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



FORM 10-Q

ý

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

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


Commission File Number 001-34115

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

DELAWARE

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

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


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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

As of July 26, 2010, there were 275,220,150 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 JUNE 30, 2010

TABLE OF CONTENTS



PagePART I FINANCIAL INFORMATIONItem 1.

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

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

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

5Notes to Condensed Consolidated Financial Statements (unaudited)

6Item 2.

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

24Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34Item 4.

Controls and Procedures

34PART II OTHER INFORMATIONItem 1.

Legal Proceedings

34Item 1A.

Risk Factors

34Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35Item 6.

Exhibits

36Signatures

37Exhibit Index

38


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PART I FINANCIAL INFORMATION

Item 1.    Financial Statements



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

June 30,
2010

December 31,
2009AssetsCurrent assets:Cash and cash equivalents

$
103,788

$
125,323Marketable securities


249,393


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


40,188


47,998Inventory, net


21,181


21,925Deferred income taxes


669


562Other current assets


20,394


17,508Total current assets


435,613


452,539Property and equipment, net


14,355


14,646Intangible assets, net


2,065


341Goodwill


5,053


5,053Investments


66,474


49,598Deferred income taxes


780


711Other assets


22,623


17,849$
546,963

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

$
18,619

$
5,337Accrued expenses


17,584


19,292Current portion of deferred revenue


57,141


74,748Current portion of long-term liabilities


484


753Total current liabilities


93,828


100,130Deferred revenue


31,703


25,242Long-term liabilities


1,042


1,127Total liabilities


126,573


126,499Commitments and contingencies (Note 14)Stockholders' equity:Preferred stock, $0.01 par value; 5,000,000 shares authorized, none issued and outstanding





Common stock, $0.001 par value; 600,000,000 shares authorized; 277,511,919 and 276,792,897 shares issued; 275,215,009 and 274,495,987 shares outstanding at
June 30, 2010 and December 31, 2009, respectively


278


277Additional paid-in capital


1,292,492


1,286,326Accumulated deficit


(878,633
)

(878,810
)Accumulated other comprehensive income


6,520


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


(267
)

(267
)Total stockholders' equity


420,390


414,238$
546,963

$
540,737


See notes to the condensed consolidated financial statements.

3

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

Three months ended
June 30,

Six months ended
June 30,2010

2009

2010

2009Revenue:Product

$
36,796

$
36,320

$
73,074

$
55,723Service


24,385


25,287


50,515


46,896Total revenue


61,181


61,607


123,589


102,619Cost of revenue:Product


10,826


10,747


23,127


16,881Service


11,842


10,568


23,771


22,231Total cost of revenue


22,668


21,315


46,898


39,112Gross profit


38,513


40,292


76,691


63,507Operating expenses:Research and development


15,106


15,501


30,046


31,854Sales and marketing


12,392


12,344


25,986


24,491General and administrative


10,971


10,186


21,115


20,681Restructuring





(7
)




1,977Total operating expenses


38,469


38,024


77,147


79,003Income (loss) from operations


44


2,268


(456
)

(15,496
)Interest expense


(30
)

8


(43
)

(71
)Interest income


466


1,077


981


2,726Other income (expense), net


1


19


11


12Income (loss) before income taxes


481


3,372


493


(12,829
)Income tax (provision) benefit


(170
)

1,011


(316
)

985Net income (loss)

$
311

$
4,383

$
177

$
(11,844
)Earnings (loss) per share:Basic

$


$
0.02

$


$
(0.04
)Diluted

$


$
0.02

$


$
(0.04
)Shares used to compute earnings (loss) per share:Basic


275,051


273,543


274,877


273,320Diluted


276,314


273,768


276,038


273,320


See
notes to the condensed consolidated financial statements.

4

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

Six months ended
June 30,2010

2009Cash flows from operating activities:Net income (loss)

$
177

$
(11,844
)Adjustments to reconcile net income (loss) to cash flows provided by operating activities:Depreciation and amortization of property and equipment


4,804


5,004Amortization of intangible assets


276


153Stock-based compensation


5,698


6,750Loss on disposal of property and equipment


59


15Deferred income taxes





(208
)Changes in operating assets and liabilities:Accounts receivable


7,778


37,714Inventory


(5,201
)

(5,204
)Other operating assets


261


(13,472
)Accounts payable


12,989


1,204Accrued expenses


(1,828
)

(11,275
)Accrued litigation settlements





(100
)Deferred revenue


(11,181
)

3,645Net cash provided by operating activities


13,832


12,382Cash flows from investing activities:Purchases of property and equipment


(4,276
)

(3,352
)Purchase of intangible assets


(2,000
)

Purchases of marketable securities


(168,953
)

(61,926
)Sale/maturities of marketable securities


139,620


153,738Increase in restricted cash





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


(35,609
)

78,960Cash flows from financing activities:Sale of common stock in connection with employee stock purchase plan


609


529Proceeds from exercise of stock options


61


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


(257
)

(287
)Principal payments of capital lease obligations


(110
)

(124
)Net cash provided by financing activities


303


119Effect of exchange rate changes on cash and cash equivalents


(61
)

407Net increase (decrease) in cash and cash equivalents


(21,535
)

91,868Cash and cash equivalents, beginning of year


125,323


122,207Cash and cash equivalents, end of period

$
103,788

$
214,075Supplemental disclosure of cash flow information:Interest paid

$
43

$
71Income taxes paid

$
677

$
411Income tax refunds received

$
429

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

$
1,191

$
596Property and equipment acquired under capital lease

$


$
151


See notes to the condensed consolidated financial statements.

