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



FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2009ORo

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


Commission File Number 001-34115

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

DELAWARE(State or other jurisdiction
of incorporation or organization)

04-3387074(I.R.S. employer
identification no.)7 Technology Park Drive, Westford, Massachusetts 01886(Address of principal executive offices, including zip code)


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

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

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

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

Large accelerated filer ý

Accelerated filer o

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

Smaller reporting company o


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

As of October 29, 2009, there were 274,324,004 shares of the registrant's common stock, $0.001 par value, outstanding.



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SONUS NETWORKS, INC.  FORM 10-Q  QUARTER ENDED SEPTEMBER 30, 2009

TABLE OF CONTENTS



PagePART I FINANCIAL INFORMATIONItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008 (unaudited)

1Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008
(unaudited)

2Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (unaudited)

3Notes to Condensed Consolidated Financial Statements (unaudited)

4Item 2.

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

24Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32Item 4.

Controls and Procedures

32PART II OTHER INFORMATIONItem 1.

Legal Proceedings

33Item 1A.

Risk Factors

33Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33Item 6.

Exhibits

34Signatures

35Exhibit Index

36


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PART I FINANCIAL INFORMATION

Item 1.    Financial Statements



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

September 30,
2009

December 31,
2008AssetsCurrent assets:Cash and cash equivalents

$
178,905

$
122,207Marketable securities


158,771


180,786Accounts receivable, net of allowance for doubtful accounts of $558 and $1,028 at September 30, 2009 and December 31, 2008,
respectively


34,054


75,788Inventory


22,183


22,553Deferred income taxes


223


111Other current assets


16,379


14,937Total current assets


410,515


416,382Property and equipment, net


15,451


17,852Intangible assets, net


379


568Goodwill


5,046


5,025Investments


56,521


84,965Deferred income taxes


1,756


1,611Other assets


18,969


9,182$
508,637

$
535,585Liabilities and stockholders' equityCurrent liabilities:Accounts payable

$
6,300

$
9,200Accrued expenses


15,718


28,231Accrued litigation settlements





9,600Current portion of deferred revenue


52,888


40,962Current portion of long-term liabilities


977


1,301Total current liabilities


75,883


89,294Deferred revenue


30,545


37,991Long-term liabilities


1,214


1,865Total liabilities


107,642


129,150Commitments and contingencies (Note 16)Stockholders' equity:Preferred stock, $0.01 par value; 5,000,000 shares authorized, none issued and outstanding





Common stock, $0.001 par value; 600,000,000 shares authorized; 276,617,928 and 275,133,894 shares issued; 274,321,018 and 272,836,984 shares outstanding at
September 30, 2009 and December 31, 2008, respectively


277


275Additional paid-in capital


1,283,570


1,272,952Accumulated deficit


(889,119
)

(873,878
)Accumulated other comprehensive income


6,534


7,353Treasury stock, at cost; 2,296,910 common shares


(267
)

(267
)Total stockholders' equity


400,995


406,435$
508,637

$
535,585


See notes to the condensed consolidated financial statements.

1

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

Three months ended
September 30,

Nine months ended
September 30,2009

2008

2009

2008Revenue:Product

$
33,544

$
36,710

$
89,267

$
149,745Service


22,621


25,474


69,517


73,856Total revenue


56,165


62,184


158,784


223,601Cost of revenue:Product


10,160


11,643


27,041


46,643Service


10,755


11,524


32,986


33,919Total cost of revenue


20,915


23,167


60,027


80,562Gross profit


35,250


39,017


98,757


143,039Operating expenses:Research and development


14,141


18,240


45,995


57,101Sales and marketing


11,527


17,520


36,018


55,412General and administrative


11,578


21,631


32,259


44,660Litigation settlements





19,100





19,100Restructuring


1,533





3,510


Total operating expenses


38,779


76,491


117,782


176,273Loss from operations


(3,529
)

(37,474
)

(19,025
)

(33,234
)Interest expense


(23
)

(204
)

(94
)

(257
)Interest income


787


2,897


3,513


10,097Other income, net


12


2


24


387Loss from continuing operations before income taxes


(2,753
)

(34,779
)

(15,582
)

(23,007
)Income tax (provision) benefit


(644
)

14,096


341


6,365Loss from continuing operations


(3,397
)

(20,683
)

(15,241
)

(16,642
)Loss from discontinued operations, net of tax





(563
)




(4,308
)Net loss

$
(3,397
)
$
(21,246
)
$
(15,241
)
$
(20,950
)Loss per shareBasic:Continuing operations

$
(0.01
)
$
(0.08
)
$
(0.06
)
$
(0.06
)Discontinued operations











(0.02
)$
(0.01
)
$
(0.08
)
$
(0.06
)
$
(0.08
)Diluted:Continuing operations

$
(0.01
)
$
(0.08
)
$
(0.06
)
$
(0.06
)Discontinued operations











(0.02
)$
(0.01
)
$
(0.08
)
$
(0.06
)
$
(0.08
)Shares used to compute loss per shareBasic


273,907


271,619


273,518


271,121Diluted


273,907


271,619


273,518


271,121


See notes to the condensed consolidated financial statements.

2

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

Nine months ended
September 30,2009

2008Cash flows from operating activities:Net loss

$
(15,241
)
$
(20,950
)Adjustments to reconcile net loss to cash flows provided by (used in) operating activities:Depreciation and amortization of property and equipment


7,497


9,273Amortization of intangible assets


184


852Stock-based compensation


9,889


19,544Impairment of intangible assets and goodwill





3,630Loss on disposal of property and equipment


173


157Deferred income taxes


(137
)

(6,896
)Changes in operating assets and liabilities:Accounts receivable


41,600


42,631Inventory


(4,217
)

(7,828
)Insurance receivablelitigation settlement





15,328Other operating assets


(7,516
)

3,189Accounts payable


(3,212
)

(4,107
)Accrued expenses


(12,999
)

(16,016
)Accrued litigation settlements


(9,600
)

(30,400
)Deferred revenue


4,240


(11,350
)Net cash provided by (used in) operating activities


10,661


(2,943
)Cash flows from investing activities:Purchases of property and equipment


(4,813
)

(6,968
)Business acquisition, net of cash acquired





(4,909
)Purchases of marketable securities


(179,416
)

(280,717
)Sale/maturities of marketable securities


228,979


262,040Decrease in litigation settlement escrow





25,000Net cash provided by (used in) investing activities


44,750


(5,554
)Cash flows from financing activities:Sale of common stock in connection with employee stock purchase plan


1,119


3,756Proceeds from exercise of stock options


32


425Payment of tax withholding obligations related to net share settlements of restricted stock awards


(531
)

(1,236
)Principal payments of capital lease obligations


(189
)

(166
)Net cash provided by financing activities


431


2,779Effect of exchange rate changes on cash and cash equivalents


856


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


56,698


(5,801
)Cash and cash equivalents, beginning of period


122,207


118,933Cash and cash equivalents, end of period

$
178,905

$
113,132Supplemental disclosure of cash flow information:Interest paid

$
94

$
257Income taxes paid

$
753

$
1,520Income tax refunds received

$
545

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

$
301

$
976Property and equipment acquired under capital lease

$
151

$
1,083


See notes to the condensed consolidated financial statements.

