Table of Contents



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, 2008ORo

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


Commission File Number 000-30229

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 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 ý

Accelerated filer o

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 30, 2008, there were 272,364,942 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, 2008  TABLE OF CONTENTS



PagePART I FINANCIAL INFORMATIONItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of September 30,
2008 and December 31, 2007 (unaudited)

1Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 2008 and 2007 (unaudited)

2Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2008 and 2007 (unaudited)

3Notes to Condensed Consolidated Financial Statements
(unaudited)

4Item 2.

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

26Item 3.

Quantitative and Qualitative Disclosures About Market
Risk

34Item 4.

Controls and Procedures

34PART II OTHER INFORMATIONItem 1.

Legal Proceedings

37Item 1A.

Risk Factors

38Item 2.

Unregistered Sales of Equity Securities and Use of
Proceeds

42Item 6.

Exhibits

43Signatures

44Exhibit Index

45


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Table of Contents

PART IFINANCIAL INFORMATION

Item 1.    Financial Statements

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

September 30,
2008

December 31,
2007AssetsCurrent assets:Cash and cash equivalents

$
113,132

$
118,933Marketable securities


204,600


207,088Accounts receivable, net of allowance for doubtful accounts of $1,336 and $474 at September 30, 2008 and December 31, 2007,
respectively


42,781


84,951Inventory


49,109


45,560Deferred income taxes


22,845


30,683Litigation settlement escrow





25,000Insurance receivablelitigation settlement





15,328Other current assets


20,425


18,842Total current assets


452,892


546,385Property and equipment, net


18,023


18,459Intangible assets, net


3,784


2,607Goodwill


6,247


8,397Investments


86,986


66,568Deferred income taxes


64,075


49,296Other assets


6,793


2,338Total assets

$
638,800

$
694,050Liabilities and stockholders' equityCurrent liabilities:Accounts payable

$
14,937

$
17,379Accrued expenses


26,860


39,980Accrued litigation settlements


9,600


40,000Current portion of deferred revenue


73,295


82,743Current portion of long-term liabilities


946


1,079Total current liabilities


125,638


181,181Deferred revenue


15,229


16,462Deferred income taxes


259


760Long-term liabilities


2,240


2,061Total liabilities


143,366


200,464Commitments 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; 274,639,691 and 272,565,951 shares issued; 272,342,781 and 270,269,041 shares outstanding at
September 30, 2008 and December 31, 2007, respectively


275


273Additional paid-in capital


1,264,746


1,244,232Accumulated deficit


(770,810
)

(751,920
)Accumulated other comprehensive income


1,490


1,268Treasury stock, at cost; 2,296,910 common shares


(267
)

(267
)Total stockholders' equity


495,434


493,586Total liabilities and stockholders' equity

$
638,800

$
694,050


See notes to condensed consolidated financial statements (unaudited).

1

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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 30,2008

2007

2008

2007Revenue:Product

$
36,710

$
54,485

$
149,745

$
158,283Service


25,474


21,285


73,856


64,037Total revenue


62,184


75,770


223,601


222,320Cost of revenue:Product


11,600


21,126


46,563


61,661Service


11,396


9,279


33,681


27,421Total cost of revenue


22,996


30,405


80,244


89,082Gross profit


39,188


45,365


143,357


133,238Operating expenses:Research and development


17,885


21,008


56,443


61,826Sales and marketing


17,169


19,330


54,762


63,444General and administrative


21,507


14,118


44,430


42,316Litigation settlements


19,100


40,000


19,100


40,000Total operating expenses


75,661


94,456


174,735


207,586Loss from operations


(36,473
)

(49,091
)

(31,378
)

(74,348
)Interest expense


(204
)

(40
)

(257
)

(120
)Interest income


2,897


4,478


10,097


13,622Other income


2


2,024


387


1,088Loss from continuing operations before income taxes


(33,778
)

(42,629
)

(21,151
)

(59,758
)Income tax benefit


14,759


16,003


6,569


22,508Loss from continuing operations


(19,019
)

(26,626
)

(14,582
)

(37,250
)Loss from discontinued operations, net of tax


(563
)

(146
)

(4,308
)

(476
)Net loss

$
(19,582
)
$
(26,772
)
$
(18,890
)
$
(37,726
)Net loss per share:BasicLoss from continuing operations

$
(0.07
)
$
(0.10
)
$
(0.05
)
$
(0.14
)Loss from discontinued operations








(0.02
)

Net loss

$
(0.07
)
$
(0.10
)
$
(0.07
)
$
(0.14
)DilutedLoss from continuing operations

$
(0.07
)
$
(0.10
)
$
(0.05
)
$
(0.14
)Loss from discontinued operations








(0.02
)

Net loss

$
(0.07
)
$
(0.10
)
$
(0.07
)
$
(0.14
)Shares used in computing net loss per share:Basic


271,619


262,913


271,121


260,834Diluted


271,619


262,913


271,121


260,834


See notes to condensed consolidated financial statements (unaudited).

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

Nine months ended
September 30,2008

2007Cash flows from operating activities:Net loss

$
(18,890
)
$
(37,726
)Adjustments to reconcile net loss to cash flows provided by operating activities:Depreciation and amortization of property and equipment


9,273


9,994Amortization of intangible assets


852


284Stock-based compensation


17,688


35,115Impairment of intangible assets and goodwill


3,630


Deferred income taxes


(7,100
)

(17,152
)Decrease in fair value of modified stock options held by former employees





(1,088
)Loss on disposal of property and equipment


157


12Changes in operating assets and liabilities:Accounts receivable


42,631


(1,512
)Inventory


(7,828
)

(8,991
)Insurance receivablelitigation settlement


15,328


Other operating assets


3,189


(3,620
)Accounts payable


(4,107
)

1,869Accrued expenses, deferred rent and accrued restructuring expenses


(16,016
)

(12,565
)Litigation settlement liability


(30,400
)

40,000Deferred revenue


(11,350
)

(2,253
)Net cash provided by (used in) operating activities


(2,943
)

2,367Cash flows from investing activities:Purchases of property and equipment


(6,968
)

(8,955
)Business acquisitions, net of cash acquired


(4,909
)

(8,825
)Purchases of available-for-sale marketable securities


(156,866
)

(67,958
)Sale/maturities of available-for-sale marketable securities


133,825


70,358Purchases of held-to-maturity marketable securities


(123,851
)

(249,126
)Maturities of held-to-maturity marketable securities


128,215


277,704Decrease in litigation settlement escrow


25,000


Decrease in restricted cash





261Net cash provided by (used in) investing activities


(5,554
)

13,459Cash flows from financing activities:Sale of common stock in connection with employee stock purchase plan


3,756


5,613Proceeds from exercise of stock options


425


26,183Repayment of notes payable to Zynetix Limited former shareholders





(335
)Payment of tax withholding obligations related to net share settlements of restricted stock awards


(1,236
)

(399
)Principal payments of capital lease obligations


(166
)

(148
)Net cash provided by financing activities


2,779


30,914Effect of exchange rate changes on cash and cash equivalents


(83
)

999Net increase (decrease) in cash and cash equivalents


(5,801
)

47,739Cash and cash equivalents, beginning of period


118,933


44,206Cash and cash equivalents, end of period

$
113,132

$
91,945Supplemental disclosure of cash flow information:Interest paid

$
257

$
123Income taxes paid

$
1,520

$
2,807Supplemental disclosure of non-cash investing activities:Capital expenditures incurred, but not yet paid

$
976

$
1,243Property and equipment acquired under capital lease

$
1,083

$
247


See notes to condensed consolidated financial statements (unaudited).

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 infrastructure
solutions for wireline and wireless service providers. Sonus offers a new generation of carrier-class infrastructure equipment and software that enables voice services to be delivered over Internet
Protocol 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

The accompanying unaudited condensed consolidated financial statements have been prepared by Sonus pursuant to the rules and
regulations of the United States Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by
accounting principles generally accepted in the United States of America ("U.S. GAAP") for complete financial statements and should be read in conjunction with the audited consolidated
financial statements included in Sonus' Annual Report on Form 10-K for the year ended December 31, 2007.

In
the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements, and include
all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods
presented are not necessarily indicative of the results expected for the full fiscal year.

In
the third quarter of 2008, the Company committed to a plan to sell its Zynetix Limited ("Zynetix") subsidiary, which the Company had acquired on April 13, 2007 (see
Note 5). The Company is currently in negotiations regarding the sale of Zynetix. The results of operations of Zynetix have been reclassified and reported as discontinued operations for all
periods presented, including in the notes to these financial statements.

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.

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 dates 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, estimated fair value of investments, inventory reserves,

4

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

expected
future cash flows used to evaluate the recoverability of long-lived assets, restructuring and other related charges, contingencies associated with revenue contracts, assumptions
used to determine the fair value of stock-based compensation, assumptions used to determine the fair value of intangible assets, contingent liabilities and recoverability of Sonus' net deferred tax
assets and related valuation allowance estimate. 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 other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Income Tax Benefit

The Company records its tax provision (benefit) on an interim basis using the estimated annual effective tax rate. This rate is applied
to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period. Losses from jurisdictions for which no benefit can be realized are
excluded from the overall estimated effective tax rate. The income tax effects of significant unusual and infrequent items are recognized in the impacted interim period as discrete items. The
estimated annual effective tax rate is significantly impacted by the amount of nondeductible expenses and projected earnings in the various tax jurisdictions. Adjustments are recognized in the period
that such estimates are revised.

During
the three and nine months ended September 30, 2008, a number of discrete events occurred which impacted the net tax benefit recognized. These events include legal
settlements, disqualifying dispositions of stock options, cancellations or forfeitures of stock-based compensation awards and deductions for stock option exercises that are less than the previously
recognized deferred tax asset for such awards. The net effect of these discrete items for the nine months ended September 30, 2008 was a $6.2 million benefit corresponding to
approximately $16 million of charges incurred. The incremental tax benefit related to discontinued operations was $764,000 for the nine months ended September 30, 2008.