5

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Table of Contents



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1) BASIS OF PRESENTATION

Business

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

Basis of Presentation

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

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

Principles of Consolidation

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

Use of Estimates and Judgments

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

6

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

Fair Value of Financial Instruments

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

Foreign Currency Translation

The Company recorded net losses on foreign currency remeasurement and transactions of $0.6 million and $0.8 million for
the three months ended June 30, 2010 and 2009, respectively. These amounts include $0.6 million of losses and $1.8 million of gains in the three months ended June 30, 2010
and 2009, respectively, related to the Company's remeasurement of its U.S. dollar foreign subsidiaries.

The
Company recorded net losses on foreign currency remeasurement and transactions of $0.8 million and $1.2 million for the six months ended June 30, 2010 and 2009,
respectively. These amounts include $1.4 million of losses and $1.3 million of gains in the six months ended June 30, 2010 and 2009, respectively, related to the Company's
remeasurement of its U.S. dollar foreign subsidiaries.

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

Operating Segments

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

Recent Accounting Pronouncements

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

In
October 2009, the FASB issued an update to the accounting guidance related to the separation criteria used to determine the unit of accounting for multiple-element arrangements. This
update removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to

7

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

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

(2) REVENUE RECOGNITION

The Company's products are primarily marketed based on the software elements contained therein. In addition, hardware sold generally cannot be used apart from the software. Therefore,
Sonus considers its principal products to be software-related. Sonus recognizes revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is
fixed or determinable, and collectibility of the related receivable is probable under customary payment terms. When the Company has future obligations, including a requirement to deliver additional
elements that are essential to the functionality of the delivered elements or for which vendor-specific objective evidence of fair value ("VSOE") does not exist or when customer acceptance is
required, Sonus defers revenue recognition and related costs until those obligations are satisfied. The ordering patterns and sales lead times associated with customer orders may vary significantly
from period to period.

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

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

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

8

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(2) REVENUE RECOGNITION (Continued)

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

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

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

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

Beginning
in the fourth quarter of fiscal 2008, the Company concluded that it no longer had sufficient evidence of VSOE on maintenance services for AT&T Inc. ("AT&T"), one of its
largest customers. Therefore, all revenue related to multiple-element arrangements for this customer entered into beginning in the fourth quarter of fiscal 2008 is being recognized ratably over the
maintenance period. Revenue recognition on multiple-element arrangements with this customer will begin when the only undelivered element of the arrangement is maintenance. Beginning in the fourth
quarter of 2008, for orders from AT&T that contain bundled product and maintenance, the Company has allocated a fixed percentage (which represents the maintenance renewal rate for its largest
customers for which the Company has VSOE) of the arrangement fee to service revenue with the residual amount classified as product revenue. The Company has and will continue to apply this methodology
on a consistent basis. At June 30, 2010, Other current assets included $1.1 million of deferred product costs related to arrangements with AT&T in which both the revenue and product
costs are being recognized ratably. At June 30, 2010 and December 31, 2009, Other assets included $2.0 million and $3.9 million, respectively, of deferred product costs
related to arrangements with this customer in which both the revenue and product costs are being recognized ratably.

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

(3) EARNINGS (LOSS) PER SHARE

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

9

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

Three months ended
June 30,

Six months ended
June 30,2010

2009

2010

2009Weighted average shares outstandingbasic


275,051


273,543


274,877


273,320Potential dilutive common shares


1,263


225


1,161


Weighted average shares outstandingdiluted


276,314


273,768


276,038


273,320


Options
to purchase the Company's common stock aggregating approximately 19.7 million and 34.3 million shares of common stock have not been included in the computation of
diluted earnings per share for the three months ended June 30, 2010 and 2009, respectively, because the options' exercise prices were greater than the average market price for the common stock
and their effect would have been antidilutive. Options to purchase the Company's common stock aggregating approximately 21.3 million shares of common stock have not been included in the
computation of diluted earnings per share for the six months ended June 30, 2010 because the options' exercise prices were greater than the average market price for the common stock and their
effect would have been antidilutive. Options to purchase the Company's common stock, unvested shares of restricted stock and performance-based stock awards aggregating approximately
35.8 million shares of common stock have not been included in the computation of diluted loss per share for the six months ended June 30, 2009 because their effect would have been
antidilutive.

(4) COMPREHENSIVE INCOME (LOSS)

The Company's comprehensive income (loss) for the three and six months ended June 30, 2010 and 2009 is as follows (in thousands):

Three months ended
June 30,

Six months ended
June 30,2010

2009

2010

2009Net income (loss)

$
311

$
4,383

$
177

$
(11,844
)Other comprehensive income (loss):Foreign currency translation adjustments


144


245


158


(11
)Unrealized loss on available-for-sale marketable securities, net of tax


(175
)

190


(350
)

(606
)Comprehensive income (loss)

$
280

$
4,818

$
(15
)
$
(12,461
)


10

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

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

June 30, 2010Amortized
cost

Unrealized
gains

Unrealized
losses

Fair
valueCash equivalents

$
64,288

$


$


$
64,288Marketable securitiesU.S. government agency notes

$
95,909

$
108

$
(5
)
$
96,012Foreign government notes


5,345


3


(7
)

5,341Corporate debt securities


71,934


71


(59
)

71,946Commercial paper


42,849


1


(1
)

42,849Certificates of deposit


33,250


8


(13
)

33,245$
249,287

$
191

$
(85
)
$
249,393InvestmentsU.S. government agency notes

$
17,809

$
61

$


$
17,870Foreign government notes


1,093





(1
)

1,092Corporate debt securities


47,606


36


(130
)

47,512$
66,508

$
97

$
(131
)
$
66,474




December 31, 2009Amortized
cost

Unrealized
gains

Unrealized
losses

Fair
valueCash equivalents

$
95,845

$


$
(2
)
$
95,843Marketable securitiesMunicipal obligations

$
4,999

$


$


$
4,999U.S. government agency notes


86,534


231


(11
)

86,754Corporate debt securities


77,843


294


(67
)