3

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SONUS NETWORKS, INC.        Notes to Condensed Consolidated Financial Statements        (Unaudited)

(1) BASIS OF PRESENTATION

Business

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Sonus pursuant to the rules and
regulations of the United States Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by
accounting principles generally accepted in the United States of America ("U.S. GAAP") for complete financial statements and should be read in conjunction with the audited consolidated
financial statements included in Sonus' Annual Report on Form 10-K for the year ended December 31, 2008.

In
the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements, and include
all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods
presented are not necessarily indicative of the results expected for the full fiscal year. The Company considers events or transactions that occur after the balance sheet date but before the financial
statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through
November 5, 2009, the date of issuance of these financial statements.

In
the third quarter of 2008, the Company committed to a plan to sell its Zynetix Limited ("Zynetix") subsidiary, which the Company had acquired on April 13, 2007. The Company
completed the sale of Zynetix on November 26, 2008. The results of operations of Zynetix have been classified within discontinued operations for the three and nine months ended
September 30, 2008.

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.

Immaterial Restatement

During the second quarter of 2009, the Company identified an error in the calculation of stock-based compensation expense for prior
periods. The Company's third party equity accounting software calculated stock-based compensation expense after consideration of the impact of estimated forfeitures.

4

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

However,
the amount of stock-based compensation expense recognized at any date did not equal at least the grant date fair value of the vested portion of each award as of that date. Because the
Company's stock option awards generally vest on a monthly basis after the first anniversary date of the award, the Company under-recognized stock-based compensation expense in certain periods. This
error changes the timing of stock-based compensation expense recognition, but does not change the total stock-based compensation expense. As stock-based compensation expense is a non cash item, this
error did not impact net cash provided by (used in) operations in any period. This error resulted in the understatement of stock-based compensation expense, with corresponding understatement of
additional paid-in capital, in the amounts of $2.5 million and $0.7 million for the years ended December 31, 2008 and 2007, respectively. The stock-based compensation
related to deductible awards would also impact the tax provision prior to recognition of a valuation allowance on deferred tax assets in the fourth quarter of 2008.

The
Company believes the correction of this error is not material to its previously issued historical consolidated financial statements; therefore, the Company plans to restate its 2007
and 2008 consolidated financial statements when issuing its 2009 consolidated financial statements in Form 10-K. The Company has restated the accompanying Condensed Consolidated
Balance Sheet as of December 31, 2008, the Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2008 and the Condensed Consolidated
Statement of Cash Flows for the nine month period ended September 30, 2008, all appearing herein, from amounts previously reported.

The
effects of this restatement on the unaudited Condensed Consolidated Balance Sheet as of December 31, 2008 are as follows (in thousands):

As previously
reported

Adjustment

As restatedStockholders' equity:Preferred stock

$


$


$
Common stock


275





275Additional paid-in capital


1,269,790


3,162


1,272,952Accumulated deficit


(870,716
)

(3,162
)

(873,878
)Accumulated other comprehensive income


7,353





7,353Treasury stock


(267
)




(267
)Total stockholders' equity

$
406,435

$


$
406,435


5

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

The
effects of this restatement on the unaudited Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2008 are as follows (in
thousands, except per share data):

Three months ended
September 30, 2008

Nine months ended
September 30, 2008As previously
reported*

Adjustment

As restated

As previously
reported*

Adjustment

As restatedRevenue:Product

$
36,710

$


$
36,710

$
149,745

$


$
149,745Service


25,474





25,474


73,856





73,856Total revenue


62,184





62,184


223,601





223,601Cost of revenue:Product


11,600


43


11,643


46,563


80


46,643Service


11,396


128


11,524


33,681


238


33,919Total cost of revenue


22,996


171


23,167


80,244


318


80,562Gross profit


39,188


(171
)

39,017


143,357


(318
)

143,039Operating expenses:Research and development


17,885


355


18,240


56,443


658


57,101Sales and marketing


17,169


351


17,520


54,762


650


55,412General and administrative


21,507


124


21,631


44,430


230


44,660Litigation settlements


19,100





19,100


19,100





19,100Total operating expenses


75,661


830


76,491


174,735


1,538


176,273Loss from operations


(36,473
)

(1,001
)

(37,474
)

(31,378
)

(1,856
)

(33,234
)Interest expense


(204
)




(204
)

(257
)




(257
)Interest income


2,897





2,897


10,097





10,097Other income, net


2





2


387





387Loss from continuing operations before income taxes


(33,778
)

(1,001
)

(34,779
)

(21,151
)

(1,856
)

(23,007
)Income tax (provision) benefit


14,759


(663
)

14,096


6,569


(204
)

6,365Loss from continuing operations


(19,019
)

(1,664
)

(20,683
)

(14,582
)

(2,060
)

(16,642
)Loss from discontinued operations, net of tax


(563
)




(563
)

(4,308
)




(4,308
)Net loss

$
(19,582
)
$
(1,664
)
$
(21,246
)
$
(18,890
)
$
(2,060
)
$
(20,950
)Loss per share:Basic:Continuing operations

$
(0.07
)
$
(0.01
)
$
(0.08
)
$
(0.05
)
$
(0.01
)
$
(0.06
)Discontinued operations











(0.02
)




(0.02
)$
(0.07
)
$
(0.01
)
$
(0.08
)
$
(0.07
)
$
(0.01
)
$
(0.08
)Diluted:Continuing operations

$
(0.07
)
$
(0.01
)
$
(0.08
)
$
(0.05
)
$
(0.01
)
$
(0.06
)Discontinued operations











(0.02
)




(0.02
)$
(0.07
)
$
(0.01
)
$
(0.08
)
$
(0.07
)
$
(0.01
)
$
(0.08
)


*As
adjusted to reflect the classification of the results of operations of Zynetix within discontinued operations.