Principles of Consolidation

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

Recent Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 161,Disclosures About Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133("SFAS 161"). SFAS 161 amends and expands the disclosure requirements of SFAS No. 133,Accounting for Derivative Instruments and Hedging
Activities. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains
and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 also amends SFAS No. 107, Disclosures About Fair Value of Financial
Instruments("SFAS 107"), to clarify that derivative instruments are subject to SFAS 107's
concentration-of-credit risk disclosures. SFAS 161

5

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

is
effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early adoption is permitted, and entities are encouraged, but not required,
to provide comparative disclosures for earlier periods. The adoption of SFAS 161 will not affect the Company's consolidated financial statements or financial condition, but may require
additional disclosures if the Company enters into derivative and hedging activities.

In
December 2007, the FASB issued SFAS No. 141(R),Business Combinations("SFAS 141R"), which revises SFAS No. 141.
SFAS 141R establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008; early adoption is not permitted. The adoption of SFAS 141R will
affect the Company's accounting for business combinations once adopted, but the effect will be dependent upon acquisitions at that time.

(2) REVENUE RECOGNITION

Sonus' products are primarily marketed based on the software elements contained therein. In addition, hardware sold by Sonus 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 Sonus has future obligations, including a requirement to deliver additional elements
which 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.

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 associated with any undelivered elements
that are 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 the price 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.

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(2) REVENUE RECOGNITION (Continued)

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.

Sonus
records deferred revenue for products delivered or services performed for which collection of the amount billed is either probable or has been collected but for which other revenue
recognition criteria have not been met. Deferred revenue 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 noncurrent liabilities in the condensed consolidated balance sheets.

Sonus
defers recognition of incremental direct costs, such as cost of goods, royalties, commissions and third-party installation costs, until recognition of the related revenue.

Sonus
sells the majority of its products directly to its service provider customers. For products sold to resellers and distributors, Sonus generally recognizes revenue on a
sell-through basis utilizing information provided to Sonus from its resellers and distributors unless it has at least eight quarters of consistent history with a reseller which provides
sufficient information regarding potential product returns or refunds, price protection or any other form of concession.

In
fiscal 2008, the Company began to enter into arrangements to deliver software or a software system, either alone or combined with other products or services, that require significant
production, modification or customization. The Company is accounting for these arrangements under AICPA Statement of Position No. 81-1,Accounting for
Performance of Construction-Type and Certain Production-Type Contracts("SOP 81-1"). For arrangements accounted for under
SOP 81-1, all development costs are deferred until the related revenue is recognized. The current arrangements are recognized using the completed contract method; however, the
Company will use the percentage-of-completion method when it has established a history of making dependable estimates under that method. During both the three and nine months
ended
September 30, 2008, the Company recognized approximately $480,000 of revenue and $97,000 of costs for arrangements accounted for under SOP 81-1.

(3) NET INCOME (LOSS) PER SHARE

Net income (loss) per share is computed in accordance with SFAS No. 128,Earnings per Share. Basic net income (loss) per share is
computed by dividing net income (loss) by the weighted average number of shares of common stock 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. Potential dilutive common
shares consist of common stock issuable upon the exercise of stock options under the Company's stock compensation plans and are computed using the treasury stock method.

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(3) NET INCOME (LOSS) PER SHARE (Continued)

The
calculation of shares used in computing basic and diluted net loss per share is as follows (in thousands):

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007Weighted average shares outstandingbasic


271,619


262,913


271,121


260,834Potential dilutive common shares











Weighted average shares outstandingdiluted


271,619


262,913


271,121


260,834


The
calculations above for the periods ended September 30, 2008 and 2007 exclude options to purchase an aggregate of approximately 39.1 million shares of common stock and
41.9 million shares of common stock, respectively, as their effect would be antidilutive.

(4) COMPREHENSIVE LOSS

Sonus' comprehensive loss for the three and nine months ended September 30, 2008 and 2007 is as follows (in thousands):

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007Net loss

$
(19,582
)
$
(26,772
)
$
(18,890
)
$
(37,726
)Other comprehensive income (loss):Foreign currency translation adjustments


455


1,442


696


1,345Unrealized loss on transfer of held-to-maturity marketable debt securities to available-for-sale, net of tax








(33
)

Unrealized loss on marketable debt and equity securities classified as available-for-sale, net of tax


(740
)




(441
)

Comprehensive loss

$
(19,867
)
$
(25,330
)
$
(18,668
)
$
(36,381
)


(5) BUSINESS ACQUISITIONS

Atreus Systems, Inc.

On April 18, 2008, the Company completed the acquisition of Atreus Systems, Inc., a privately-held company
with its principal office located in Ottawa, Canada (collectively with its subsidiaries, "Atreus"). Atreus is a supplier of service provisioning software for Voice over IP ("VoIP") and IP Multimedia
Subsystem ("IMS")-based services. In consideration, the Company paid the selling stockholders $4.7 million and incurred $0.2 million of transaction costs. The Company believes that the
addition of Atreus solutions to the Sonus product portfolio will allow Sonus to provide comprehensive integration services for operators' growing IP-service portfolios. The operating
results of Atreus have been included in the Company's condensed consolidated financial statements for the periods subsequent to its acquisition.

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(5) BUSINESS ACQUISITIONS (Continued)

A
summary of the transaction is as follows (in thousands):

Consideration:Cash paid, net of cash acquired of $108

$
4,692Transaction costs


217Total consideration

$
4,909Preliminary allocation of the purchase consideration:Current assets

$
3,210Other assets


390Identifiable intangible assets:Developed technology


2,500Customer relationships


1,000Order backlog


300Goodwill


538Current liabilities


(3,029
)$
4,909


Current
assets acquired primarily consist of accounts receivable. Other assets acquired primarily consist of noncurrent unbilled accounts receivable. Current liabilities assumed
primarily consist of accrued expenses, accounts payable and deferred revenue. Current liabilities also include $0.7 million for employee severance costs, of which approximately $67,000 remained
unpaid at September 30, 2008. The Company expects the remaining amounts to be paid by the second quarter of fiscal 2009.

The
preliminary amounts assigned to identifiable intangible assets acquired were based on their respective fair values determined as of the acquisition date. The Company is currently in
the process of gathering all information necessary to finalize its purchase price allocation. Accordingly, adjustments to the preliminary amounts are possible. The Company is amortizing these
identifiable intangible assets using the straight-line method over their respective useful lives, which range from one to four years (see Note 9). The excess of the purchase price
over net assets acquired was recorded as goodwill. In accordance with SFAS No. 142,Goodwill and Other Intangible Assets("SFAS 142"), the
goodwill will not be amortized, but will instead be tested for impairment at least annually. The goodwill is not deductible for income tax purposes. Pro forma results of operations are not presented
as the amounts are not material to the Company's historical results.

Zynetix Limited

In connection with the acquisition of all of the issued share capital of Zynetix in April 2007, the share purchase agreement, as
amended, included two additional potential payments (the "earnouts") to the selling shareholders: (1) £1,500,000 (U.S. $2.7 million at September 30, 2008) payable on
December 31, 2008 (the "2008 earnout"); and (2) 175,000 shares of Sonus common stock (fair value of U.S. $0.5 million at September 30, 2008) deliverable on April 30,
2009 (the "2009 earnout"), both contingent upon the business achieving certain predetermined financial and business metrics related to

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(5) BUSINESS ACQUISITIONS (Continued)

revenue,
operating expenses and customer trials. The shares of common stock were placed into escrow and would be released if the earnout metrics were achieved.

The
Company is presently in negotiations to sell Zynetix (see Note 6). As of September 30, 2008, the Company had proposed to settle the 2008 earnout by paying
£650,000 (U.S. $1.2 million at September 30, 2008) in cash and releasing the remaining £100,000 held in escrow to the selling shareholders and had proposed to
settle the 2009 earnout by releasing the 175,000 shares of Sonus common stock previously placed into escrow to the selling shareholders (collectively, the "earnout settlement"). The Company recorded a
liability of $1.7 million related to the proposed earnout settlement at September 30, 2008, which is included as a component of Accrued expenses in the condensed consolidated balance
sheet. The related expense is included as a component of General and administrative expenses in the condensed consolidated statements of operations for the three and nine months ended
September 30, 2008. On November 3, 2008, the Company consummated the proposed earnout settlement by releasing both the cash and the common stock to the selling shareholders.

In
connection with the preparation of its financial statements for the second quarter of fiscal 2008, the Company performed a review of the intangible assets and goodwill that were
acquired with this acquisition and recorded impairment charges aggregating $3.6 million (see Note 9).

(6) DISCONTINUED OPERATIONS

In the third quarter of 2008, the Company committed to a plan to sell its Zynetix subsidiary. The Company is currently in negotiations regarding the sale of Zynetix and expects the
transaction to be completed in the fourth quarter of 2008.

The
Company accounts for its discontinued operations under the provisions of SFAS No. 144,Accounting for the Impairment or Disposal of
Long-Lived Assets("SFAS 144"). The results of operations of Zynetix have been classified within in discontinued operations and include the following (in
thousands):

Three months
ended
September 30,

Nine months
ended
September 30,2008

2007

2008

2007Revenue

$
646

$
801

$
1,143

$
890Loss before income taxes

$
(611
)
$
(209
)
$
(5,072
)
$
(680
)Income tax benefit


48


63


764


204Loss from discontinued operations, net of tax

$
(563
)
$
(146
)
$
(4,308
)
$
(476
)


10

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(6) DISCONTINUED OPERATIONS (Continued)

Assets and liabilities of discontinued operations at September 30, 2008, are comprised of the following
(in thousands):

Accounts receivable, net

$
750Inventory


282Other current assets


113Total current assets

$
1,145Accounts payable

$
66Accrued expenses


181Current portion of deferred revenue


1,076Total current liabilities

$
1,323


(7) 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 credit instruments.

On
June 12, 2008, the Company transferred its held-to-maturity portfolio of debt securities, aggregating $373.1 million, to the
available-for-sale category. The Company recorded, at the time of the transfer, approximately $33,000 of net unrealized losses on available-for-sale
securities in Accumulated other comprehensive income, net of tax. Because the transfer did not qualify under the exemption provisions for the sale or transfer of
held-to-maturity securities under SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities("SFAS 115"), the reclassification
decision by the Company is deemed to have "tainted" the held-to-maturity category and, accordingly, it will not be permitted to prospectively classify any investment securities
accounted for in accordance with SFAS 115 as held-to-maturity for an extended period. However, the Company does not intend to designate securities as
held-to-maturity for the foreseeable future and believes that maintaining its securities in the available-for-sale category provides greater flexibility
in the management of its overall investment portfolio. As a result of the transfer, there were no investments classified as held-to-maturity securities at September 30,
2008.