78,070Commercial paper


44,567


15


(5
)

44,577Certificates of deposit


24,801


34


(12
)

24,823$
238,744

$
574

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

$
6,444

$
13

$
(2
)
$
6,455Corporate debt securities


43,209


40


(106
)

43,143$
49,653

$
53

$
(108
)
$
49,598


11

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

Fair Value Hierarchy

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



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

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

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

Quoted prices
in active
markets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)Cash equivalents

$
64,288

$
60,283

$
4,005

$
Marketable securitiesU.S. government agency notes

$
96,012

$


$
96,012

$
Foreign government notes


5,341





5,341


Corporate debt securities


71,946


49,318


22,628


Commercial paper


42,849





42,849


Certificates of deposit


33,245





33,245


$
249,393

$
49,318

$
200,075

$
InvestmentsU.S. government agency notes

$
17,870

$


$
17,870

$
Foreign government notes


1,092





1,092


Corporate debt securities


47,512


26,319


21,193


$
66,474

$
26,319

$
40,155

$





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

Quoted prices
in active
markets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)Cash equivalents

$
95,843

$
88,645

$
7,198

$
Marketable securitiesMunicipal obligations

$
4,999

$


$
4,999

$
U.S. government agency notes


86,754





86,754


Corporate debt securities


78,070


54,297


23,773


Commercial paper


44,577





44,577


Certificates of deposit


24,823





24,823


$
239,223

$
54,297

$
184,926

$
InvestmentsU.S. government agency notes

$
6,455

$


$
6,455

$
Corporate debt securities


43,143


21,328


21,815


$
49,598

$
21,328

$
28,270

$



13

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

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

(6) INVENTORY, NET

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

June 30,
2010

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

$
12,321

$
11,036Deferred cost of goods sold


24,122


20,13236,443


31,168Less current portion


(21,181
)

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

$
15,262

$
9,243


(7) INTANGIBLE ASSETS AND GOODWILL

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

June 30, 2010

Useful life

Cost

Accumulated
amortization

Net
carrying valueIntellectual property

5 years

$
2,999

$
934

$
2,065Order backlog

1 year


287


287


$
3,286

$
1,221

$
2,065




December 31, 2009

Useful life

Cost

Accumulated
amortization

Net
carrying valueIntellectual property

5 years

$
999

$
658

$
341Order backlog

1 year


287


287


$
1,286

$
945

$
341


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

14

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(7) INTANGIBLE ASSETS AND GOODWILL (Continued)

intangible
asset is included as a component of Intangible assets in the Company's condensed consolidated balance sheet at June 30, 2010.

The
Company amortizes its intangible assets over the estimated useful lives of the respective assets. Amortization expense related to intangible assets was approximately $138,000 and
$57,000 in the three months ended June 30, 2010 and 2009, respectively, and approximately $276,000 and $153,000 in the six months ended June 30, 2010 and 2009, respectively.

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

Remainder of 2010

$
2762011


5512012


4382013


4002014


400$
2,065


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

Six months ended June 30,2010

2009Balance at January 1:Goodwill

$
8,159

$
8,131Accumulated impairment losses


(3,106
)

(3,106
)5,053


5,025Foreign currency translation adjustment





9Balance at June 30:Goodwill


8,159


8,140Accumulated impairment losses


(3,106
)

(3,106
)$
5,053

$
5,034


15

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(8) ACCRUED EXPENSES

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

June 30,
2010

December 31,
2009Employee compensation and related costs

$
12,100

$
11,892Employee stock purchase plan


654


653Professional fees


1,068


863Royalties





1,039Income taxes payable


353


648Sales taxes payable


1,238


2,278Other taxes


46


96Restructuring


9


82Other


2,116


1,741$
17,584

$
19,292


(9) STOCK-BASED COMPENSATION PLANS

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

On
May 18, 2010, Dr. Richard N. Nottenburg, the Company's President and Chief Executive Officer ("Dr. Nottenburg"), and the Company entered into a letter agreement
(the "Retention Agreement") pursuant to which Dr. Nottenburg agreed to stay with the Company while assisting the Company with an orderly transition of his duties and responsibilities.
Dr. Nottenburg agreed to remain in his current role until the earlier of (i) the date the Board of Directors of the Company (the "Board") relieves him of such duties or
(ii) March 31, 2011 (the "Effective Termination Date"). In connection with the Retention Agreement, on June 15, 2010 Dr. Nottenburg was granted 750,000 shares of restricted
stock (the "Retention Shares") under the Company's 2007 Plan. The Retention Shares, which have a fair value, in the aggregate, of $1.9 million, will vest as follows: (i) 250,000 shares
will vest on the Effective Termination Date; (ii) 125,000 shares will vest upon the achievement of the financial metrics in the Company's 2010 operating plan, as previously approved by the
Board; (iii) 125,000 shares will vest upon the achievement of the target bookings from new products, as reflected in the Company's 2010 Incentive Compensation Program Base Plan under the Senior
Management Cash Incentive Plan; and (iv) 250,000 shares will vest on the earlier of (a) sixty days after the first day of employment of Dr. Nottenburg's successor, (b) the
date the Board relieves Dr. Nottenburg of his duties as President or Chief Executive Officer of the Company other than for cause, if no successor has been appointed by such date, or
(c) March 31, 2011. If Dr. Nottenburg terminates his employment with the Company for "Good Reason" (as such term is defined in Dr. Nottenburg's May 13, 2008
employment agreement (the "Employment Agreement")) the Retention Shares will accelerate and become fully vested. The Company recognized $0.3 million of stock-based compensation expense in both
the three and six months ended June 30, 2010 related to the Retention

16

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(9) STOCK-BASED COMPENSATION PLANS (Continued)

Shares.
Dr. Nottenburg agreed to relinquish his rights to two performance stock grants, each in the amount of 250,000 restricted shares, which were to be granted under the Employment Agreement
provided that certain performance targets were met. The Company had previously determined it was not probable that the performance conditions for these performance stock grants would be satisfied;
accordingly, no stock-based compensation expense has been recorded for these awards.