6

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

This error resulted in changes to net loss, stock-based compensation and deferred income taxes within
cash flows from operating activities; however, this error did not result in any changes to net cash flows from operating, investing or financing activities.

Use of Estimates and Judgments

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

Principles of Consolidation

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

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.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board ("FASB") issued its final Statement of Financial Accounting Standards ("SFAS")
No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement
No. 162("SFAS 168"). SFAS 168 made the FASB Accounting Standards Codification (the "Codification") the single source of U.S. GAAP used by
nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of
authoritative accounting guidance for SEC registrants. The Codification is meant to simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into
approximately 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The Codification supersedes all existing non-SEC
accounting and reporting standards and was effective for the Company beginning July 1, 2009.

7

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

Following
SFAS 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards
Updates ("ASU"). The FASB will not consider ASUs as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance and
provide the bases for conclusions on the change(s) in the Codification.

In
October 2009, an update was made toRevenue RecognitionMultiple Deliverable Revenue Arrangements. This update removes the
objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting, replaces references to "fair value" with "selling price" to distinguish from the fair value measurements required under the Fair Value Measurements and
Disclosuresguidance, 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 update is effective for the Company beginning January 1, 2011, although early adoption is permitted, and
adoption can be applied prospectively or retrospectively. Management is currently evaluating the effect that implementation of this update will have, if any, on the Company's consolidated financial
position and results of operations upon adoption.

In
October 2009, an update was made 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 is effective for the Company beginning January 1, 2011, although early adoption is permitted, and adoption can be applied prospectively or retrospectively.
Management is currently evaluating the effect that implementation of this update will have, if any, on the Company's consolidated financial position and results of operations upon adoption.

(2) REVENUE RECOGNITION

Sonus' 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 Sonus has future obligations, including a requirement to deliver additional elements which
are essential to the functionality of the delivered elements or for which vendor-specific objective evidence of fair value ("VSOE") does not exist or when customer acceptance is required, Sonus defers
revenue recognition and related costs until those obligations are satisfied. 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

8

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(2) REVENUE RECOGNITION (Continued)

recognized
as, product revenue. VSOE is determined based upon the price charged when the same element is sold separately or established by management having the relevant pricing authority. If Sonus
cannot establish VSOE for each undelivered element, including specified upgrades, it defers revenue on the entire arrangement until VSOE for all undelivered elements is known or all elements are
delivered and all other revenue recognition criteria are met.

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

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

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

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

Sonus
defers recognition of incremental direct costs, such as cost of goods, royalties, commissions and third-party installation costs, until recognition of the related revenue. Such
costs are classified as current assets if the deferred revenue is initially classified as current and noncurrent assets if the deferred revenue is initially classified as noncurrent.

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

Beginning
in the fourth quarter of fiscal 2008, the Company did not have sufficient evidence of VSOE on maintenance services for one of its largest customers. Therefore, all revenue
related to multiple element arrangements for this customer is recognized ratably over the arrangement's remaining maintenance period through the end of 2010. Revenue recognition on multiple element
arrangements with this customer will begin when the only undelivered element of the arrangement (that does not have VSOE) is maintenance. At September 30, 2009 and December 31, 2008,
Other assets included $3.7 million and $0.4 million, respectively, of deferred costs related to arrangements with this customer in which both the revenue and 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.

9

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(3) EARNINGS (LOSS) PER SHARE

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

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

Three months ended
September 30,

Nine months ended
September 30,2009

2008

2009

2008Weighted average shares outstandingbasic


273,907


271,619


273,518


271,121Potential dilutive common shares











Weighted average shares outstandingdiluted


273,907


271,619


273,518


271,121


Options
to purchase common stock and unvested shares of restricted stock aggregating approximately 32.4 million shares have not been included in the computation of diluted loss
per share for the three and nine months ended September 30, 2009 because their effect would have been antidilutive. Options to purchase common stock and unvested shares of restricted stock
aggregating approximately 41.8 million shares have not been included in the computation of diluted loss per share for the three and nine months ended September 30, 2008 because their
effect would have been antidilutive.

(4) COMPREHENSIVE LOSS

The Company's comprehensive loss for the three and nine months ended September 30, 2009 and 2008 is as follows (in thousands):

Three months ended
September 30,

Nine months ended
September 30,2009

2008

2009

2008Net loss

$
(3,397
)
$
(21,246
)
$
(15,241
)
$
(20,950
)Other comprehensive income (loss):Foreign currency translation adjustments


88


455


77


696Unrealized loss on transfer of held-to-maturity marketable debt securities to available-for-sale, net of tax











(33
)Unrealized loss on marketable debt and equity securities classified as available-for-sale, net of tax


(290
)

(740
)

(896
)

(441
)Comprehensive loss

$
(3,599
)
$
(21,531
)
$
(16,060
)
$
(20,728
)


10

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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

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

At
September 30, 2009 and December 31, 2008, the amortized cost, gross unrealized gains and losses and fair value of the Company's marketable debt and equity securities and
investments were comprised of the following (in thousands):

September 30, 2009Amortized
cost

Unrealized
gains

Unrealized
losses

Fair
valueCash equivalents

$
144,187

$


$
(5
)
$
144,182Marketable securitiesMunicipal obligations

$
1,455

$


$


$
1,455U.S. government agency notes


56,021


245





56,266Corporate debt securities


60,848


407


(56
)

61,199Commercial paper


21,555


12


(21
)

21,546Certificates of deposit


18,301


20


(16
)

18,305$
158,180

$
684

$
(93
)
$
158,771InvestmentsU.S. government agency notes

$
39,129

$
94

$
(34
)
$
39,189Corporate debt securities


17,371


31


(70
)

17,332$
56,500

$
125

$
(104
)
$
56,521




December 31, 2008Amortized
cost

Unrealized
gains

Unrealized
losses

Fair
valueCash equivalents

$
104,953

$
2

$


$
104,955Marketable securitiesEquity securities

$
45

$


$


$
45Municipal obligations


1,455





(9
)

1,446U.S. government agency notes


85,202


649





85,851Corporate debt securities


24,293


163


(40
)

24,416Commercial paper


68,834


194





69,028$
179,829

$
1,006

$
(49
)
$
180,786InvestmentsU.S. government agency notes

$
54,775

$
585

$


$
55,360Corporate debt securities


29,647


125


(167
)

29,605$
84,422

$
710

$
(167
)
$
84,965


11

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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
following table shows the fair value of the Company's financial assets that are measured at fair value at September 30, 2009 and December 31, 2008, comprised of the
Company's available-for-sale debt and equity securities, and are reported under the
captions Cash and cash equivalents, Marketable securities and Investments in the condensed consolidated balance sheets (in thousands):