Subsequent
to the transfer of its held-to-maturity portfolio to the available-for-sale category, the Company sold $45.6 million of
available-for-sale securities. The Company realized approximately $3,000 of gross gains in the three months ended September 30, 2008 and approximately $19,000 of gross
gains and approximately $10,000 of gross losses in the nine months ended September 20, 2008 as a result of these sales on a specific identification basis. These amounts are included in the
Company's condensed consolidated statements of operations for the respective periods.

The
Company's available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in
Accumulated other comprehensive income, which is a separate component of stockholders' equity. At September 30, 2008, the amortized cost,

11

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

gross
unrealized gains and losses and fair value of the Company's marketable debt and equity securities and investments were comprised of the following (in thousands):

September 30, 2008Amortized
cost

Unrealized
gains

Unrealized
losses

Fair
valueMarketable securitiesEquity securities

$
137

$


$
(31
)
$
106Debt securities available-for-sale:U.S. government agency notes


167,723


264


(128
)

167,859Corporate debt securities


17,522





(89
)

17,433Commercial paper


19,259





(57
)

19,202$
204,641

$
264

$
(305
)
$
204,600InvestmentsDebt securities available-for-sale:Municipal obligations

$
1,455

$


$
(9
)
$
1,446U.S. government agency notes


58,920


6


(179
)

58,747Corporate debt securities


27,299


2


(508
)

26,793$
87,674

$
8

$
(696
)
$
86,986


The
amortized cost and fair value of fixed maturities at September 30, 2008 by contractual maturity were as follows (in thousands):

Amortized
cost

Fair
valueDue in one year or less

$
204,641

$
204,600Due after one year through two years

$
87,674

$
86,986


12

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

At
December 31, 2007, marketable debt and equity securities and investments consisted of the following (in thousands):

December 31, 2007Amortized
cost

Unrealized
gains

Unrealized
losses

Fair
valueMarketable securitiesDebt securities available-for-sale:State and municipal obligations

$
23,300

$


$


$
23,300Debt securities held to maturity:U.S. government agency notes


81,950


211


(4
)

82,157Corporate debt securities


36,501


13


(35
)

36,479Commercial paper


65,200


146


(4
)

65,342$
206,951

$
370

$
(43
)
$
207,278InvestmentsDebt securities held-to-maturity:U.S. government agency notes

$
47,614

$
255

$
(4
)
$
47,865Corporate debt securities


18,954


82


(8
)

19,028$
66,568

$
337

$
(12
)
$
66,893




Cost

Unrealized
gains

Unrealized
losses

Fair
valueEquity securities available-for-sale

$
137

$


$


$
137


A
reconciliation of the Company's debt and equity securities to the amounts reported in the condensed consolidated balance sheets under the caption Marketable securities at
December 31, 2007 is as follows (in thousands):

December 31,
2007Debt securities carried at amortized cost

$
206,951Equity securities carried at fair value


137$
207,088


The
Company adopted SFAS No. 157,Fair Value Measurements("SFAS 157") as of January 1, 2008 for financial assets and
financial liabilities. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market

13

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

participants
at the measurement date (an exit price). SFAS 157 outlines a valuation framework and creates a fair value hierarchy using the following three levels:



In
accordance with the fair value hierarchy described above, the following table shows the fair value of the Company's financial assets that are measured at fair value at
September 30, 2008, which is comprised of the Company's available-for-sale debt and equity securities, and are reported under the captions Cash and cash equivalents,
Marketable securities and Investments in the condensed consolidated balance sheet (in thousands):

Fair value measurements at
September 30, 2008 using:Total carrying
value at
September 30,
2008

Quoted prices
in active
markets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)Cash equivalents

$
94,721

$
62,652

$
32,069

$
Marketable securitiesEquity securities

$
106

$
106

$


$
U.S. government agency notes


167,859





167,859


Corporate debt securities


17,433


17,433





Commercial paper


19,202





19,202


$
204,600

$
17,539

$
187,061

$
Investments










$
Municipal obligations

$
1,446

$


$
1,446


U.S. government agency notes


58,747





58,747


Corporate debt securities


26,793


26,793





$
86,986

$
26,793

$
60,193

$



14

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(8) INVENTORY

Inventory consists of the following (in thousands):

September 30,
2008

December 31,
2007On-hand final assemblies and finished goods inventory

$
15,439

$
19,102Deferred cost of goods sold


41,780


30,018Evaluation inventory


5,918


6,285Inventory, gross


63,137


55,405Evaluation inventory reserve


(5,918
)

(6,285
)Excess and obsolescence reserve


(3,531
)

(3,560
)Inventory, net


53,688


45,560Less current portion


(49,109
)

(45,560
)Long-term portion (included in Other assets)

$
4,579

$



(9) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets at September 30, 2008 and December 31, 2007 consist of the following (in thousands):

September 30, 2008

Weighted
average
useful life

Cost

Accumulated
amortization

Net
carrying
valueCustomer relationships


4.0 years

$
968

$
111

$
857Intellectual property


5.0 years


1,103


475


628Developed technology


4.0 years


2,419


277


2,142Order backlog


1.0 year


290


133


157$
4,780

$
996

$
3,784




December 31, 2007

Weighted
average
useful life

Cost

Accumulated
amortization

Net
carrying
valueCustomer relationships


7.0 years

$
1,415

$
152

$
1,263Intellectual property


5.0 years


1,314


197


1,117Trade name


3.0 years


303


76


227$
3,032

$
425

$
2,607


The
Company amortizes its intangible assets over the estimated useful lives of the respective assets, which have a weighted average useful life of 4.0 years. Amortization expense
related to intangible assets was $0.3 million and $0.9 million in the three and nine months ended September 30, 2008, respectively, and $0.1 million and $0.2 million
in the three and nine months ended September 30, 2007, respectively. These amounts include $0.2 million of amortization expense for the nine months ended September 30, 2008, and
$0.1 million and $0.2 million of amortization expense for the three and nine months ended September 30, 2007, respectively, that is reported as a component of Loss from

15

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(9) INTANGIBLE ASSETS AND GOODWILL (Continued)

discontinued
operations, net of tax, in the condensed consolidated statements of operations. As a result of the impairment of intangible assets and goodwill allocated to the Zynetix reporting unit in
the second quarter of fiscal 2008 described below, the net book values of these assets were reduced to zero at June 30, 2008 and accordingly, no amortization expense was recorded during the
three months ended September 30, 2008.

Estimated
future amortization expense for intangible assets recorded by the Company at September 30, 2008 is as follows (in thousands):

Remainder of 2008

$
3382009


1,1152010


1,0362011


1,0362012


259$
3,784


Goodwill
is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. The change in the carrying amount of
goodwill during the nine months ended September 30, 2008 is as follows (in thousands):

Balance at January 1, 2008

$
8,397Acquisition of Atreus


538Impairment of goodwill allocable to discontinued operations


(2,068
)Foreign currency translation adjustment


(620
)Balance at September 30, 2008

$
6,247


Goodwill
and intangible assets with indefinite lives are tested for impairment on an annual basis and between annual tests if indicators of potential impairment exist. Intangible assets
with estimated lives and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be
recoverable. Factors that could indicate that an impairment may exist include significant underperformance relative to plan or long-term projections, strategic changes in business
strategy, significant negative industry or economic trends, a significant change in circumstances relative to a large customer, a significant decline in the Company's stock price for a sustained
period, and a decline in the Company's market capitalization to below net book value.

In
connection with the preparation of the Company's financial statements for the second quarter of fiscal 2008 and update of its sales forecast for the second half of the fiscal year,
the Company conducted its quarterly review for impairment indicators, during which it determined that there were no impairment indicators related to the intangible assets and goodwill allocated to the
Sonus reporting unit. However, this review identified several indicators related to the intangible assets and goodwill allocated to the Zynetix reporting unit, including significant underperformance
relative to plan or long-term projections. In response, the Company performed an assessment of the carrying value of its intangible assets and goodwill. Because these comparisons indicated
that the intangible assets and

16

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(9) INTANGIBLE ASSETS AND GOODWILL (Continued)

goodwill
were impaired, the Company recognized an impairment loss for the amount by which the carrying value of the intangible assets and goodwill allocated to the Zynetix reporting unit exceeded the
related estimated or implied fair value. As a result, the Company recorded a charge to operations of $3.6 million for the write-down of intangible assets and goodwill. Of this
charge, $1.5 million relates to intangible assets and $2.1 million relates to goodwill. As a result, the net book values of the intangible assets and goodwill attributable to the Zynetix
reporting unit were reduced to zero at June 30, 2008. The impairment charge for the write-down of these assets is included as a component of Loss from discontinued operations, net
of tax, in the Company's condensed consolidated statements of operations for the nine months ended September 30, 2008.

(10) ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

September 30,
2008

December 31,
2007Employee compensation and related costs

$
12,346

$
20,892Employee stock purchase plan


350


2,367Earnout settlement


1,685


Professional fees


3,912


4,199Royalties


1,019


2,373Income taxes payable


183


1,442Sales taxes payable


2,063


1,203Other taxes


115


3,471Other


5,187


4,033$
26,860

$
39,980


(11) STOCK-BASED COMPENSATION

The Company issues options to purchase its common stock and restricted shares of common stock pursuant to the 2007 Stock Incentive Plan (the "2007 Stock Plan"). The 2007 Stock Plan
provides for the award of stock options and restricted stock 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 issued stock options and restricted stock pursuant to the 1997 Stock Incentive Plan (the "1997 Stock Plan") through November 18, 2007, when the
1997 Stock Plan expired.

On
May 16, 2008, the Company appointed a new President and Chief Executive Officer ("Dr. Nottenburg"), effective June 13, 2008 (the "Commencement Date"). Pursuant to
the terms of his employment agreement, the Company issued Dr. Nottenburg an option to purchase 500,000 shares of the Company's common stock at an exercise price of $4.75 per share, the closing
price of the Company's common stock on June 16, 2008, the date of grant. Twenty-five percent of the shares subject to the option will vest on the first anniversary of the
Commencement Date and the remaining 75% will vest in equal monthly increments thereafter through the fourth anniversary of the Commencement Date. Dr. Nottenburg was also granted 500,000 shares
of restricted stock. Twenty-five percent of the shares of restricted stock will vest on the first anniversary of the Commencement Date and the

17

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(11) STOCK-BASED COMPENSATION (Continued)

remaining
75% will vest in equal increments semi-annually thereafter through the fourth anniversary of the Commencement Date.