The
Employment Agreement provides for the acceleration of vesting for certain options and restricted shares on the date his employment is terminated. Accordingly, the Company has
adjusted the requisite service period of the stock options and shares of restricted stock awarded under the Employment Agreement, as the Company now expects that these awards will be fully vested by
March 31, 2011. This acceleration resulted in $0.2 million of additional stock-based compensation expense in the three months ended June 30, 2010.

Stock Options

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

Number of
Shares

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual Life
(Years)

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


24,081,565

$
4.90Granted


1,520,500

$
2.54Exercised


(51,719
)
$
1.17Forfeited


(317,966
)
$
4.93Expired


(7,906,080
)
$
5.34Outstanding at June 30, 2010


17,326,300

$
4.50


6.29

$
2,519Vested or expected to vest at June 30, 2010


16,905,348

$
4.54


6.22

$
2,393Exercisable at June 30, 2010


12,263,019

$
5.02


5.33

$
774


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

Three months
ended
June 30, 2010

Six months
ended
June 30, 2010Risk-free interest rate


2.28
%
2.28% - 2.65%Expected dividend yield




Weighted average volatility


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


4.5

4.5


The
weighted average grant date fair values of stock options granted during the three and six months ended June 30, 2010 were $1.43 and $1.36, respectively.

17

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(9) STOCK-BASED COMPENSATION PLANS (Continued)

Restricted Stock Awards

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

Shares

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


3,444,496

$
3.29Granted


685,000

$
2.34Vested


(418,921
)
$
4.37Forfeited


(291,007
)
$
3.03Unvested balance at June 30, 2010


3,419,568

$
2.99


The
total fair value of shares of restricted stock that vested during the six months ended June 30, 2010 was $1.8 million.

Performance-Based Stock Awards

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

Shares

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


550,000

$
4.15Granted


484,556

$
2.54Vested





Forfeited


(500,000
)
$
4.35Unvested balance at June 30, 2010


534,556

$
2.50


There
are 181,611 shares of the Company's common stock that are not included in the table above, as the Company has not finalized the performance conditions for these awards. The Company
will begin to record stock-based compensation expense at the time that the performance conditions are defined and when it becomes probable that the respective performance conditions will be achieved.

18

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(9) STOCK-BASED COMPENSATION PLANS (Continued)

Stock-Based Compensation

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

Three months
ended
June 30,

Six months
ended
June 30,2010

2009

2010

2009Product cost of revenue

$
89

$
115

$
160

$
231Service cost of revenue


404


387


823


852Research and development


665


1,102


1,271


1,869Sales and marketing


688


1,490


1,417


2,534General and administrative


1,366


616


2,027


1,264$
3,212

$
3,710

$
5,698

$
6,750


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

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

At
June 30, 2010, there was $17.6 million, net of expected forfeitures, of unrecognized stock-based compensation expense related to unvested stock option and restricted
stock awards, as well as performance-based stock awards for which the Company believes it is probable the performance conditions will be satisfied. This expense is expected to be recognized over a
weighted average period of approximately two years.

(10) MAJOR CUSTOMERS

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

Three months
ended
June 30,

Six months
ended
June 30,Customer

2010

2009

2010

2009AT&T


14
%

*


14
%
*Global Crossing


*


14
%

*

*


---

At
June 30, 2010, one customer accounted for 10% or more of the Company's accounts receivable balance, representing approximately 21% of total accounts receivable. At
December 31, 2009, there were no customers that accounted for 10% or more of the Company's accounts receivable balance. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral

19

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(10) MAJOR CUSTOMERS (Continued)

on
accounts receivable. The Company maintains an allowance for doubtful accounts and such losses have historically been within management's expectations.

(11) INCOME TAXES

The Company's provision for income taxes of $0.3 million for the six months ended June 30, 2010 and income tax benefit of $1.0 million for the six months ended
June 30, 2009 reflect the Company's estimates of the effective rates expected to be applicable for the respective full fiscal years, adjusted for any discrete events, which are recorded in the
period that they occur. These estimates are reevaluated each quarter based on the Company's estimated tax expense for the full fiscal year.

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

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

(12) GEOGRAPHIC INFORMATION

The Company's classification of revenue by geographic area is determined by the location where the product is shipped to or where the services are performed. The following table
summarizes revenue by geographic area as a percentage of total revenue for the three and six months ended June 30, 2010 and 2009:

Three months
ended
June 30,

Six months
ended
June 30,2010

2009

2010

2009United States


68
%

78
%

63
%

75
%Japan


13


4


17


5Other Asia Pacific


1


1


*


1Europe, Middle East and Africa


16


14


18


15Other


2


3


2


4100
%

100
%

100
%

100
%


---

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

20

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(13) RELATED PARTIES

The Company's President and Chief Executive Officer serves on the Board of Directors of Comverse Technology, Inc. ("Comverse"), a worldwide provider of software and systems.
Comverse has several
majority-owned subsidiaries, including Ulticom, Inc. and Verint Systems. All three companies are vendors of the Company. The Company had well-established and ongoing business
relationships with these vendors prior to the appointment of Dr. Nottenburg as the Company's President and Chief Executive Officer effective June 13, 2008. Costs incurred for purchases
from these companies, in the aggregate, were $1.0 million and $2.3 million for the three and six months ended June 30, 2010, respectively, and $1.6 million and
$3.8 million for the three and six months ended June 30, 2009, respectively. At June 30, 2010 and December 31, 2009, the Company had aggregate outstanding accounts payable
balances of $0.3 million and $0.2 million, respectively, to these companies.