Fair value measurements at
September 30, 2009 using:Total carrying
value at
September 30,
2009

Quoted prices
in active
markets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)Cash equivalents

$
144,182

$
135,183

$
8,999

$
Marketable securitiesMunicipal obligations

$
1,455

$


$
1,455

$
U.S. government agency notes


56,266





56,266


Corporate debt securities


61,199


61,199





Commercial paper


21,546





21,546


Certificates of deposit


18,305





18,305


$
158,771

$
61,199

$
97,572

$
InvestmentsU.S. government agency notes

$
39,189

$


$
39,189

$
Corporate debt securities


17,332


17,332





$
56,521

$
17,332

$
39,189

$





Fair value measurements at
December 31, 2008 using:Total carrying
value at
December 31,
2008

Quoted prices
in active
markets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)Cash equivalents

$
104,955

$
90,965

$
13,990

$
Marketable securitiesEquity securities

$
45

$
45

$


$
Municipal obligations


1,446





1,446


U.S. government agency notes


85,851





85,851


Corporate debt securities


24,416


24,416





Commercial paper


69,028





69,028


$
180,786

$
24,461

$
156,325

$
InvestmentsU.S. government agency notes

$
55,360

$


$
55,360

$
Corporate debt securities


29,605


29,605





$
84,965

$
29,605

$
55,360

$



12

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(6) INVENTORY

Inventory consists of the following (in thousands):

September 30,
2009

December 31,
2008On-hand final assemblies and finished goods inventory

$
16,340

$
13,100Deferred product costs


19,128


18,617Evaluation inventory


5,201


5,683Inventory, gross


40,669


37,400Evaluation reserve


(5,201
)

(5,683
)Excess and obsolescence reserve


(2,436
)

(2,877
)Inventory, net


33,032


28,840Less current portion


(22,183
)

(22,553
)Long-term portion (included in Other assets)

$
10,849

$
6,287


(7) INTANGIBLE ASSETS AND GOODWILL

The Company's intangible assets, which resulted from business acquisitions, consisted of the following at September 30, 2009 and December 31, 2008 (in thousands):

September 30, 2009

Useful life

Cost

Accumulated
amortization

Net
carrying valueIntellectual property

5 years

$
999

$
620

$
379Order backlog

1 year


277


277


$
1,276

$
897

$
379




December 31, 2008

Useful life

Cost

Accumulated
amortization

Net
carrying valueIntellectual property

5 years

$
999

$
504

$
495Order backlog

1 year


247


174


73$
1,246

$
678

$
568


The
Company amortizes its intangible assets over the estimated useful lives of the respective assets, which have a weighted average useful life of 4.2 years. Amortization expense
related to intangible assets was approximately $40,000 and $0.2 million, respectively, in the three and nine months ended September 30, 2009. Amortization expense related to intangible
assets was $0.3 million and $0.9 million, respectively, in the three and nine months ended September 30, 2008.

13

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(7) INTANGIBLE ASSETS AND GOODWILL (Continued)

Estimated
future amortization expense for intangible assets recorded by the Company at September 30, 2009 is as follows (in thousands):

Remainder of 2009

$
382010


1522011


1522012


37$
379


Goodwill
is recorded when the consideration for an acquisition exceeds the fair value of net tangible and identifiable intangible assets acquired. The change in the carrying amount of
goodwill during the nine months ended September 30, 2009 is as follows (in thousands):

Balance at January 1, 2009

$
5,025Foreign currency translation adjustment


21Balance at September 30, 2009

$
5,046


(8) ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

September 30,
2009

December 31,
2008Employee compensation and related costs

$
8,991

$
13,190Employee stock purchase plan


157


1,229Professional fees


1,941


2,422Royalties


684


1,809Income taxes payable


2,089


1,563Sales taxes payable


404


2,715Other taxes


109


902Restructuring


254


567Other


1,089


3,834$
15,718

$
28,231


(9) RESTRUCTURING ACCRUAL

In the nine months ended September 30, 2009, the Company recorded restructuring expenses aggregating $3.5 million related to three headcount reduction restructuring
initiatives implemented as part of the Company's efforts to right-size the business to align with market needs and opportunities while managing costs to position Sonus for profitable
growth. These headcount reduction restructuring initiatives occurred on August 12, 2009, March 9, 2009 and January 9, 2009. Of the $3.5 million recorded,
$1.5 million was recorded in the three months ended September 30, 2009 and $2.0 million

14

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(9) RESTRUCTURING ACCRUAL (Continued)

was
recorded in the three months ended March 31, 2009. The Company believes that actions related to these restructuring initiatives are complete as of September 30, 2009.

The
amount recorded in the three months ended September 30, 2009 represents severance and related expenses for the Company's August 12, 2009 initiative, which reduced the
Company's workforce by approximately 93 people, or 10% of its then-current employees worldwide.

In
the three months ended March 31, 2009, the Company recorded restructuring expenses aggregating $2.0 million related to two headcount reduction restructuring initiatives.
The Company recorded $0.9 million of severance and related expenses for its January 9, 2009 restructuring initiative, which reduced the Company's workforce by approximately 40 people, or
4% of the
then-current employees worldwide, and $1.1 million of severance and related expenses for its March 9, 2009 restructuring initiative, which further reduced the Company's
workforce by approximately 60 people, or 6% of the then-current employees worldwide.

The
Company expects the payments related to these initiatives to be completed in the first quarter of fiscal 2010.

The
activity related to these initiatives during the nine months ended September 30, 2009 is as follows (in thousands):

Balance
January 1,
2009

New
initiatives
charged to
expense

Charges
(reversals)
for changes
in estimate

Cash
payments

Foreign
exchange

Balance
September 30,
2009Severance and related costs

$
567

$
3,547

$
(37
)
$
(3,831
)
$
8

$
254


(10) STOCK-BASED COMPENSATION

The Company issues options to purchase its common stock and restricted shares of common stock pursuant to the 2007 Stock Incentive Plan (the "2007 Stock Plan"). Under the 2007 Stock
Plan, the Company may provide equity awards, including stock options and restricted stock, stock appreciation rights and restricted stock units to employees, officers, directors (including those
directors who are not employees or officers of the Company), consultants and advisors of the Company and its subsidiaries.