On
January 15, 2009, Dr. Nottenburg will be granted an option to purchase 500,000 shares of the Company's common stock at an exercise price per share equal to the closing
price of the Company's common stock January 15, 2009. Twenty-five percent of the shares subject to the option will vest on the first anniversary of the Commencement Date and the
remaining 75% will vest in equal monthly increments thereafter through the fourth anniversary of the Commencement Date. On January 15, 2009, Dr. Nottenburg will also be granted 500,000
shares of restricted stock, of which 25% will vest on the first anniversary of the Commencement Date and the remaining 75% in equal increments semi-annually thereafter through the fourth
anniversary of the Commencement Date. The grants of stock and options and the vesting of the awards described above are subject to Dr. Nottenburg's continued employment with the Company.

Dr. Nottenburg
will be entitled to two performance stock awards of 250,000 shares each upon the Company's achieving certain performance metrics between January 1, 2010 and
December 31, 2012 as approved by the Compensation Committee of the Board of Directors. The Company will begin to record stock-based compensation expense at the time that it becomes probable
that the respective performance conditions will be achieved.

In
November 2007, the Company granted the then-President and Chief Executive Officer ("Mr. Ahmed") 750,000 shares of restricted stock subject to certain accelerated
vesting terms as set forth in his Retention and Restricted Stock Agreement dated as of November 14, 2007. On May 16, 2008, the vesting of 375,000 shares of the restricted stock awarded
to Mr. Ahmed were accelerated through September 13, 2008, the completion date of Mr. Ahmed's required minimum transition assistance period and accordingly, the unrecognized
expense of $1.9 million at May 16, 2008 related to these shares was amortized ratably through September 13, 2008, the accelerated vesting date and the last day of the minimum
transition period.

In
October 2008, the Company entered into Executive Severance and Arbitration Agreements with seven executives of the Company (the "Executive Agreements"). The Executive Agreements
provide for post-termination benefits in the event that any of the executives' employment is terminated by the Company or the executives for specified reasons. The
post-termination benefits include 12-months accelerated vesting of unvested stock options and complete vesting of restricted stock. In addition, under each Executive Agreement,
any stock options that are or become vested prior to the employment termination date of the executive will remain outstanding and exercisable for the shorter of three years following the employment
termination date or the original remaining life of the stock options. The Company will record a charge in the fourth quarter of 2008 related to the modification and extension of the stock option
exercise periods. The Company also granted an aggregate of 642,666 restricted shares of Sonus common stock to the executives. The shares will vest 25% on each of September 15, 2009 and
September 15, 2010 and the remaining 50% will vest on September 15, 2011. The Company will record stock-based compensation expense for these shares over the requisite service periods,
which end on September 15, 2011. In addition, the executives are entitled to three performance stock awards contingent upon the Company's achieving certain performance metrics for the three
years ended December 31, 2010, 2011 and 2012, as approved by the Compensation Committee of the Board of Directors. The combined number of shares that could be awarded to the seven executives
totals 320,334

18

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(11) STOCK-BASED COMPENSATION (Continued)

shares.
The Company will begin to record stock-based compensation expense at the time that it becomes probable that the respective performance conditions will be achieved. The vesting of the
restricted stock awards and the performance stock award grants are subject to the respective executive's continued employment with the Company.

On
January 25, 2008, the Company's Board of Directors approved the Amended and Restated 2000 Employee Stock Purchase Plan (the "Amended and Restated ESPP"). The Amended and
Restated ESPP provides for six-month consecutive offering periods commencing with the March 1, 2008 purchase period. The purchase price of the stock is equal to 85% of the market
price on the last day of the offering period. Under the Amended and Restated ESPP, because employees are entitled to purchase a variable number of shares for a fixed monetary amount, future awards are
classified as share-based liabilities and recorded at fair value. The Company will reclassify these liabilities to Additional paid-in capital at the time of the share purchase, which is
the date of the award.

The
Company recorded stock-based compensation expense in continuing operations aggregating $4.5 million and $11.6 million for the three months ended September 30,
2008 and 2007, respectively, and $17.5 million and $35.0 million for the nine months ended September 30, 2008 and 2007, respectively. The results of discontinued operations
include stock-based compensation totaling approximately $53,000 and $68,000 for the three months ended September 30, 2008 and 2007, respectively, and approximately $140,000 and $89,000 for the
nine months ended September 30, 2008 and 2007, respectively. The amounts included in continuing operations are reported as components of the following expense categories in the condensed
consolidated statements of operations (in thousands):

Three months
ended
September 30,

Nine months
ended
September 30,2008

2007

2008

2007Product cost of revenue

$
152

$
306

$
503

$
584Service cost of revenue


426


1,265


2,028


2,870Research and development


1,018


4,064


6,050


13,743Sales and marketing


636


3,476


3,518


12,688General and administrative


2,223


2,450


5,449


5,141$
4,455

$
11,561

$
17,548

$
35,026


At
September 30, 2008, there was $49.3 million of unrecognized compensation cost related to share-based awards, which is expected to be recognized over a weighted average
period of approximately three years, excluding the October 2008 grants to executives described above.

Valuation Assumptions

The grant-date fair values of options to purchase common stock granted in the three and nine months ended
September 30, 2008 and 2007, excluding the stock options granted to Dr. Nottenburg

19

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(11) STOCK-BASED COMPENSATION (Continued)

described
above, were estimated using the Black-Scholes valuation model with the following assumptions:

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007Risk-free interest rate


3.11
%

4.5
%

2.75% - 3.12%


4.8%Expected dividend yield











Expected volatility


66.78
%

61
%

66.78% - 71.34%


70% - 78%Weighted average volatility


66.78
%

61
%

70.40%


75%Expected life (years)


4.5


4.5


4.5


4.5


The
grant date fair value of the option to purchase 500,000 shares of the Company's common stock granted to Dr. Nottenburg was estimated using the Black-Scholes valuation model
with the following assumptions:

Risk-free interest rate


3.84
%Expected dividend yield


Expected volatility


77.25
%Expected life (years)


6.0


Based
on the above assumptions, the weighted average fair values of stock options granted during the three months ended September 30, 2008 and 2007 were $1.74 and $3.04,
respectively. The weighted average fair values of stock options granted during the nine months ended September 30, 2008 and 2007 were $2.31 and $3.00, respectively.

The
fair values of the rights to purchase shares of common stock under the original ESPP were estimated on the commencement date of the applicable offering period using the Black-Scholes
valuation model with the following assumptions:

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008*

2007Risk-free interest rate

N/A


3.7% - 5.1%


3.6% - 5.1%


3.6% - 5.1%Expected dividend yield

N/A








Expected volatility

N/A


46% - 73%


46% - 79%


46% - 79%Expected life (years)

N/A


0.33 - 2.0


0.5 - 2.0


0.33 - 2.0


---

Under
the Amended and Restated ESPP, the employee participant is not considered to have received a grant until the date of the stock purchase. The stock-based compensation expense
related to the Amended and Restated ESPP is equal to the discount from the market price of the Company's shares.

20

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(11) STOCK-BASED COMPENSATION (Continued)

Stock Option and Restricted Stock Grant Activity

The activity related to the Company's outstanding stock options during the nine months ended September 30, 2008 is as follows:

Stock Options

Number of
Shares

Weighted
Average
Exercise Price

Weighted
Average
Remaining Contractual Life
(Years)

Aggregate
Intrinsic Value
(in thousands)Outstanding at January 1, 2008


38,769,859

$
5.35Granted


2,671,416

$
4.14Exercised


(107,095
)
$
2.53Forfeited


(1,139,485
)
$
5.70Expired


(1,088,079
)
$
5.02Outstanding at September 30, 2008


39,106,616

$
5.27


6.06

$
658Vested or expected to vest at September 30, 2008


37,791,329

$
5.26


5.87

$
658Exercisable at September 30, 2008


28,381,178

$
5.17


4.99

$
658


The
activity related to the Company's nonvested restricted stock awards for the nine months ended September 30, 2008 is as follows:

Shares

Weighted
Average
Grant-Date
Fair ValueNonvested balance at January 1, 2008


3,290,100

$
5.86Granted*


1,055,000

$
4.55Vested


(1,023,766
)
$
6.00Forfeited


(109,034
)
$
5.71Nonvested balance at September 30, 2008*


3,212,300

$
5.50






21

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(12) STOCKHOLDER RIGHTS PLAN

On June 26, 2008, the Company's Board of Directors adopted a three-year stockholder
rights plan (the "Rights Plan"). The Rights Plan is designed to protect stockholders, to the extent possible, from a creeping acquisition and other tactics to gain control of the Company without
offering all stockholders an adequate price and control premium. The Rights Plan is intended to protect the interests of all the Company's stockholders and to provide the Company's Board of Directors
with the ability to attempt to maximize long-term stockholder value.

Under
the Rights Plan, preferred stock purchase rights (the "Rights") will be distributed as a dividend at the rate of one Right per share of common stock of the Company held by
stockholders of record as of the close of business on July 7, 2008. Each Right entitles the stockholder to purchase from the Company a unit consisting of one one-thousandth of a
share (a "Unit") of preferred stock at a purchase price of $25.00 per Unit, subject to adjustment. The Rights will be issued as a non-taxable dividend and will expire on June 26,
2011, unless earlier redeemed or exchanged.

The
Rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common stock (which includes for this purpose shares of
common stock referenced in derivative transactions or securities), or commences or publicly announces a tender or exchange offer upon consummation of which they would beneficially own 15% or more of
the Company's common stock. A person or group who beneficially owned 15% or more of the outstanding shares of the Company's common stock prior to the adoption of the Rights Plan did not cause the
Rights to become exercisable upon adoption of the Rights Plan. As a result, the Rights will not be triggered even though Legatum Capital Limited ("Legatum") and its affiliates have reported that they
beneficially owned approximately 25% of the outstanding shares of the Company's common stock prior to the adoption of the Rights Plan based on Legatum's public filings. Legatum and its affiliates
will, however, cause the Rights to become exercisable if they (subject to certain limited exceptions) become the beneficial owner of additional shares of the Company's common stock or their beneficial
ownership decreases below 15% and subsequently increases to 15% or more. Should the Rights become exercisable, the effect would be to dilute the ownership of the beneficial owner(s) who triggered the
Rights, as that beneficial owner or group of owners would not receive the Rights.

