
prior year quarter. Of this amount, $1.2 million represents maintenance revenue from new customers and $1.2 million relates to higher maintenance revenue from AT&T, primarily due to the
shorter revenue recognition period discussed above. These increases were partially offset by $0.6 million of decreases in maintenance revenue, principally related to the decommissioning of
customer equipment or termination of maintenance agreements. Higher professional services revenue accounted for $2.7 million of the increase in service revenue in the three months ended
March 31, 2010, compared to the same quarter of the prior year. Of this amount, $2.3 million relates to professional services for the previously described new customer deployments
completed in the quarter and $0.4 million represents additional professional services provided to our existing customer base.

We
currently believe that our fiscal 2010 revenue will range from flat to low single-digit percentage growth compared to our fiscal 2009 revenue.

AT&T
and KDDI Corporation contributed approximately 15% and 11%, respectively, of our revenue in the three months ended March 31, 2010. AT&T contributed approximately 11% of our
revenue in the
three months ended March 31, 2009. There were no other customers that contributed 10% or more of our revenue in the three months ended March 31, 2010 or 2009.

International
revenue was approximately 42% and 29% of revenue in the three months ended March 31, 2010 and 2009, respectively. 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 $36.9 million and $47.7 million at March 31, 2010 and December 31, 2009, respectively, and our deferred service revenue was
$46.7 million and $52.3 million at March 31, 2010 and December 31, 2009, respectively. 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 primarily of amounts paid to third-party manufacturers for purchased
materials and
services, royalties, manufacturing and professional services personnel and related costs and inventory obsolescence. Our cost of revenue and gross profit as a

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percentage
of revenue ("gross margin") for the three months ended March 31, 2010 and 2009 were as follows (in thousands, except percentages):

Three months ended
March 31,

Increase
from prior year2010

2009

$

%Cost of revenueProduct

$
12,301

$
6,134

$
6,167


100.5
%Service


11,929


11,663


266


2.3
%Total cost of revenue

$
24,230

$
17,797

$
6,433


36.1
%Gross marginProduct


66.1
%

68.4
%Service


54.3
%

46.0
%Total gross margin


61.2
%

56.6
%


The
decrease in product gross margin in the three months ended March 31, 2010 compared to the three months ended March 31, 2009 was primarily due to changes
in product and customer mix, which reduced our product gross margin by approximately 4 percentage points, partially offset by lower manufacturing-related costs, which contributed approximately
2 percentage points to our product gross margin. The increase in service gross margin in the three months ended March 31, 2010 compared to the same prior year quarter was due to our
ability to leverage our higher service revenue against our primarily fixed cost base. 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 months ended March 31, 2010 and 2009 were as follows (in thousands,
except percentages):

Three months ended
March 31,

Decrease
from prior year2010

2009

$

%$
14,940

$
16,353

$
(1,413
)

-8.6
%


The
decrease in the current period primarily reflects lower employee-related costs, including salary and related costs as a result of our restructuring initiatives. As a result of these
initiatives, we reduced our research and development headcount by approximately 140 people. The savings from these headcount reductions were partially offset by an increase of approximately 80
employees at our development center in India. These changes in headcount resulted in a net decrease in employee-related costs of $2.5 million, including $0.2 million of lower stock-based
compensation expense. These reductions were partially offset by $1.1 million of increased expense for new product development for both our new and existing product offerings and related
activities. 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.

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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 for the three months ended March 31, 2010 and
2009 were as follows (in thousands, except percentages):

Three months ended
March 31,

Increase
from prior year2010

2009

$

%$
13,594

$
12,147

$
1,447


11.9
%


The
increase in the three months ended March 31, 2010 compared to the same prior year quarter is primarily attributable to $1.8 million of higher sales employee-related
expense, including $1.2 million of higher sales commission expense resulting from higher revenue. This increase was partially offset by $0.3 million of lower marketing employee-related
expense as a result of our restructuring initiatives, coupled with $0.2 million of other net reductions in marketing 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 months ended March 31, 2010 and 2009
were as follows (in thousands, except percentages):

Three months ended
March 31,

Decrease
from prior year2010

2009

$

%$
10,144

$
10,495

$
(351
)

-3.3
%


The
decrease in the three months ended March 31, 2010 compared to the three months ended March 31, 2009 is primarily attributable to $0.9 million of lower
non-income tax-related expense and $0.1 million of lower foreign currency translation expense. These decreases were partially offset by $0.4 million of higher
employee-related expense, including a net increase of $0.2 million in bonus expense related to the implementation of our new Company-wide employee bonus program in fiscal 2010, and
$0.3 million of higher legal-related and professional fees. We believe that our general and administrative expenses will decrease in fiscal 2010 from fiscal 2009 levels, primarily due to lower
expected professional fees and personnel-related expenses in the remainder of the fiscal year.

Restructuring.In the three months ended March 31, 2009, we recorded restructuring expenses aggregating $2.0 million
related to two
restructuring initiatives implemented as part of our efforts to right-size the business to align with market opportunities while managing costs to position Sonus for profitable growth. Of
this amount, $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 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. We did not record any restructuring expense in the three months ended March 31, 2010.

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Interest Income, net.Interest income and interest expense for the three months ended March 31, 2010 and 2009 were as
follows (in thousands,
except percentages):

Three months ended
March 31,

Decrease
from prior year2010

2009

$

%Interest income

$
515

$
1,649

$
(1,134
)

-68.8
%Interest expense


(13
)

(79
)

(66
)

-83.5
%Interest income, net

$
502

$
1,570

$
(1,068
)

-68.0
%


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 months ended March 31, 2010 compared to the same prior year quarter is primarily attributable to a lower average
portfolio yield.