On
May 20, 2010, the Company announced that Dr. Nottenburg plans to step down as President and Chief Executive Officer and a director of the Company by the end of March
2011. Based on current knowledge, the Company does not foresee any change in its relationship with Comverse or any of its subsidiaries.

(14) COMMITMENTS AND CONTINGENCIES

2001 IPO Litigation

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

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

21

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(14) COMMITMENTS AND CONTINGENCIES (Continued)

In
June 2003, a special committee of the Company's Board of Directors authorized Sonus to enter into a proposed settlement with the plaintiffs on terms substantially consistent with the
terms of a Memorandum of Understanding negotiated among representatives of the plaintiffs, the issuer defendants and the insurers for the issuer defendants. In October 2004, the District Court
certified the class in a case against certain defendants. On February 15, 2005, the District Court preliminarily approved the terms of the proposed settlement contingent on modifications to the
proposed settlement. On August 31, 2005, the District Court approved the terms of the proposed settlement, as modified. On April 24, 2006, the District Court held a hearing on a motion
to approve the final settlement and took the matter under advisement.

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

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

22

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(14) COMMITMENTS AND CONTINGENCIES (Continued)

On
March 31, 2009, plaintiff-appellant appealed the judgment to the United States Court of Appeals for the Ninth Circuit. The underwriter defendants filed a cross-appeal in each
of the cases wherein the issuers moved for dismissal (including the appeal relating to the Sonus IPO). Briefing before the United States Court of Appeals for the Ninth Circuit was complete as of
November 17, 2009. The Company does not currently expect that this claim will have a material impact on its financial position or results of operations.

Other

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

23

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Table of Contents

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

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

Overview

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

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

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

24

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Table of Contents

We
reported income from operations of approximately $44,000 and $2.3 million in the three months ended June 30, 2010 and 2009, respectively, and losses from operations of
$0.5 million and $15.5 million in the six months ended June 30, 2010 and 2009, respectively.

We
reported net income of $0.3 million and $0.2 million in the three and six months ended June 30, 2010, respectively. We reported net income of $4.4 million
in the three months ended June 30, 2009 and a net loss of $11.8 million in the six months ended June 30, 2009.

Our
revenue decreased slightly, by $0.4 million, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. However, our revenue
increased $21.0 million in the six months ended June 30, 2010 compared to the six months ended June 30, 2009.

Despite
our virtually flat revenue in the three months ended June 30, 2010 compared to the three months ended June 30, 2009, our gross profit decreased $1.8 million,
to $38.5 million, primarily the result of fixed and third party costs related to service revenue. Our gross profit was $76.7 million in the six months ended June 30, 2010, an
increase of $13.2 million compared to the six months ended June 30, 2009, which is primarily attributable to our ability to leverage our higher service revenue in the current year
against our fixed service cost base, partially offset by higher third party service costs, and customer and product mix related to product revenue.

Operating
expenses were $38.5 million in the three months ended June 30, 2010, compared to $38.0 million in the three months ended June 30, 2009. Higher
general and administrative expenses in the three months ended June 30, 2010 were partially offset by lower research and development expenses. The increase in general and administrative expenses
is primarily attributable to higher personnel-related costs and depreciation. Lower research and development expenses primarily reflect lower personnel-related costs. Our personnel-related costs, with
the exception of sales commissions which are a function of our revenue levels, have been reduced primarily as a result of our fiscal 2009 and 2008 headcount reduction restructuring initiatives (the
"restructuring initiatives"). As a result of the restructuring initiatives, we reduced our total headcount by approximately 240 employees, or approximately 25% of our total worldwide workforce.
However, while we have eliminated jobs in some areas of the business, we continue to hire for positions in certain geographies, such as for our development center in India, to support our business
plans.

On
May 20, 2010, we announced that Richard N. Nottenburg ("Dr. Nottenburg") plans to step down as President and Chief Executive Officer and a director of the Company by the
end of March 2011. Since
this announcement, we have retained a firm to help us identify a qualified successor and the search is actively underway.

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:



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

Results of Operations

Three and Six Months Ended June 30, 2010 and 2009

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

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

2010

2009

$

%Product

$
36,796

$
36,320

$
476


1.3
%Service


24,385


25,287


(902
)

-3.6
%Total revenue

$
61,181

$
61,607

$
(426
)

-0.7
%


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Increase from
prior yearSix months ended June 30,

2010

2009

$

%Product

$
73,074

$
55,723

$
17,351


31.1
%Service


50,515


46,896


3,619


7.7
%Total revenue

$
123,589

$
102,619

$
20,970


20.4
%


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

The
increase in product revenue in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 is attributable to an increase in revenue from
AT&T Inc. ("AT&T") of $2.5 million, partially offset by a $2.0 million reduction in revenue from other customers.

The
increase in product revenue in the six months ended June 30, 2010 compared to the six months ended June 30, 2009 resulted from $5.6 million of additional revenue
from AT&T and $11.8 million of higher revenue from other customers. For the six months ended June 30, 2010, we recognized approximately $16 million of product revenue from eight
new customers. This compares to approximately $7 million of revenue from five new customers in the six months ended June 30, 2009.

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

Service
revenue is primarily comprised of hardware and software maintenance and support ("maintenance revenue") and network design, installation and other professional services
("professional services revenue"). The decrease in service revenue in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 is attributable to
$2.4 million of lower professional services revenue, partially offset by $1.5 million of higher maintenance revenue, of which $1.2 million was from AT&T.

The
increase in service revenue in the six months ended June 30, 2010 compared to the six months ended June 30, 2009 is attributable to $3.2 million of higher
maintenance revenue and $0.4 million of higher professional services revenue.

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

AT&T
contributed approximately 14% of our revenue in both the three and six month periods ended June 30, 2010. Global Crossing contributed approximately 14% of our revenue in the
three

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months
ended June 30, 2009. There were no other customers that contributed 10% or more of our revenue in the three or six months ended June 30, 2010 or 2009.