The
condensed consolidated statements of operations include stock-based compensation for the three and nine months ended September 30, 2009 and 2008 as follows (in thousands):

Three months
ended
September 30,

Nine months
ended
September 30,2009

2008

2009

2008Product cost of revenue

$
67

$
195

$
298

$
583Service cost of revenue


483


554


1,335


2,266Research and development


774


1,373


2,643


6,708Sales and marketing


885


987


3,419


4,168General and administrative


930


2,347


2,194


5,679$
3,139

$
5,456

$
9,889

$
19,404


15

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(10) STOCK-BASED COMPENSATION (Continued)

The
Company included $0.1 million and $0.2 million of stock-based compensation in inventory at September 30, 2009 and December 31, 2008,
respectively.

At
September 30, 2009, there was $22.4 million, net of expected forfeitures, of unrecognized stock-based compensation expense related to unvested stock option and
restricted stock awards, which is expected to be recognized over a weighted average period of approximately 2.5 years.

Valuation Assumptions

The grant-date fair values of options to purchase common stock granted in the three and nine months ended
September 30, 2009 and 2008, excluding the options granted to the Company's President and Chief Executive Officer ("Dr. Nottenburg"), were estimated using the Black-Scholes valuation
model with the following assumptions:

Three months
ended
September 30,

Nine months
ended
September 30,2009

2008

2009

2008Risk-free interest rate

2.47%

3.11%

1.76% - 2.47%

2.75% - 3.12%Expected dividend yield







Weighted average volatility

64.77%

66.78%

64.34%

70.58%Expected life (years)

4.5

4.5

4.5

4.5


The
grant date fair values of the options to purchase the Company's common stock granted to Dr. Nottenburg were estimated using the Black-Scholes valuation model with the
following assumptions:

June 16, 2008
Award

January 15, 2009
AwardRisk-free interest rate


3.84
%

2.0
%Expected dividend yield





Expected volatility


77.25
%

70.24
%Expected life (years)


6.0


6.0


Based
on the above assumptions, the weighted average fair values of stock options granted during the three and nine months ended September 30, 2009 were $1.13 and $0.96 per share,
respectively. The weighted average fair values of stock options granted during the three and nine months ended September 30, 2008 were $1.74 and $2.31 per share, respectively.

16

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(10) STOCK-BASED COMPENSATION (Continued)

Stock Option, Restricted Stock and Performance Stock Award Activity

The activity related to the Company's outstanding stock options during the nine months ended September 30, 2009 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, 2009


36,875,380

$
5.19Granted


1,721,500

$
1.73Exercised


(63,804
)
$
0.52Forfeited


(1,649,444
)
$
5.06Expired


(7,130,551
)
$
5.10Outstanding at September 30, 2009


29,753,081

$
5.03


4.98

$
1,094Vested or expected to vest at September 30, 2009


29,369,683

$
5.04


4.93

$
1,045Exercisable at September 30, 2009


23,324,567

$
5.22


4.03

$
287


The
total intrinsic values of stock options exercised during the three and nine months ended September 30, 2009 were approximately $70,000 and $88,000, respectively. The total
intrinsic values of stock options exercised during the three and nine months ended September 30, 2008 were approximately $16,000 and $155,000, respectively.

The
activity related to the Company's unvested restricted stock awards for the nine months ended September 30, 2009 is as follows:

Shares

Weighted
Average
Grant-Date
Fair ValueUnvested balance at January 1, 2009


3,539,161

$
4.40Granted*


310,000

$
1.86Vested


(890,048
)
$
4.70Forfeited


(294,834
)
$
5.52Unvested balance at September 30, 2009


2,664,279

$
3.69


*Excludes
500,000 shares issued to Dr. Nottenburg on January 15, 2009, which were included in 2008 activity, as this grant met the criteria for
an award on June 16, 2008.


17

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(10) STOCK-BASED COMPENSATION (Continued)




The
activity related to the Company's performance stock awards for the nine months ended September 30, 2009 is as follows:

Shares

Weighted
Average
Grant-Date
Fair ValueUnvested balance at January 1, 2009


500,000

$
4.35Granted




$
Vested




$
Forfeited




$
Unvested balance at September 30, 2009


500,000

$
4.35


The
Company did not record stock-based compensation expense in either the three or nine months ended September 30, 2009 related to performance-based stock awards, as the Company
does not currently believe it is probable that the performance conditions will be achieved.

Stock Option Exchange Offer

At the Company's 2009 Annual Meeting of Stockholders, held on June 19, 2009, the Company's stockholders approved an amendment to
the 2007 Stock Plan and a one-time voluntary stock option exchange program (the "Exchange Offer"). On September 8, 2009, the Company commenced the Exchange Offer, which allowed
employees to surrender eligible outstanding stock options with exercise prices equal to or greater than the highest intra-day trading price of the Company's common stock as reported on The
Nasdaq
Global Select Market during the previous 52 weeks in exchange for a lesser amount of restricted stock. The number of shares of restricted stock granted to each participant in the Exchange Offer
was determined according to exchange ratios based on a combination of exercise prices and remaining contractual terms of the surrendered stock options. Shares of restricted stock issued under the
Exchange Offer were completely unvested at the time they were granted and will become vested on the basis of the participant's continued employment with the Company or any of its subsidiaries over a
period of three years following the exchange date, with 331/3% of the shares vesting annually.

The
Exchange Offer expired on October 5, 2009. Pursuant to the Exchange Offer, a total of 185 eligible participants tendered and the Company accepted for cancellation options to
purchase an aggregate of 5,476,701 shares of the Company's common stock with exercise prices greater than or equal to $3.54. The eligible stock options that were accepted for cancellation represented
approximately 36% of the options eligible for participation in the Exchange Offer. In accordance with the terms and conditions of the Exchange Offer, on October 6, 2009, the Company issued
1,015,360 shares of restricted stock in exchange for the tendered stock options. The exchange ratios were designed to provide for the grant of replacement restricted stock that will have a fair value,
in the aggregate, that is no greater than the fair value of the stock options surrendered. The Company expects the amount of additional stock-based compensation expense, reflecting the excess of fair
value of shares of restricted stock issued over the fair value of stock options tendered to be immaterial to its consolidated results of operations.

18

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(11) MAJOR CUSTOMERS

The following customers each contributed at least 10% of the Company's revenue in at least one of the three and nine month periods ended September 30, 2009 and 2008:

Three months
ended
September 30,

Nine months
ended
September 30,Customer

2009

2008

2009

2008Softbank Telecom


17
%

*


*


*Global Crossing


12
%

*


10
%

*AT&T


*


36
%

*


37
%


*Represents
less than 10% of revenue.