Income Taxes.Our provision for income taxes was $146,000 and $26,000 for the three months ended March 31, 2010 and 2009,
respectively. 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 expense 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 have continued to conclude that a valuation allowance for our domestic losses is appropriate.

The
provision for income taxes for the three months ended March 31, 2010 represents forecasted tax expense on the earnings of our foreign operations. Our effective tax rate for
the three months ended March 31, 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 March 31, 2010, our cash, cash equivalents, marketable securities and investments totaled $413.0 million.

Our
operating activities provided $3.3 million and $8.9 million of cash in the three months ended March 31, 2010 and 2009, respectively.

Cash
provided by operating activities in the three months ended March 31, 2010 was primarily the result of a net decrease in accounts receivable, which was mainly driven by our
focus on cash collections, higher accounts payable and lower inventory, partially offset by decreases in deferred revenue and accrued expenses, as well as an increase in other operating assets. The
decrease in deferred revenue is primarily the result of the completion of projects aggregating approximately $14 million for which revenue recognition criteria were met during the quarter. The
decrease in accrued expenses is primarily attributable to lower employee compensation and related costs lower

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taxes
payable and payments for previously accrued royalty agreements. The increase in other operating assets is primarily higher prepaid expenses. Our net loss, adjusted for non-cash items
such as depreciation, amortization and stock-based compensation, contributed $5.0 million to the cash provided by operating activities.

Cash
provided by operating activities in the three months ended March 31, 2009 was the result of lower levels of accounts receivable and higher deferred revenue. These amounts
were partially offset by lower accrued expenses and accounts payable, and higher levels of operating assets and inventory. The lower accounts receivable levels were primarily the result of lower
shipments and billings in the quarter, coupled with focused collection efforts as a result of the strong seasonal billings and shipments in late fiscal 2008. The decrease in accrued expenses was
primarily attributable to lower employee compensation and related costs, including reductions for the payment of bonuses to our executives and employees under our bonus programs, the completion of an
employee stock purchase under our Amended and Restated 2000 Employee Stock Purchase Plan ("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, used $10.6 million of operating cash.

Our
investing activities used $64.1 million of cash in the three months ended March 31, 2010, compared to $60.7 million of cash provided by investing activities in
the three months ended March 31, 2009. Our net investment in marketable securities in the three months ended March 31, 2010 was $60.4 million, compared to $71.0 million of
net sales and maturities of marketable securities and investments in the three months ended March 31, 2009. In addition, during the three months ended March 31, 2010, we used
$1.8 million of cash for purchases of property and equipment and $2.0 million to purchase intangible assets. In the three months ended March 31, 2009, we placed
$9.5 million into escrow related to a litigation settlement and used $0.8 million for purchases of property and equipment.

Our
financing activities provided $0.4 million of cash in the three months ended March 31, 2010, including $0.6 million of proceeds from the sale of common stock in
connection with our ESPP and $35,000 from the exercise of stock options. These amounts were partially offset by $0.2 million used to pay withholding obligations related to the net share
settlement of restricted stock awards upon vesting and $0.1 million used for payments on our capital leases for office equipment. Our financing activities provided $0.3 million of cash
in the three months ended March 31, 2009, including $0.5 million of proceeds from the sale of common stock in connection with our ESPP, partially offset by $0.1 million used to
pay withholding obligations related to the net share settlement of restricted stock awards upon vesting and $0.1 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, to improve our controls environment and for other general corporate activities, as well as to vigorously defend against
existing and potential litigation. See Note 15 to our condensed consolidated financial statements for a description of legal contingencies.

Recent Accounting Pronouncements

In October 2009, the FASB issued an update toCertain Arrangements that Include Software
Elements. This update removes tangible products from the scope of software revenue guidance and

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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 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 than 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 March 31, 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 March 31, 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 March 31, 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 15 of this Quarterly Report on Form 10-Q. There were no material developments to these legal
proceedings during the quarter ended March 31, 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.

There are no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2009. There were no modifications or supplements to these risk factors in the quarter ended March 31, 2010.

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 first 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
ProgramsJanuary 1, 2010 to January 31, 2010











February 1, 2010 to February 28, 2010


72,411

$
2.14





March 1, 2010 to March 31, 2010


10,435

$
2.41





Total


82,846

$
2.17








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Item 6.    Exhibits

Exhibit Number

Description10.1
(a)
The Sonus Networks, Inc. Senior Management Cash Incentive Plan, effective as of February 23, 2010.10.2
(b)
Amendment to Employment Agreement between Sonus Networks, Inc. and Wayne Pastore, dated April 29, 2010.31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

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


(a)Incorporated
by reference from the Registrant's Current Report on Form 8-K (File No. 001-34115) filed with the
Securities and Exchange Commission on February 24, 2010.(b)Incorporated
by reference from the Registrant's Current Report on Form 8-K (File No. 001-34115) filed with the
Securities and Exchange Commission on May 3, 2010.


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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: May 4, 2010

SONUS NETWORKS, INC.By:

/s/ WAYNE PASTORE Wayne Pastore Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)


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EXHIBIT INDEX

Exhibit Number

Description10.1
(a)
The Sonus Networks, Inc. Senior Management Cash Incentive Plan, effective as of February 23, 2010.10.2
(b)
Amendment to Employment Agreement between Sonus Networks, Inc. and Wayne Pastore, dated April 29, 2010.31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

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


(a)Incorporated
by reference from the Registrant's Current Report on Form 8-K (File No. 001-34115) filed with the
Securities and Exchange Commission on February 24, 2010.(b)Incorporated
by reference from the Registrant's Current Report on Form 8-K (File No. 001-34115) filed with the
Securities and Exchange Commission on May 3, 2010.


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