International
revenue was approximately 32% and 22% of our revenue in the three months ended June 30, 2010 and 2009, respectively, and 37% and 25% of our revenue in the six months
ended June 30, 2010 and 2009, respectively. Due to the uneven ordering patterns of customers and the timing of project completions, we expect that the domestic and international components as a
percentage of our revenue will fluctuate from quarter to quarter and year to year.

Our
deferred product revenue was $45.3 million and $47.7 million at June 30, 2010 and December 31, 2009, respectively, and our deferred service revenue was
$43.5 million and $52.3 million at June 30, 2010 and December 31, 2009, respectively. Our deferred revenue balance may fluctuate as a result of the timing of revenue
recognition, customer payments, maintenance contract renewals, contractual billing rights and maintenance revenue deferrals included in multiple element arrangements.

Cost of Revenue/Gross Profit.Our cost of revenue consists primarily of amounts paid to third-party manufacturers for purchased
materials and
services, royalties, manufacturing and professional services personnel and related costs and inventory obsolescence. Our cost of revenue and gross profit as a percentage of revenue ("gross margin")
for the three and six months ended June 30, 2010 and 2009 were as follows (in thousands, except percentages):

Increase from
prior yearThree months ended June 30,

2010

2009

$

%Cost of revenueProduct

$
10,826

$
10,747

$
79


0.7
%Service


11,842


10,568


1,274


12.1
%Total cost of revenue

$
22,668

$
21,315

$
1,353


6.3
%Gross marginProduct


70.6
%

70.4
%Service


51.4
%

58.2
%Total gross margin


62.9
%

65.4
%




Increase from
prior yearSix months ended June 30,

2010

2009

$

%Cost of revenueProduct

$
23,127

$
16,881

$
6,246


37.0
%Service


23,771


22,231


1,540


6.9
%Total cost of revenue

$
46,898

$
39,112

$
7,786


19.9
%Gross marginProduct


68.4
%

69.7
%Service


52.9
%

52.6
%Total gross margin


62.1
%

61.9
%


The
slight increase in product gross margin in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 was primarily due to changes in product
and customer mix, which increased our product gross margin by approximately one percentage point, virtually offset by higher manufacturing-related costs. The decrease in product gross margin in the
six months ended June 30, 2010 compared to the six months ended June 30, 2009 was primarily due to product and

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customer
mix, which decreased our product gross margin by approximately two percentage points, partially offset by lower manufacturing-related costs.

The
decrease in service gross margin in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 is primarily attributable to increases in
third party costs, which reduced our service gross margin by approximately four percentage points, and higher fixed costs, which reduced our service gross margin by approximately two percentage
points. Our higher fixed cost base is primarily related to the implementation of our new Company-wide employee bonus program in fiscal 2010. The increase in service gross margin in the six
months ended June 30, 2010 compared to the six months ended June 30, 2009 is primarily attributable to our ability to leverage our higher service revenue against our fixed cost base,
which increased our service gross margin by approximately one percentage point, partially offset by higher third party costs.

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

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

Research and Development Expenses.Research and development expenses consist primarily of salaries and
related personnel expenses and prototype costs related to the design, development, testing and enhancement of our products.

Research
and development expenses for the three and six months ended June 30, 2010 and 2009 were as follows (in thousands, except percentages):

Decrease from
prior year2010

2009

$

%Three months ended June 30,

$
15,106

$
15,501

$
(395
)

-2.5
%Six months ended June 30,

$
30,046

$
31,854

$
(1,808
)

-5.7
%


The
decrease in both the three and six months ended June 30, 2010 compared to the same prior year periods primarily reflects lower employee-related costs, including salary and
related costs as a result of our 2009 and 2008 restructuring initiatives. As a result of these initiatives, we reduced our worldwide research and development headcount by approximately 140 people
through the third quarter of 2009. The savings from these headcount reductions were partially offset by an increase of approximately 100 employees at our development center in India compared to such
number of employees at June 30, 2009. These changes in headcount resulted in decreases in employee-related costs of $1.7 million, including $0.4 million of lower stock-based
compensation expense, in the three months ended June 30, 2010 and $4.2 million, including $0.6 million of lower stock-based compensation expense, in the six months ended
June 30, 2010 compared to the same prior year periods. These reductions were partially offset by increased expense for product development for both our new and existing product offerings and
related activities totaling $1.4 million in the three months ended June 30, 2010 and $2.4 million in the six months ended June 30, 2010. Some aspects of our research and
development efforts require significant short-term expenditures, the timing of which can cause significant variability in our expenses. We believe that rapid technological innovation is
critical to our long-term success, and we are tailoring our investments to meet the requirements of our customers and market. We believe that our research and development expenses for
fiscal 2010 will increase from fiscal 2009 levels due to our increased focus on new product development, partially offset by lower development costs as a result of the recent migration of many of our
research and development activities to our development center in India.

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Sales and Marketing Expenses.Sales and marketing expenses consist primarily of salaries and related personnel costs,
commissions, travel and
entertainment expenses, promotions, customer evaluations inventory and other marketing and sales support expenses. Sales and marketing expenses for the three and six months ended June 30, 2010
and 2009 were as follows (in thousands, except percentages):

Increase from
prior year2010

2009

$

%Three months ended June 30,

$
12,392

$
12,344

$
48


0.4
%Six months ended June 30,

$
25,986

$
24,491

$
1,495


6.1
%


The
slight increase in sales and marketing expense in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 is primarily attributable to
higher sales commissions, travel and related expenses aggregating $0.6 million, including expenses related to our entry into new geographic markets, and $0.4 million of higher expense
related to increased new market evaluation equipment activity, offset primarily by $0.8 million of lower stock-based compensation expense and $0.2 million of lower depreciation expense.