(13) MAJOR CUSTOMERS

One customer contributed at least 10% of the Company's revenue in each of the three and nine month periods ended September 30, 2008 and 2007. This customer contributed 36% and 37%
of revenue in the three or nine months ended September 30, 2008, respectively, and 38% and 39% of revenue in the three or nine months ended September 30, 2007, respectively. There were
no other customers that contributed at least 10% of the Company's revenue in any of the three and nine month periods ended September 30, 2008 and 2007.

At
September 30, 2008 and December 31, 2007, one customer and two customers, respectively, each accounted for at least 10% of the Company's accounts receivable balance,
representing totals of approximately 16% and 28%, respectively, of Sonus' accounts receivable balances. The Company performs ongoing credit evaluations of its customers and generally does not require
collateral on accounts receivable. Sonus maintains an allowance for doubtful accounts and such losses have been within management's expectations.

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(14) 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:

Three months
ended
September 30,

Nine months
ended
September 30,2008

2007

2008

2007United States


81
%

85
%

82
%

81
%Japan


5


8


8


9Europe, Middle East and Africa


12


6


9


8Other


2


1


1


2100
%

100
%

100
%

100
%


(15) LITIGATION SETTLEMENTS

On June 14, 2006, C2 Communications ("C2") sued AT&T, Inc., Verizon Communications, Inc., Qwest, Bellsouth Corporation, Sprint Nextel Corporation, Global Crossing
and Level 3 in the Eastern District of Texas, Marshall Division. C2 has alleged that each of the defendants infringe U.S. Patent No. 6,243,373 entitled "Method and Apparatus for
Implementing a Computer Network Internet Telephone System." Sonus agreed, subject to certain conditions, to assume the defense of Qwest, Global Crossing and Level 3 in this litigation to the
extent the claim results from their use of products purchased from Sonus. During the trial, on September 16, 2008, Sonus reached an agreement to settle this litigation. The parties entered into
a settlement and license agreement that provided for the payment of $9.5 million in full settlement of all claims against Qwest, Global Crossing and Level 3 as well as fully paid
licenses to the Company and Qwest, Global Crossing and Level 3. The settlement was paid on September 24, 2008. The settlement expense is included as a component of Litigation settlements
in the Company's condensed consolidated statements of operations for the three and nine months ended September 30, 2008.

On
January 6, 2006, a purchaser of the Company's common stock filed a complaint in the United States District Court for the District of Massachusetts that is essentially identical
to a Consolidated Amended Complaint alleging that Sonus made false and misleading statements about its products and business previously filed against the defendants and dismissed on October 5,
2005. The court appointed the Public Employees' Retirement System of Mississippi as lead plaintiff. The lead plaintiff filed an Amended Consolidated Complaint (the "2002 Securities Litigation"). On
April 19, 2007, the defendants filed a motion to dismiss the Amended Consolidated Complaint. On September 23, 2008, Sonus agreed to settle the litigation and, on October 3, 2008,
entered into a Memorandum of Understanding with the plaintiff setting forth the terms of the settlement. Pursuant to the settlement, subject to confirmatory discovery and final court approval, the
Company agreed to pay $9.5 million to the shareholder class in the case, as well as $0.1 million toward the cost of the class notice process. In addition, the Company expects to incur
$0.4 million in incremental legal fees in connection with the confirmatory discovery and settlement approval process. At September 30, 2008, the Company has accrued $10.0 million
related to this settlement, of which $9.6 million is included as a component of Litigation settlements

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(15) LITIGATION SETTLEMENTS (Continued)

and
$0.4 million is included as a component of General and administrative expense in the Company's condensed consolidated statements of operations for the three and nine months ended
September 30, 2008. The Company does not have any directors and officers insurance available for this claim.

(16) 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 Sonus, two of its officers and the lead underwriters alleging violations of the federal securities laws in connection
with Sonus' 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 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 Sonus 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 (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 Sonus, have been transferred to a single federal judge for purposes of coordinated case management. On July 15, 2002, Sonus, together 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 Sonus' officers named in the complaint. On February 19, 2003, the court granted a portion of the
motion to dismiss by dismissing the Section 10(b) claims against certain defendants including Sonus, 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 court certified the class in a case against certain
defendants. On February 15, 2005, the court preliminarily approved the terms of the proposed settlement contingent on modifications to the proposed settlement. On August 31, 2005, the
court approved the terms of the proposed settlement, as modified. On April 24, 2006, the court held a hearing on a motion to approve the final settlement and took the matter under advisement.
On December 5, 2006, the Court of Appeals for the Second Circuit reversed the court's October 2004 order certifying a class. On June 25, 2007, the court entered an order terminating the
settlement. Accordingly, 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 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

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(16) CONTINGENCIES (Continued)

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 Sonus
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.
On July 25, 2008, the underwriter and issuer defendants filed motions to dismiss the case. On September 8, 2008, the plaintiff filed oppositions to the motions. The court has not yet
conducted a hearing on the motions. Sonus does not expect that this claim will have a material impact on its financial position or results of operations.

Patent Litigation

On January 24, 2008, Sprint Communications sued two of the Company's customers, Broadvox and Nuvox, in the District of Kansas
for patent infringement. By letter dated April 23, 2008, Broadvox requested that the Company assume the defense of the case on its behalf. Pursuant to the indemnification obligation in the
Company's agreement with Broadvox, the Company has agreed, subject to certain conditions, to assume the defense in this litigation on behalf of Broadvox to the extent the claims result from its use of
Sonus products. There can be no assurance that the Company will not be required to indemnify Nuvox from any judgment of infringement rendered against it.

Sonus
includes standard intellectual property indemnification provisions in its product agreements in the ordinary course of business. Pursuant to its product agreements, Sonus will
indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent,
copyright or other intellectual property infringement claims by third parties with respect to Sonus products. Other agreements with Sonus' customers provide indemnification for claims relating to
property damage or personal injury resulting from the performance of services by Sonus or its subcontractors. Although historically Sonus' costs to defend lawsuits or settle claims relating to such
indemnification provisions in its product agreements have been insignificant, these costs were significant in the third quarter of fiscal 2008 and may continue to be significant in future periods.

2006 Stock Option Accounting Investigation

As announced on March 19, 2007, the SEC is conducting a formal private investigation into Sonus' historical stock option
granting practices. If the Company is subject to adverse findings, it could be required to pay damages or penalties or have other remedies imposed, including criminal penalties, which could adversely
impact Sonus' business, financial position or results of operations. At this time, the Company is unable to determine the ultimate outcome of the investigation.

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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 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. Further
reference should be made to our Annual Report on Form 10-K for the year ended December 31, 2007.

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
suite of voice infrastructure solutions allows 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 Program ("3GPP"). This IMS architecture is being accepted
by network operators globally as the common approach for building converged voice, data, wireline and wireless networks. The IMS architecture is based primarily on IP packets and the SIP protocol,
which have been the foundation of our products since our formation.

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.

In
the third quarter of fiscal 2008, the first three quarters of fiscal 2007 and for the entire fiscal year 2007, we incurred net losses. In these periods, the net losses resulted
primarily from operating expenses, in particular, stock-based compensation expense and legal and audit-related expenses that increased at a greater rate than the increase in our revenue during those
periods. We intend to

26

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Table of Contents

enhance
our expense management processes related to our operating expenses. We anticipate, however, that we may incur net losses in future quarters and years. In addition, the current macroeconomic
environment may impact our profitability, as we believe the global credit crisis may cause customers to delay or forego capacity and technology purchases.

We
reported losses from operations of $36.5 million and $31.4 million for the three and nine months ended September 30, 2008, respectively, compared to losses from
operations of $49.1 million and $74.3 million for the three and nine months ended September 30, 2007, respectively. Our losses from continuing operations for the three and nine
months ended September 30, 2008 were $19.0 million and $14.6 million, respectively, compared to losses from continuing operations of $26.6 million and $37.2 million
for the three and nine months ended September 30, 2007, respectively. We recorded $19.1 million of litigation settlement expense in the aggregate for litigation against certain of the
Company's customers alleging patent infringement of U.S. Patent No. 6,243,373 entitled "Method and Apparatus for Implementing a Computer Network Internet Telephone System" (the
"C2 Patent Litigation") and a Consolidated Amended Complaint alleging that Sonus made false and misleading statements about its products and business (the "2002 Securities Litigation") in the
third quarter; this amount is included in our results of operations for both the three and nine months ended September 30, 2008. We also incurred $6.5 million and $10.8 million of
legal costs in the three and nine months ended September 30, 2008. These operating costs were partially offset by reductions of $7.1 million and $17.5 million in stock-based
compensation expense in the three and nine months ended September 30, 2008, compared to the same prior year periods, coupled with improved gross margin performance in the current year. Our
lower stock-based compensation expense in the current year periods primarily resulted from the completion in 2007 of our stock option review, which had necessitated modifications to stock options held
by both current and former employees to allow them to exercise options that would have otherwise have expired, as well as to extend the purchase periods under our Employee Stock Purchase Plan.

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:



Acquisition of Atreus Systems, Inc.

On April 18, 2008, we completed the acquisition of Atreus Systems, Inc., a privately-held company with its
principal office located in Ottawa, Canada (collectively with its subsidiaries, "Atreus"). Atreus is a supplier of service provisioning software for VoIP and IMS-based services. In
consideration, we paid the selling stockholders $4.7 million and incurred $0.2 million of costs. We believe the addition of Atreus solutions to the Sonus product portfolio will allow us
to provide comprehensive integration services for operators' growing IP-service portfolios. The operating results of Atreus have been included in our condensed consolidated financial
statements for the period subsequent to its acquisition.