At
September 30, 2009, one customer accounted for at least 10% of the Company's accounts receivable balance, representing 13% of total accounts receivable. At December 31,
2008, one customer accounted for at least 10% of the Company's accounts receivable balance, representing 11% of total accounts receivable. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral on accounts receivable. Sonus maintains an allowance for doubtful accounts and such losses have historically been within management's expectations.

(12) INCOME TAXES

The provision for income taxes reflects the Company's estimate of the effective rate expected to be applicable for the full fiscal year, adjusted for any discrete events, which are
recorded in the period that they occur. This estimate is re-evaluated 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 effective rate for the
year ended December 31, 2009 does not include any benefit for the Company's projected domestic losses, as the Company has continued to conclude that a valuation allowance is appropriate.

The
Company's benefit for the nine months ended September 30, 2009 includes a discrete benefit of $1.1 million realized during the second quarter related to the Company's
United Kingdom operations,
as the result of a settlement with the tax authorities, offset by a tax provision applicable to certain taxable jurisdictions. The Company's effective tax rates, including discrete items, were 2.2%
and 27.7% for the nine months ended September 30, 2009 and 2008, respectively. The income tax benefit of $6.4 million in the nine months ended September 30, 2008 primarily
reflects a benefit for federal, state and foreign taxes and differed from the statutory federal and state rates due to losses in certain foreign jurisdictions for which the Company was unable to
recognize a tax benefit, and the impact of permanent nondeductible items, such as stock-based compensation expense.

19

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(13) GEOGRAPHIC INFORMATION

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

Three months
ended
September 30,

Nine months
ended
September 30,2009

2008

2009

2008United States


66
%

81
%

72
%

82
%Europe, Middle East and Africa


9


12


13


9Japan


23


5


12


8Other Asia Pacific


1


1


1


*Other


1


1


2


1100
%

100
%

100
%

100
%


*Represents
less than 1% of revenue.


(14) LITIGATION SETTLEMENTS

2002 Securities Litigation

On January 6, 2006, a purchaser of the Company's common stock filed a complaint in the United States District Court for the
District of Massachusetts that is essentially identical to an amended Consolidated Complaint alleging that Sonus made false and misleading statements about its products and business previously filed
against the defendants and dismissed on
October 5, 2005. The Court appointed the Public Employees' Retirement System of Mississippi as lead plaintiff. The lead plaintiff filed an Amended Consolidated Class Action Complaint on
March 5, 2007 (the "2002 Securities Litigation"). On April 19, 2007, the defendants filed a motion to dismiss the 2002 Securities Litigation. On September 23, 2008 Sonus agreed to
settle the litigation and, on October 3, 2008, entered into a Memorandum of Understanding with the plaintiff setting forth the terms of the settlement. Pursuant to the settlement, subject to
confirmatory discovery and final court approval, the Company agreed to pay $9.5 million to the shareholder class in the case, as well as $0.1 million toward the cost of the class notice
process. In addition, the Company had accrued $0.4 million in incremental legal fees in connection with the confirmatory discovery and settlement approval process. On February 4, 2009,
the Court issued an order in which it certified a settlement class, preliminarily approved the settlement, and ordered that notice be sent to the settlement class. The hearing on final court approval
of the settlement was held on June 16, 2009, and the Court entered its Orders finally approving the settlement and the request of plaintiff's counsel for attorneys' fees on June 23,
2009. There were no class member objections to the settlement. On February 17, 2009, the Company placed $9.5 million into escrow related to this settlement. The Company does not have any
directors and officers insurance available for this claim. At December 31, 2008, the Company had accruals aggregating $10.0 million related to this settlement, of which
$9.6 million is reported as Accrued litigation settlements and $0.4 million is included as a component of Accrued expenses in the Condensed Consolidated Balance Sheet. On July 16,
2009, the escrow amount was released to the plaintiff.

20

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Table of Contents

SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(15) RELATED PARTIES

The Company's President and Chief Executive Officer serves on the Board of Directors of Comverse Technology ("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 (the "Commencement
Date").

Management
believes the contract terms and arrangements with these vendors are customary and in accordance with the Company's normal business practices. Costs incurred for purchases from
these companies, in the aggregate, were $0.7 million and $4.5 million for the three and nine months ended September 30, 2009, respectively. Costs incurred for purchases from these
companies, in the aggregate, were $2.0 million for the three months ended September 30, 2008, and $4.6 million for the period from Dr. Nottenburg's Commencement Date
through September 30, 2008. At September 30, 2009 and December 31, 2008, the Company had aggregate outstanding accounts payable balances of $0.4 million and
$0.5 million, respectively, to these companies.

(16) COMMITMENTS AND CONTINGENCIES

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 IPO on May 24, 2000 and
December 6, 2000. An amended complaint was filed in April 2002. The amended complaint alleges that the Company's registration statement contained false or misleading information or omitted to
state material facts concerning the alleged receipt of undisclosed compensation by the underwriters and the existence of undisclosed arrangements between the underwriters and certain purchasers to
make additional purchases in the after market. The claims against the Company are asserted under Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
Section 11 of the Securities Act of 1933 (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, together with the other issuers named as
defendants in these coordinated proceedings, filed a collective motion to dismiss the consolidated amended complaints on various legal grounds common to all or most of the issuer defendants. The
plaintiffs voluntarily dismissed the claims against many of the individual defendants, including the Company's officers named in the complaint. On February 19, 2003, the court granted a portion
of the motion to dismiss by dismissing the Section 10(b) claims against certain defendants including the Company, but denied the remainder of the motion as to the defendants. In June 2003, a
special committee of the Company's Board of Directors authorized Sonus to enter into a proposed settlement with the plaintiffs

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(16) COMMITMENTS AND CONTINGENCIES (Continued)

on
terms substantially consistent with the terms of a Memorandum of Understanding negotiated among representatives of the plaintiffs, the issuer defendants and the insurers for the issuer defendants.
In October 2004, the court certified the class in a case against certain defendants. On February 15, 2005, the court preliminarily approved the terms of the proposed settlement contingent on
modifications to the proposed settlement. On August 31, 2005, the court approved the terms of the proposed settlement, as modified. On April 24, 2006, the court held a hearing on a
motion to approve the final settlement and took the matter under advisement. On December 5, 2006, the Court of Appeals for the Second Circuit reversed the court's October 2004 order certifying
a class. On June 25, 2007, the court entered an order terminating the settlement. 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 plaintiffs, the
underwriter defendants, the issuer defendants and the insurers for the issuer defendants. On June 10, 2009, the 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 court issued an opinion granting plaintiffs' motion for final approval of the settlement, approval of the plan of distribution of the settlement fund and
certification of the settlement classes. On October 20, 2009, a petition for permission to appeal the court's October 5, 2009 certification of the settlement classes was filed in the
United States Court of Appeals for the Second Circuit. 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 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 fifty-four 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 the Honorable James L. Robart, as related cases. On July 25, 2008, the underwriter
and 29 of the issuer defendants (including Sonus) filed motions to dismiss the case. On September 8, 2008, the plaintiff filed oppositions to the motions, and the issuer and underwriters
defendants filed replies in support of their motions to dismiss on October 23, 2008. Oral argument on all motions to dismiss was held on January 16, 2009, at which time the Judge took
the pending motions to dismiss under advisement. The Judge stayed discovery pending his ruling on all motions to dismiss.