The
increase in the six months ended June 30, 2010 compared to the six months ended June 30, 2009 is primarily attributable to $0.8 million of higher
employee-related expense, $0.6 million of higher expense related to increased new market evaluation equipment activity and $0.6 million of higher professional fees. These increases were
partially offset by $0.4 million of reductions in marketing promotional event expenses. The increase in employee-related expense includes $1.4 million of higher sales commission expense
resulting from higher revenue and $0.3 million of higher travel expense primarily related to our entry into new geographic markets. These employee-related expenses were partially offset by
$1.1 million of lower stock-based compensation expense.

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

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

Increase from
prior year2010

2009

$

%Three months ended June 30,

$
10,971

$
10,186

$
785


7.7
%Six months ended June 30,

$
21,115

$
20,681

$
434


2.1
%


The
increase in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 is primarily attributable to $1.5 million of higher
employee-related expense, $0.8 of higher non-income tax related expense and $0.4 million of higher depreciation expense. These increases were partially offset by lower expenses,
including $1.2 million of lower legal-related and professional fees, $0.3 million of lower facilities-related expense and $0.2 million of lower foreign currency translation
expense. The increase in employee-related expense includes $0.8 million of additional stock-based compensation expense, including $0.5 million attributable to the provisions of a letter
agreement we entered into on May 18, 2010 (the "Retention Agreement") with Dr. Nottenburg, and $0.7 million in additional bonus expense related to both the implementation of our
new Company-wide employee bonus program in fiscal 2010 and the provisions of Dr. Nottenburg's Retention Agreement. We expect to record an aggregate of $1.9 million of
stock-based compensation expense through March 31, 2011

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related
to shares of common stock issued to Dr. Nottenburg under the Retention Agreement. The increase in depreciation expense primarily relates to our investments in infrastructure technology
and our research and development facility in India.

The
increase in the six months ended June 30, 2010 compared to the six months ended June 30, 2009 is primarily attributable to $1.9 million of higher
employee-related expense and $0.5 million of higher depreciation expense. These increases were partially offset by lower expenses, primarily comprised of $1.2 million of lower
legal-related and professional fees, $0.3 million of lower bad debt expense and $0.3 million of lower foreign currency translation expense. The increase in employee-related expense
includes $0.9 million of bonus expense related to both the implementation of our new Company-wide employee bonus program in fiscal 2010 and the provisions of Dr. Nottenburg's
Retention Agreement, as well as $0.8 million of additional stock-based compensation expense, primarily attributable to the provisions of Dr. Nottenburg's Retention Agreement. The
increase in depreciation expense primarily relates to our investments in infrastructure technology and our research and development facility in India.

We
believe that our general and administrative expenses in fiscal 2010 will be consistent with fiscal 2009 levels, the net result of lower expected professional fees and
personnel-related expenses, offset primarily by expense related to the provisions of Dr. Nottenburg's Retention Agreement, in the remainder of the fiscal year.

Restructuring.In the six months ended June 30, 2009, we recorded restructuring expenses aggregating $2.0 million
related to two
restructuring initiatives implemented as part of our efforts to right-size the business to align with market opportunities while managing costs to position the Company for profitable
growth. Of this amount, $0.9 million was recorded for severance and related expenses for our January 9, 2009 restructuring initiative, which reduced our workforce by approximately 40
people, or 4% of employees worldwide, and $1.1 million was recorded for severance and related expenses for our March 10, 2009 restructuring initiative, which further reduced our
workforce by approximately 60 people, or 6% of employees worldwide. We did not record any restructuring expense in either the three or six months ended June 30, 2010 or in the three months
ended June 30, 2009.

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

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

2010

2009

$

%Interest income

$
466

$
1,077

$
(611
)

-56.7
%Interest expense


(30
)

8


38


475.0
%Interest income, net

$
436

$
1,085

$
(649
)

-59.8
%




Decrease from
prior yearSix months ended June 30,

2010

2009

$

%Interest income

$
981

$
2,726

$
(1,745
)

-64.0
%Interest expense


(43
)

(71
)

(28
)

-39.4
%Interest income, net

$
938

$
2,655

$
(1,717
)

-64.7
%


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

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Income Taxes.Our provision for income taxes was $0.3 million for the six months ended June 30, 2010 and our income
tax benefit was
$1.0 million for the six months ended June 30, 2009. These amounts reflect our estimates of the effective rates expected to be applicable for the respective full fiscal years, adjusted
for any discrete events, which are recorded in the period that they occur. These estimates are reevaluated each quarter based on our estimated tax expense for the full fiscal year.

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

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

Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

At June 30, 2010, our cash, cash equivalents, marketable securities and investments totaled $419.7 million.

Our
operating activities provided $13.8 million and $12.4 million of cash in the six months ended June 30, 2010 and 2009, respectively.

Cash
provided by operating activities in the six months ended June 30, 2010 was primarily the result of higher accounts payable and lower accounts receivable, partially offset by
increases in inventory, both current and noncurrent, and decreases in deferred revenue and accrued expenses. Our accounts payable increase is primarily attributable to purchases of materials in the
latter part of the quarter for which payments are due to the vendors in the third quarter of 2010. The decrease in accounts receivable was mainly driven by our continued focus on cash collections. The
decrease in deferred revenue is primarily the result of the completion of projects for which the revenue had been deferred at December 31, 2009, partially offset by new orders in 2010 for which
revenue recognition criteria had not been met as of June 30, 2010. The decrease in accrued expenses is primarily attributable to payments for previously accrued royalty payments and lower taxes
payable. Our net income, adjusted for non-cash items such as depreciation, amortization and stock-based compensation, contributed $11.0 million to the cash provided by operating
activities.