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Table of Contents

Discontinued Operations

In the third quarter of 2008, we committed to a plan to sell our Zynetix Limited ("Zynetix") subsidiary, which we had acquired on
April 13, 2007 (see Notes 5 and 6). The results of operations of Zynetix have been reclassified and reported as discontinued operations in the condensed consolidated statements of
operations for all periods presented.

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:



For
a complete discussion of our critical accounting policies and estimates, refer to our Annual Report on Form 10-K for the fiscal year ended December 31,
2007, which was filed with the SEC on March 6, 2008. There were no significant changes to our critical accounting policies during the nine months ended September 30, 2008, with the
exception of the following addition to our revenue recognition policy:

In
fiscal 2008, we began to enter into arrangements to deliver software or a software system, either alone or combined with other products or services, that require significant
production, modification or customization. We are accounting for these arrangements under AICPA Statement of Position No. 81-1,Accounting for Performance of
Construction-Type and Certain Production-Type Contracts("SOP 81-1"). For arrangements accounted for under
SOP 81-1, all development costs are deferred until the related revenue is recognized. We are recognizing the current arrangements using the completed contract method and are
monitoring our estimates for the respective projects to allow us to determine when we have established
a history of making dependable estimates under that method. At that time, we will use the percentage-of-completion method to account for these arrangements.

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Results of Operations

Three and Nine Months Ended September 30, 2008 and 2007

Revenue.Revenue for the three and nine months ended September 30, 2008 and 2007 was as follows (in thousands):

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007Product

$
36,710

$
54,485

$
149,745

$
158,283Service


25,474


21,285


73,856


64,037Total revenue

$
62,184

$
75,770

$
223,601

$
222,320


Product
revenue is comprised of sales of our voice infrastructure products, including our GSX9000 and GSX4000 Open Services Switches, NBS Network
Border Switch, PSX Call Routing Server, SGX Signaling Gateway, ASX Call Feature Server, IMX® Application Platform, Sonus Insight
Management System and related product offerings. Product revenue for the three months ended September 30, 2008 decreased $17.8 million, or 32.6%, compared to the same period in the prior
year. Product revenue for the nine months ended September 30, 2008, decreased $8.6 million, or 5.4%, compared to the nine months ended September 30, 2007. The decrease in both
current year periods is attributable to lower product sales and shipments. Product revenue was also negatively impacted by the current macroeconomic environment.

Service
revenue is primarily comprised of hardware and software maintenance and support, network design, installation and other professional services. Service revenue increased 19.7% and
15.3% in the three and nine months ended September 30, 2008, respectively, compared to the same prior year periods. The increase in both current periods is primarily attributable to higher
maintenance revenue related to our larger installed base, as well as the timing of cash collections from customers for whom revenue is recognized as cash is collected.

AT&T
contributed more than 10% of our revenue in each of the three and nine month periods ended September 30, 2008 and 2007. There were no other customers that contributed more
than 10% of our revenue in any of the current and prior year three and nine month periods.

International
revenue was approximately 19% and 15% of revenue in the three month periods ended September 30, 2008 and 2007, respectively, and 18% and 19% of revenue in the nine
month periods then ended. We expect that international revenue will fluctuate as a percentage of revenue from quarter to quarter.

Our
deferred product revenue was $38.7 million and $44.1 million at September 30, 2008 and December 31, 2007, respectively. Our deferred service revenue was
$49.8 million and $55.1 million at September 30, 2008 and December 31, 2007, respectively. Our deferred revenue balance may fluctuate as a result of the timing of revenue
recognition, customer payments, maintenance contract renewals, contractual billing rights, customer creditworthiness and maintenance revenue deferrals included in multiple element arrangements.

Cost of Revenue/Gross Profit.Our cost of revenue consists primarily of the cost of products purchased by our customers and services, royalties, manufacturing and
professional services personnel and related costs and inventory obsolescence. Our products are produced by a third-party manufacturer.

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Our
cost of revenue and gross profit as a percentage of revenue for the three and nine months ended September 30, 2008 and 2007 were as follows (in thousands, except percentages):

Three months ended
September 30,

Nine months ended
September 30,2008

2007

2008

2007Cost of revenueProduct

$
11,600

$
21,126

$
46,563

$
61,661Service


11,396


9,279


33,681


27,421Total cost of revenue

$
22,996

$
30,405

$
80,244

$
89,082Gross profit margin (% of respective revenue)Product


68.4
%

61.2
%

68.9
%

61.0
%Service


55.3
%

56.4
%

54.4
%

57.2
%Total gross profit margin


63.0
%

59.9
%

64.1
%

59.9
%


The
increase in product gross profit as a percentage of revenue ("product gross margin") was primarily due to product and customer mix. The decrease in service gross profit as a
percentage of service revenue ("service gross margin") was primarily due to increased personnel costs to support our global expansion efforts. We believe that our gross margin over time will be 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 were $17.9 million for the three months ended September 30, 2008, a decrease of
$3.1 million, or 14.9%, from $21.0 million in the same prior year period. Research and development expenses for the nine months ended September 30, 2008 were $56.4 million,
a decrease of $5.4 million, or 8.7%, from $61.8 million in the same prior year period. The decreases in both the three and nine month periods of the current year primarily reflect
$3.0 million and $7.7 million, respectively, of lower stock-based compensation expense, partially offset by higher facility and related expenses resulting from the Atreus acquisition.
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.

Sales and Marketing Expenses.Sales and marketing expenses consist primarily of salaries and related personnel costs, commissions, travel and entertainment
expenses, promotions, customer evaluation inventory and other marketing and sales support expenses. Sales and marketing expenses were $17.2 million for the three months ended
September 30, 2008, a decrease of $2.1 million, or 11.2%, compared to $19.3 million in the three months ended September 30, 2007. Sales and marketing expenses were
$54.8 million for the nine months ended September 30, 2008, a decrease of $8.6 million, or 13.7%, from $63.4 million in the same prior year period. The current period
decreases are primarily attributable to lower commission and stock-based compensation expense. In the first half of 2007, commission expense included certain orders received in fiscal 2006 that were
recognized in 2007 at an accelerated commission rate. Lower stock-based compensation costs accounted for $2.8 million and $9.2 million of the decrease in sales and marketing expenses in
the three and nine months ended September 30, 2008, respectively, compared to the same periods of the prior year. These amounts were partially offset by higher personnel-related costs primarily
related to our expansion of our worldwide sales and support coverage.

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General and Administrative Expenses.General and administrative expenses consist primarily of salaries and related personnel costs for executive and administrative
personnel, recruiting expenses, allowance for doubtful accounts and professional fees. General and administrative expenses were $21.5 million in the three months ended September 30,
2008, an increase of $7.4 million, or 52.3%, compared to $14.1 million in the three months ended September 30, 2007. General and administrative expenses were $44.4 million
in the nine months ended September 30, 2008, an increase of $2.1 million, or 5.0%, compared to $42.3 million in the same prior year period. These increases are primarily
attributable to $4.5 million and $5.9 million of higher legal costs primarily related to the recently settled litigation in the
three and nine months ended September 30, 2008, respectively, compared to the same prior year periods. In addition, the Company recorded $0.4 million of bad debt expense related to a
customer with an outstanding balance that filed for bankruptcy in the three months ended September 30, 2008.

Litigation Settlements.We recorded $19.1 million of expense reported as Litigation Settlements in our consolidated statements of operations for the three
and nine months ended September 30, 2008. On September 16, 2008, we reached an agreement to settle the C2 Patent Litigation. The parties entered into a settlement and license agreement
that provided for the payment of $9.5 million in full settlement of all claims against customers as well as fully paid licenses to us and our customers. The settlement was paid on
September 24, 2008. On September 23, 2008, we reached a tentative agreement to settle the 2002 Securities Litigation. Pursuant to the settlement, subject to confirmatory discovery and
final court approval, we agreed to pay $9.5 million to the shareholder class in the case, as well as $0.1 million toward the cost of the class notice process. At September 30,
2008, we had accrued $10.0 million for the 2002 Securities Litigation settlement, including the aforementioned $9.6 million for the settlement and class notice process, as well as
$0.4 million for costs related to the confirmatory discovery process. The $0.4 million for discovery costs is included as a component of General and administrative expense.

On
November 7, 2007, we reached an agreement to settle litigation against the Company and certain of our former and current officers alleging violations of federal securities laws
in connection with the restatement in 2004 of our financial statements (the "2004 Restatement Litigation"). Under the terms of the settlement, the plaintiffs agreed to release all claims against us
and the other defendants in consideration for the payment of $40.0 million from us to the class of plaintiffs. In connection with the settlement, in the third quarter of fiscal 2007, we
recorded a charge of $40.0 million and a related liability for the full amount of the settlement.

Interest Income, net.Interest income, net of interest expense, was $2.7 million and $9.8 million in the three and nine months ended
September 30, 2008, respectively, compared to $4.4 million and $13.5 million in the three and nine months ended September 30, 2007, respectively. Interest income consists
of interest earned on our cash equivalents, marketable securities and long-term investments. Interest expense relates to interest on capital lease obligations. The reduction in interest
income, net, in the current year period is primarily the result of lower interest rates.

Other Income.We recorded $2,000 and $0.4 million of other income in the three and nine months ended September 30, 2008, respectively. We recorded
$2.0 million and $1.1 million of other income in the three and nine months ended September 30, 2007 to reflect the change in fair value of stock options modified subsequent to the
departure of former employees which are accounted for as derivatives.

Income Taxes.The provision for income taxes reflects our estimate of the effective rate expected to be applicable for the full fiscal year, adjusted for any
discrete events, which are recorded in the period that they occur. This estimate is reevaluated each quarter based on our estimated tax expense for the full fiscal year. Our effective tax rates,
including discrete items, were 31.1% and 37.7% for the nine months ended September 30, 2008 and 2007, respectively. Our effective tax rate for the nine

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months
ended September 30, 2008 is less than the statutory federal and state rates primarily due to the impact of permanent nondeductible items, our forecasted mix of earnings by country for
the year and losses in certain foreign countries for which we are unable to recognize a tax benefit. During the nine months ended September 30, 2008, a number of discrete events occurred which
impacted the net tax benefit recognized. These events include legal settlements, disqualifying dispositions of stock options, cancellations or forfeitures of stock-based compensation awards and
deductions for stock option exercises that are less than the previously recognized deferred tax asset for such awards. The net effect of these discrete items for the nine months ended
September 30, 2008 was a $6.2 million benefit corresponding to approximately $16 million of charges incurred. The incremental tax benefit related to discontinued operations was
$764,000 for the nine months ended September 30, 2008. In addition, our effective tax rate for the 2008 period does not include any benefit related to the federal research and development tax
credit, as this tax law was not extended until the fourth quarter of 2008.