On
March 12, 2009, the 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 judge also granted the underwriters' motion to dismiss as to the claims

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(16) COMMITMENTS AND CONTINGENCIES (Continued)

arising
from the non-moving issuers' IPOs, finding plaintiff's claims were time-barred under the applicable statute of limitations.

On
March 31, 2009, the plaintiff-appellant appealed the judgment to the Court of Appeals for the Ninth Circuit, and thereafter filed an amended notice of appeal on
April 10, 2009 at the court's request. 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). The plaintiff's opening brief on appeal was filed on August 26, 2009, and the issuers' (including the Company) and the underwriters' responses were filed on October 2, 2009. The
plaintiff filed a reply brief on November 2, 2009, and underwriters may file a reply brief on their cross-appeal by November 17, 2009. The Company does not currently believe that
this claim will have a material impact on its financial position or results of operations.

2006 Stock Option Accounting Investigation

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

Other

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

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

This Quarterly Report on Form 10-Q and, in particular, this Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements which are subject to a number of risks and uncertainties. The words "could", "expects", "may", "anticipates", "believes", "intends", "estimates",
"plans", "envisions", "seeks", "will" and other similar language whether in the negative or affirmative are intended to identify forward-looking statements, although not all forward-looking statements
contain these identifying words. These forward-looking statements are based on our current expectations, assumptions, estimates, forecasts and projections about the operating environment, economies
and markets in which we operate, and we do not undertake an obligation to update our forward-looking statements to reflect new information, future events or circumstances. Our actual results could
differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, the factors set forth in our Annual Report on
Form 10-K for the year ended December 31, 2008 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 service providers to build converged voice over IP ("VoIP") networks. Our products are built on the same distributed,
IP-based principles embraced by the IP Multimedia Subsystem ("IMS") architecture, as defined by the Third Generation Partnership Program ("3GPP"). This IMS architecture is being accepted
by network operators globally as the common approach for building converged voice, data, wireline and wireless networks. 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 elegant evolution path to our customers.

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.

The
following Management's Discussion and Analysis of Financial Condition and Results of Operations has been adjusted to give effect to the immaterial restatement described in
Note 1 to the unaudited interim financial statements presented in Item 1 herein.

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We
incurred net losses in fiscal 2008 and 2007. Operating expenses, including litigation settlements, stock-based compensation and professional services such as legal fees were the main
factors in these reported net losses. We recorded $19.1 million and $24.7 million in fiscal 2008 and 2007, respectively, of operating expense for the settlements of litigation, net of
insurance recovery. Additionally, in fiscal 2008 we recorded $88.4 million of income tax expense for a valuation allowance against certain deferred tax assets. We continue to enhance our
expense management processes related to our operating expenses. We anticipate, however, that we may incur net losses in future quarters and years. In addition, the current macroeconomic environment
may impact our profitability, as we believe the global economic crisis may cause customers to delay or forego capacity and technology purchases.

We
reported losses from operations of $3.5 million and $37.5 million for the three months ended September 30, 2009 and 2008, respectively, and losses from operations
of $19.0 million and $33.2 million for the nine month periods then ended.

We
reported a net loss of $3.4 million for the three months ended September 30, 2009, compared to a net loss of $21.2 million for the three months ended
September 30, 2008. Our net loss for the nine months ended September 30, 2009 was $15.2 million, compared to a net loss of $20.9 million for the nine months ended
September 30, 2008. Our results for the three and nine months ended September 30, 2008 include $0.6 million and $4.3 million, respectively, of loss from discontinued
operations, net of tax. Our lower revenue in the current year was a significant factor in our reported net loss in the three and nine months ended September 30, 2009. This lower revenue
resulted in lower gross profit of $35.2 million in the three months ended September 30, 2009, compared to $39.0 million in the same prior year quarter, and $98.8 million in
the nine months ended September 30, 2009, compared to $143.0 million in the same prior year period. Operating expenses, including $1.5 million of restructuring expense, were
$38.8 million in the three months ended September 30, 2009, compared to $76.5 million, including $19.1 million of expense for litigation settlements, in the three months
ended September 30, 2008. Operating expenses were $117.8 million, including $3.5 million of restructuring expense, in the nine months ended September 30, 2009, compared to
$176.3 million, including $19.1 million of expense for litigation settlements, in the nine months ended September 30, 2008. The reductions in the three and nine months ended
September 30, 2009 are also attributable to lower personnel-related costs as a result of lower stock-based compensation and our recent headcount reduction restructuring initiatives. During 2009
we have implemented three headcount reduction restructuring initiatives, including one in the third quarter, and in December 2008 we had implemented one headcount reduction restructuring initiative as
well. As a result of these headcount reduction restructuring initiatives, we reduced our 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 select positions in some geographies to support our business plans. As of September 30, 2009, we have completed
the actions related to these restructuring initiatives.

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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Discontinued Operations

In the third quarter of 2008, we committed to a plan to sell our Zynetix Limited ("Zynetix") subsidiary. We completed the sale of
Zynetix on November 26, 2008. The results of operations of Zynetix have been reclassified as discontinued operations in our condensed consolidated statements of operations for the three and
nine months ended September 30, 2008.

Critical Accounting Policies and Estimates

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



For
a complete discussion of our critical accounting policies and estimates, refer to our Annual Report on Form 10-K for the fiscal year ended December 31,
2008, which was filed with the SEC on February 26, 2009. There were no significant changes to our critical accounting policies during either the three or nine months ended September 30,
2009.