Cash
provided by operating activities in the six months ended June 30, 2009 was the result of lower levels of accounts receivable and higher deferred revenue and accounts payable,
coupled with non-cash adjustments for stock-based compensation, depreciation and amortization. These amounts were partially offset by our net loss, lower accrued expenses and higher levels
of operating assets and inventory. The lower accounts receivable levels were primarily the result of focused collection efforts in the quarter as a result of the strong seasonal billings and shipments
in late fiscal 2008. The decrease in accrued expenses is primarily attributable to lower employee compensation and related costs, including reductions for the payment of bonuses to our executives and
employees under our bonus programs, the completion of an employee stock purchase under our Amended and Restated 2000 Employee Stock

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Purchase
Plan ("ESPP"), and lower taxes payable, accrued royalties and professional fees. The increase in operating assets is primarily attributable to higher deferred costs, including cost of goods,
royalties, commissions and third party installation costs, for which the related revenue has not yet been recognized.

Our
investing activities used $35.6 million of cash in the six months ended June 30, 2010, compared to $79.0 million of cash provided by investing activities in the
six months ended June 30, 2009. Our net investment in marketable securities in the six months ended June 30, 2010 was $29.3 million, compared to $91.8 million of net sales
and maturities of marketable securities and investments in the six months ended June 30, 2009. In addition, during the six months ended June 30, 2010, we used $4.3 million of cash
for purchases of property and equipment and $2.0 million to purchase intangible assets. In the six months ended June 30, 2009, we placed $9.5 million into escrow related to a
litigation settlement and used $3.4 million for purchases of property and equipment.

Our
financing activities provided $0.3 million of cash in the six months ended June 30, 2010, including $0.6 million of proceeds from the sale of common stock in
connection with our ESPP and $0.1 million from the exercise of stock options. These amounts were partially offset by $0.3 million used to pay withholding obligations related to the net
share settlement of restricted stock awards upon vesting and $0.1 million used for payments on our capital leases for office equipment. Our financing activities
provided $0.1 million of cash in the six months ended June 30, 2009, including $0.5 million of proceeds from the sale of common stock in connection with our ESPP, partially offset
by $0.3 million used to pay withholding obligations related to the net share settlement of restricted stock awards upon vesting and $0.1 million used for payments on our capital leases
for office equipment.

Based
on our current expectations, we believe our cash, cash equivalents, marketable securities and long-term investments will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least the next 12 months. It is difficult to predict future liquidity requirements with certainty. The rate at which we will consume
cash will be dependent on the cash needs of future operations, including changes in working capital, which will, in turn, be directly affected by the levels of demand for our products, the timing and
rate of expansion of our business, the resources we devote to developing our products and any litigation settlements. We anticipate devoting substantial capital resources to continue our research and
development efforts, to maintain our sales, support and marketing operations, to improve our controls environment and for other general corporate activities, as well as to vigorously defend against
existing and potential litigation. See Note 14 to our condensed consolidated financial statements for a description of legal contingencies.

Recent Accounting Pronouncements

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

In
October 2009, the FASB issued an update to the accounting guidance related to the separation criteria used to determine the unit of accounting for multiple-element arrangements. This
update removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an
arrangement involving multiple deliverables contains more than one unit of accounting, replaces references to "fair value" with "selling price" to distinguish from the fair value

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measurements
required under ASC 820, provides a hierarchy that entities must use to estimate the selling price, eliminates the use of the residual method for allocation and expands the ongoing
disclosure requirements. This guidance is effective for us beginning January 1, 2011, although early
adoption is permitted, and adoption can be applied prospectively or retrospectively. We are currently evaluating the effect that implementation of this update will have, if any, on our consolidated
financial position and results of operations upon adoption.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.    Controls and Procedures

Disclosure Controls and Procedures

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

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

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

PART IIOTHER INFORMATION

Item 1.    Legal Proceedings

We are a party to the legal proceedings described in Part I, Item 3, "Legal Proceedings" of our Annual Report on
Form 10-K for the year ended December 31, 2009 and Note 14 of this Quarterly Report on Form 10-Q. There were no material developments to these legal
proceedings in the three or six months ended June 30, 2010.

Item 1A.    Risk Factors

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

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

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

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

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

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

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 second quarter of fiscal 2010, which represent shares returned to satisfy tax withholding obligations:

Issuer Purchases of Equity Securities

Period

Total Number
of Shares
Purchased

Average
Price Paid
per Share

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

Approximate Dollar
Value of Shares That
May Yet be Purchased
Under the Plans or
ProgramsApril 1, 2010 to April 30, 2010











May 1, 2010 to May 31, 2010


474

$
2.48





June 1, 2010 to June 30, 2010


29,572

$
2.55





Total


30,046

$
2.55








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Item 6.    Exhibits

Exhibit Number

Description10.1
(a)
Retention Letter between Sonus Networks, Inc. and Dr. Richard N. Nottenburg dated May 18, 2010.10.2

Employment Agreement between Sonus Networks, Inc. and Jeffrey M. Snider dated May 29, 2009.10.3

Employment Agreement between Sonus Networks, Inc. and Kumar Vishwanathan dated July 7, 2009.10.4

Amendment to Employment Agreement between Sonus Networks, Inc. and Kumar Vishwanathan dated July 29, 2009.31.1

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: August 3, 2010

SONUS NETWORKS, INC.By:

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


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EXHIBIT INDEX

Exhibit Number

Description10.1
(a)
Retention Letter between Sonus Networks, Inc. and Dr. Richard N. Nottenburg dated May 18, 2010.10.2

Employment Agreement between Sonus Networks, Inc. and Jeffrey M. Snider dated May 29, 2009.10.3

Employment Agreement between Sonus Networks, Inc. and Kumar Vishwanathan dated July 7, 2009.10.4

Amendment to Employment Agreement between Sonus Networks, Inc. and Kumar Vishwanathan dated July 29, 2010.31.1

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

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

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

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


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