The
income tax benefit of $6.6 million in the nine months ended September 30, 2008 primarily reflects a current benefit for federal, state and foreign taxes. The income tax
benefit of $22.5 million in the nine months ended September 30, 2007 primarily reflects a current benefit for federal, state and foreign taxes.

Discontinued Operations.In the third quarter of 2008, we committed to a plan to sell our Zynetix subsidiary. We are currently in negotiations regarding the sale
of Zynetix and expect the transaction to be completed in the fourth quarter of 2008. We acquired Zynetix on April 13, 2007; accordingly, the results of operations of Zynetix are included in
discontinued operations for the period subsequent to its acquisition. We adjusted the book values of certain Zynetix assets to approximate their net realizable value and the aggregate fair value of
the consideration to be received from the sale of Zynetix. The write-down of these assets, which totaled $0.4 million, is included in the results of discontinued operations for the
three and nine months ended September 30, 2008.

In
connection with the preparation of our financial statements for the second quarter of fiscal 2008 and the update of our sales forecast for the second half of the fiscal year, we
conducted a review of intangible assets and goodwill for impairment indicators, during which we determined that there were no impairment indicators related to the intangible assets and goodwill
allocated to the Sonus reporting unit. However, this review identified several indicators related to the intangible assets and goodwill allocated to the Zynetix reporting unit, including significant
underperformance relative to plan or long-term projections. In response, we performed an assessment of the carrying value of
our intangible assets and goodwill. As a result, we recorded a charge to operations of $3.6 million for the write-down of intangible assets and goodwill. Of this charge,
$1.5 million related to intangible assets and $2.1 million related to goodwill. As a result, the net book values of the intangible assets and goodwill attributable to the Zynetix
reporting unit were reduced to zero at June 30, 2008.

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, 2008, our cash, cash equivalents, marketable securities and investments totaled $404.7 million.

Our
operating activities used $2.9 million of cash in the nine months ended September 30, 2008. Cash used in operating activities was the result of our net loss and
non-cash changes in our deferred income taxes, partially offset by adjustments for other non-cash items including stock-based compensation, depreciation and amortization of
property and equipment and intangible assets and

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impairment
of goodwill. These non-cash adjustments further benefited from decreases in accounts receivable, the insurance receivable for a litigation settlement and other operating assets.
These amounts were more than offset by the release of the $40.0 million litigation settlement held in escrow to the plaintiffs, coupled with lower levels of accrued expenses, including deferred
rent, deferred revenue and accounts payable, as well as an increase in inventory. The lower accounts receivable levels are the result of our efforts on cash collections. On March 31, 2008, our
proposed litigation settlement related to the 2004 securities litigation was approved by the court. Accordingly, the amounts that had been placed into escrow by us and our insurer were released to the
plaintiff, and we eliminated the related liability and insurance receivable included in our condensed consolidated balance sheet at December 31, 2007. As a result, our cash flows from operating
activities were negatively affected by the release at March 31, 2008 of the $25.0 million we had previously placed into an escrow account, partially offset by the $9.6 million
liability recorded for the settlement of the 2002 Securities Litigation. The decrease in accrued expenses is primarily attributable to the payment on September 24, 2008 of the
$9.5 million settlement of the C2 Patent Litigation, lower employee compensation and related costs, including reductions for the payment of bonuses to our executives and employees under our
bonus programs, payments for professional fees and royalties previously accrued, the completion of an employee stock purchase under our original ESPP and lower ESPP withholdings under the Amended and
Restated ESPP.

Our
investing activities used $5.6 million of cash in the nine months ended September 30, 2008, primarily comprised of $18.7 million of net purchases of marketable
securities and long-term investments, $7.0 million of investments in property and equipment and cash payments aggregating $4.9 million for our April 18, 2008
acquisition of Atreus. These amounts were offset by $25.0 million related to the release at March 31, 2008 of the $25.0 million in the 2004 Securities Litigation settlement escrow
account as a result of the court's approval of the settlement agreement and the release of those funds to the plaintiffs.

Our
financing activities provided $2.8 million of cash in the nine months ended September 30, 2008, including $3.8 million of proceeds from the sale of common stock
in connection with our ESPP and $0.4 million of proceeds from the exercise of stock options. These proceeds were partially offset by $1.2 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 debt securities and long-term investments will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least 12 months, including the payments related to the 2002 Securities Litigation and the Zynetix earnout agreement, despite the
current global economic climate and constrained financing environment. Additionally, during the second quarter of 2008 we transferred our held-to-maturity marketable securities
and investments to the available-for-sale category. This change allows us to better take advantage of investing, acquisition and related opportunities. It is difficult to
predict future liquidity requirements with certainty, and 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 internal
control environment and for other general corporate activities, as well as to vigorously defend against existing and potential litigation. See Note 16 to our condensed consolidated financial
statements.

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Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161,Disclosures About Derivative Instruments and Hedging
Activitiesan amendment of FASB Statement No. 133("SFAS 161"). SFAS 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 161 requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS 161 also amends SFAS No. 107,Disclosures About Fair Value of Financial Instruments("SFAS 107"), to
clarify that derivative instruments are subject to SFAS 107's concentration-of-credit risk disclosures. SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. Early adoption is permitted, and entities are encouraged, but not required, to provide comparative disclosures for earlier
periods. The adoption of SFAS 161 will not affect our consolidated financial statements or financial condition, but may require additional disclosures if we enter into derivative and hedging
activities.

In
December 2007, the FASB issued SFAS No. 141(R),Business Combinations("SFAS 141R"), which revises SFAS No. 141.
SFAS 141R establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008; early adoption is not permitted. The adoption of SFAS 141R will
have an impact on accounting for business combinations once adopted, but the effect is dependent upon acquisitions at that time.

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, 2007.

Item 4.    Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of
September 30, 2008. The term "disclosure controls and procedures," as defined in Rule 13a-15(e), means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In
our Management's Report on Internal Control over Financial Reporting filed with our Annual Report on Form 10-K for the year ended December 31, 2007, we
reported material weaknesses in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). During

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the
quarter ended September 30, 2008, we continued to design enhancements to our controls and implemented a number of changes to address the reported material weaknesses.

We
are continuing to refine the processes and review procedures associated with the accounting for stock-based compensation. Specifically the refinements include enhanced communication
and awareness of modifications to awards across a larger cross-functional audience. While we believe that the cumulative effect of the modifications we have implemented and tested through
September 30, 2008 have improved our controls relating to our accounting for stock-based compensation we believe that we have not fully remediated the material weakness as of
September 30, 2008. Although we continued to make progress this quarter, we believe that the material weakness relating to financial statement preparation and review procedures has not yet been
fully remediated as of September 30, 2008. As we have material weaknesses in our internal controls over financial reporting, we have concluded that our disclosure controls and procedures were
not effective as of September 30, 2008.

Changes in Internal Control over Financial Reporting

We discuss below the material changes to our internal control over financial reporting relating to the two reported material weaknesses
and the remediation steps we are taking through the end of 2008.

Inadequate financial statement preparation and review procedures.

During the quarter ended September 30, 2008, we initiated several programs and enhanced processes in order to improve our
financial statement preparation and review
procedures as well as strengthening our entity level controls as set forth below:



In
addition, we hired a permanent Chief Information Officer ("CIO") in the third quarter. This position reports directly to the Chief Financial Officer. We expect that with the addition
of the CIO we will be able to accelerate many of our planned initiatives to automate the remaining manual business processes by having the CIO lead our efforts of developing and implementing continued
improvements and enhancements to our ERP system and other internal systems and processes that impact our financial statement preparation and review procedures.

Although
we made improvements in our financial statement preparation and review procedures in the third quarter, we continue to work on further enhancing and automating our systems and
processes and thus continue to strengthen our internal control over financial reporting. Some of the corrective

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actions
with respect to financial statement preparation and review procedures that we are currently working to implement within the current fiscal year include:



The
foregoing corrective actions will affect all accounts. We are in the process of implementing and expect to complete the majority of these corrective actions by the end of the current
fiscal year.

We
will continue to evaluate, design and implement additional policies, procedures and controls as required during the remediation of these material weaknesses. None of the
aforementioned projects for either of the reported items above, whether completed or contemplated through year-end, are expected to result in any material incremental costs to be incurred
by us.

Inadequate controls over the accounting for stock-based compensation.

As of the period ended September 30, 2008, we have initiated several programs and enhanced processes and systems in order to
improve our accounting for stock-based compensation procedures as set forth below:



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We
continue to refine the processes and review procedures associated with the accounting for stock-based compensation. Although we believe that the cumulative effect of the changes we
have implemented and tested through September 30, 2008 have improved our controls to provide reasonable assurance that our accounting for stock-based compensation is accurate, we believe that
the controls have not been in place for a long enough period to enable us to determine that the material weakness over accounting for stock-based compensation has been remediated.

Except
as described above, there was no change in our internal control over financial reporting during the quarter ended September 30, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

Risks and Inherent Limitations

Prior to the complete remediation of these material weaknesses, there remains risk that the processes and procedures on which we
currently rely will fail to be sufficiently effective, which could result in material misstatement of our financial position or results of operations and require a restatement. Moreover, because of
the inherent limitations in all control systems, no evaluation of controlseven where we conclude the controls operate effectivelycan provide absolute assurance that all
control issues, including instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur
because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, our control systems, as we develop them, may become inadequate because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected and could be material to our financial statements.

The
certifications of our principal executive officer and principal financial officer required in accordance with Rule 13a-14(a) under the Exchange Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4 contain
information concerning the evaluation of our disclosure controls and procedures, and changes in internal control over financial reporting, referred to in paragraph 4 of the certifications.
Those certifications should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications.

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, 2007. There have been no material developments with respect to the legal proceedings during the quarter ended September 30,
2008 other than as set forth below.

Subject
to confirmatory discovery and court approval, we agreed to pay $9.5 million in settlement of the 2002 Securities Litigation, as well as $0.1 million toward the cost
of class notice. See Note 15 to our condensed consolidated financial statements.

On
September 16, 2008, we agreed to settle the C2 Patent Litigation on behalf of Qwest, Global Crossing and Level 3 with the payment of $9.5 million for a release of
all claims and fully paid licenses

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for
Qwest, Global Crossing, Level 3 and Sonus. See Note 15 to our condensed consolidated financial statements.

For
a more detailed discussion of our legal proceedings, please see Note 16 to our condensed consolidated financial statements.

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 factors have been added since the filing of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008:

Difficult conditions in the economy generally may materially adversely affect our business and results of operations and we do not expect these conditions to improve in the
near future.

Declining business and consumer confidence and increased unemployment have precipitated an economic slowdown and fears of a long
recession. Continuing market upheavals may have an adverse affect on us because we are dependent on customer behavior. Our revenues are likely to decline in such circumstances and our profit margins
could erode. In addition, in the event of extreme prolonged events, such as the global credit crisis, we could incur significant losses. Factors such as consumer spending, business investment, the
volatility and strength of the capital markets and information all affect the business and economic environment, and, ultimately, the amount and profitability of our business. In an economic downturn
characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our products could be adversely affected.
Adverse changes in the economy could affect
earnings negatively and could have a material adverse effect on our business, results of operations and financial condition.

Recent turmoil in the world's credit markets may have an adverse impact on the capital spending in the markets we serve and, as a result, could have a material adverse
effect on our business and our results of operations.

We are exposed to the risks associated with the volatility of the U.S. and global economies. In October 2008, the global financial
markets experienced significant losses due to failures of many dominant financial institutions. The governments of the United States and several foreign countries instituted a bailout plan to assist
many banks and lenders through the economic crisis. This crisis results in a lack of visibility regarding whether or when there will be sustained growth periods for sales of our products and
uncertainty regarding the amount of sales, since our customers may rely on lending arrangements and/or have limited resources to finance capital technology expenditures. In addition, it is expected
that this crisis and economic uncertainty will result in decreased consumer spending, which will likely reduce the need our customers have for our products. Slow or negative growth in the global
economy may continue to materially and adversely affect our business, financial condition and results of operations for the foreseeable future. Our results of operations would be further adversely
affected if we were to experience lower-than-anticipated order levels, cancellations of orders in backlog, extended customer delivery requirements or pricing pressure as a
result of the slowdown.

The
following risk factors have been modified since the filing of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008:

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We may continue to incur net losses.

We have incurred significant losses since inception and, at September 30, 2008, had an accumulated deficit of
$770.8 million. Although we achieved profitability on an annual basis in fiscal 2006, fiscal 2005 and fiscal 2004, we have incurred a net loss in the three and nine months ended
September 30, 2008 and in fiscal 2007 and may incur additional losses in future quarters and years. Our revenues may not grow and we may never generate sufficient revenues to sustain
profitability.

We expect that a majority of our revenue will be generated from a limited number of customers and we will not be successful if we do not grow our customer base.

To date, we have shipped our products to a limited number of customers. We expect that in the foreseeable future, the majority of our
revenue will continue to depend on sales of our products to a limited number of customers. One customer contributed approximately 37% of our
revenue in the nine months ended September 30, 2008. One customer contributed approximately 33% of our revenue in fiscal 2007. Three customers each contributed more than 10% of our revenue in
fiscal 2006, or approximately 43% of our revenue in the aggregate. Our future success will depend on our ability to attract additional customers beyond our current limited number. The growth of our
customer base could be adversely affected by:



The
loss of any of our significant customers or any substantial reduction in purchase orders from these customers could materially and adversely affect our financial position and results
of operations. If we do not expand our customer base to include additional customers that deploy our products in operational commercial networks, our business, operating results and financial position
could be materially and adversely affected.

We may face risks associated with our international expansion that could impair our ability to grow our international revenues.

International revenues approximated $41 million in the nine months ended September 30, 2008, and $84 million and
$78 million in fiscal 2007 and fiscal 2006, respectively, and we intend to expand our sales in international markets. This expansion will require significant management attention and financial
resources to successfully develop direct and indirect international sales and support channels. In addition, we may not be able to develop international market demand for our products, which could
impair our ability to grow our revenues. We have limited experience marketing, distributing and supporting our products internationally and, to do so, we expect that we will need to develop versions

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of
our products that comply with local standards. Furthermore, international operations are subject to other inherent risks, including:



Our operating results may be adversely affected by unfavorable economic and market conditions and the uncertain geopolitical environment.

Economic conditions worldwide and the recent financial crisis may contribute to slowdowns in the communications and networking
industries, as well as to specific segments and markets in which we operating, resulting in:



Recent
turmoil in the geopolitical environment in many parts of the world, including terrorist activities and military actions, particularly the continuing tension in and surrounding
Iraq, and changes in energy costs may continue to put pressure on global economic conditions. Our operating results and our ability to expand into other international markets may also be affected by
changing economic conditions particularly germane to that segment or to particular customer markets within that segment. If global economic and market conditions, or economic conditions in the United
States or other key markets, deteriorate, we may experience material impacts on our business, operating results and financial condition.

We face risks related to securities litigation that could result in significant legal expenses and settlement or damage awards.

We have been named as a defendant in securities class action and derivative lawsuits. We are generally obliged, to the extent permitted
by law, to indemnify our current and former directors and officers who are named as defendants in these lawsuits. Defending against existing and potential litigation may require significant attention
and resources of management. Regardless of the outcome, such litigation will result in significant legal expenses. On November 7, 2007, the Company and the plaintiff in the 2004 Restatement
Litigation agreed to a settlement in the amount of $40.0 million. On September 23, 2008, we agreed, subject to confirmatory discovery and court approval, to settle the 2002

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Securities
Litigation for $9.5 million. If our defenses in any of our pending litigation are ultimately unsuccessful, or if we are unable to achieve a favorable settlement, we could be liable
for large damage awards that could have a material adverse effect on our business, results of operations and financial position.

Due to long-term customer contracts, we have financial exposure to the continued financial stability of our customers.

Due to the long-term nature of certain customer contracts, we are dependent on the continued financial strength of our
customers. The current economic crisis could have already had or could have in the future a material adverse affect on these customers. If one or more of our significant customers experience financial
difficulties, it could result in uncollectible accounts receivable and our loss of significant customers and anticipated service revenue.

Our ability to compete and our business could be jeopardized if we are unable to protect our intellectual property or become subject to intellectual property rights claims,
which could require us to incur significant costs.

We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our
intellectual property rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult and we cannot be
certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United
States. If competitors are able to use our technology, our ability to compete effectively could be harmed.

In
addition, we and our customers have received inquiries from intellectual property owners and may become subject to claims that we or our customers infringe their intellectual property
rights. Any parties asserting that our products infringe upon their proprietary rights could force us to license their patents for substantial royalty payments or to defend ourselves and possibly our
customers or contract manufacturers in litigation. These claims and any resulting licensing arrangement or lawsuit, if successful, could subject us to significant royalty payments or liability for
damages and invalidation of our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:



Any
lawsuits regarding intellectual property rights, regardless of their success, would be time-consuming, expensive to resolve and would divert our management's time and
attention. In addition, although historically our costs to defend lawsuits relating to indemnification provisions in our product agreements have been insignificant, the costs were significant in the
third quarter of 2008 and may continue to be significant in future periods.

On
June 14, 2006, C2 Communications sued AT&T, Inc., Verizon Communications, Inc., Qwest, Bellsouth, Sprint Nextel Corporation, Global Crossing and Level 3 in
the Eastern District of Texas, Marshall Division. C2 Communications alleged that each of the defendants infringe U.S. Patent No. 6,243,373 entitled "Method and Apparatus for Implementing a
Computer Network Internet Telephone System." We agreed, subject to certain conditions, to assume the defense of Qwest, Global Crossing and Level 3 in this litigation to the extent the claim
results from their use of products

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purchased
from us. On September 23, 2008, we agreed to settle the litigation for the payment of $9.5 million.

On
January 24, 2008, Sprint Communications sued two of our customers, Broadvox and Nuvox, in the District of Kansas for patent infringement. We have agreed, subject to certain
conditions, to assume the defense of this litigation on behalf of Broadvox to the extent the claims result from its use of Sonus products. There can be no assurance that we will not be required to
indemnify Nuvox from any judgment of infringement rendered against them.

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 2008, which represent shares returned to satisfy tax withholding obligations:

Issuer Purchases of Equity SecuritiesPeriod

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, 2008 to July 31, 2008











August 1, 2008 to August 31, 2008


196,534

$
3.37





September 1, 2008 to September 30, 2008


156,562

$
3.05





Total


353,096

$
3.23








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Item 6.    Exhibits

Exhibit Number

Description10.1(a)

Separation of Employment Agreement between Sonus Networks, Inc. and Chuba Udokwu signed on October 10, 2008.10.2(b)

Executive Severance and Arbitration Agreement between Sonus Networks, Inc. and Matthew Dillon signed on October 7, 2008.10.3(b)

Executive Severance and Arbitration Agreement between Sonus Networks, Inc. and Richard J. Gaynor signed on October 7, 2008.10.4(b)

Executive Severance and Arbitration Agreement between Sonus Networks, Inc. and Mohammed Shanableh signed on October 7, 2008.31.1

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.


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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 6, 2008

SONUS NETWORKS, INC.By:

/s/ RICHARD J. GAYNOR Richard J. Gaynor Chief Financial Officer (Principal Financial Officer)By:

/s/ WAYNE PASTORE Wayne Pastore Vice President, Finance and Corporate Controller
(Principal Accounting Officer)


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EXHIBIT INDEX

Exhibit Number

Description10.1(a)

Separation of Employment Agreement between Sonus Networks, Inc. and Chuba Udokwu signed on October 10, 2008.10.2(b)

Executive Severance and Arbitration Agreement between Sonus Networks, Inc. and Matthew Dillon signed on October 7, 2008.10.3(b)

Executive Severance and Arbitration Agreement between Sonus Networks, Inc. and Richard J. Gaynor signed on October 7, 2008.10.4(b)

Executive Severance and Arbitration Agreement between Sonus Networks, Inc. and Mohammed Shanableh signed on October 7, 2008.31.1

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.


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