Results of Operations

Three and Nine Months Ended September 30, 2009 and 2008

Revenue.Revenue for the three and nine months ended September 30, 2009 and 2008 was as follows (in thousands):

Three months ended
September 30,

Nine months ended
September 30,2009

2008

2009

2008Product

$
33,544

$
36,710

$
89,267

$
149,745Service


22,621


25,474


69,517


73,856Total revenue

$
56,165

$
62,184

$
158,784

$
223,601


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Product
revenue is comprised of sales of our voice infrastructure products, including our GSX9000 and GSX4000 Open Services Switches, NBS Network
Border Switch, PSX Call Routing Server, SGX Signaling Gateway, ASX Call Feature Server, IMX® Application Platform, Sonus
Insight Management System and related product offerings. Product revenue for the three and nine months ended September 30, 2009 decreased 8.6% and 40.4%, respectively, compared to
the same periods of the prior year. The decreases in the current year periods are primarily attributable to lower product sales and shipments, principally resulting from the current macroeconomic
environment, coupled with the change in the fourth quarter of fiscal 2008 to ratable recognition of revenue from AT&T on a two-year maintenance contract, which also impacts the timing of
the recognition of certain product revenue attributable to this customer.

Service
revenue is primarily comprised of hardware and software maintenance and support, network design, installation and other professional services. Service revenue decreased 11.2% and
5.9% in the three and nine months ended September 30, 2009, respectively, compared to the same periods of the prior year. The decreases in the current periods are primarily attributable to
pressure on maintenance pricing, coupled with the change in the fourth quarter of fiscal 2008 to ratable recognition of revenue from AT&T on a two-year maintenance contract.

Global
Crossing contributed approximately 12% and 10% of our revenue in the three and nine months ended September 30, 2009, respectively, and Softbank Telecom contributed
approximately 17% of our revenue in the three months ended September 30, 2009. AT&T contributed approximately 36% and 37% of our revenue in the three and nine months ended September 30,
2008, respectively. There were no other customers that contributed more than 10% of our revenue in either the three or nine months ended September 30, 2009 or 2008.

International
revenue was approximately 34% and 28% of revenue, respectively, in the three and nine months ended September 30, 2009, and 19% and 18% of revenue, respectively, in
the comparable periods of the prior year. We expect that international revenue will fluctuate as a percentage of revenue from quarter to quarter.

Our
deferred product revenue was $41.6 million and $30.7 million at September 30, 2009 and December 31, 2008, respectively. Our deferred service revenue was
$41.8 million and $48.3 million at September 30, 2009 and December 31, 2008, respectively. Our deferred revenue balance may fluctuate as a result of the timing of revenue
recognition, customer payments, maintenance contract renewals, contractual billing rights, customer creditworthiness and maintenance revenue deferrals included in multiple element arrangements.

Cost of Revenue/Gross Profit.Our cost of revenue consists primarily of amounts paid to third-party manufacturers for purchased
materials and
services, royalties, manufacturing and professional services personnel and related costs and inventory obsolescence. Our cost of revenue and gross profit as a

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percentage
of revenue ("gross margin") for the three and nine months ended September 30, 2009 and 2008 were as follows (in thousands, except percentages):

Three months ended
September 30,

Nine months ended
September 30,2009

2008

2009

2008Cost of revenueProduct

$
10,160

$
11,643

$
27,041

$
46,643Service


10,755


11,524


32,986


33,919Total cost of revenue

$
20,915

$
23,167

$
60,027

$
80,562Gross profit margin (% of respective revenue)Product


69.7
%

68.3
%

69.7
%

68.9
%Service


52.5
%

54.8
%

52.6
%

54.1
%Total gross profit margin


62.8
%

62.7
%

62.2
%

64.0
%


The
changes in product gross margin were primarily due to product mix. The current year decreases in service gross margin are primarily due to lower levels of service revenue as a
function of our fixed service cost base. We have reduced our fixed service cost base through our recent restructuring headcount reduction initiatives. We 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 were $14.1 million for the three months ended September 30, 2009, a
decrease of $4.1 million, or 22.5%, from $18.2 million in the same period of the prior year. Research and development expenses were $46.0 million for the nine months ended
September 30, 2009, a decrease of $11.1 million, or 19.5%, compared to the same period of the prior year. The decreases in the current year periods primarily reflect lower
employee-related costs, including lower stock-based compensation expense and lower salary and related costs as a result of our recent headcount reduction restructuring initiatives, partially offset by
increased hiring activity in our India facility. 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 in fiscal 2009 will decrease from prior year levels, primarily as a result of the ongoing migration of our development and
quality assurance centers to lower-cost geographies.

Sales and Marketing Expenses.Sales and marketing expenses consist primarily of salaries and related personnel costs, commissions,
 travel and
entertainment expenses, customer evaluations inventory and other marketing and sales support expenses. Sales and marketing expenses were $11.5 million for the three months ended
September 30, 2009, a decrease of $6.0 million, or 34.2%, compared to $17.5 million in the three months ended September 30, 2008. Sales and marketing expenses decreased
$19.4 million, or 35.0%, to $36.0 million in the nine months ended September 30, 2009, compared to $55.4 million in the same period of the prior year. The current year
decreases are primarily attributable to lower employee-related costs, including commission, travel and stock-based compensation expenses. We believe that our sales and marketing expenses will decrease
from prior year levels, primarily the result of lower personnel and related costs.

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General and Administrative Expenses.General and administrative expenses consist primarily of salaries and related personnel
costs for executive,
information technology ("IT") and administrative personnel, foreign exchange gains and losses, allowance for doubtful accounts and professional fees. General and administrative expenses were
$11.6 million in the three months ended September 30, 2009, a decrease of $10.0 million, or 46.5%, compared to $21.6 million in the three months ended September 30,
2008. General and administrative expenses decreased by $12.4 million, or 27.8%, to $32.3 million for the nine months ended September 30, 2009, from $44.7 million in the
nine months ended September 30, 2008. These decreases are primarily attributable to lower legal and audit fees and lower stock-based compensation expense. We believe that our general and
administrative expenses will decrease from prior year levels, primarily due to lower expected professional fees and other consulting costs and personnel-related expenses.

Litigation Settlements.We recorded $19.1 million of expense reported as Litigation Settlements in our consolidated
statements of operations
for the three and nine months ended September 30, 2008. On September 16, 2008, we reached an agreement to settle the C2 Patent Litigation. The parties entered into a settlement and
license agreement that provided for the payment of $9.5 million in full settlement of all claims against customers as well as fully paid licenses to us and our customers. The settlement was
paid on September 24, 2008. On September 23, 2008, we reached a tentative agreement to settle the 2002 Securities Litigation. Pursuant to the settlement, we paid $9.5 million to
the shareholder class in the case, as well as $0.1 million toward the cost of the class notice process. At September 30, 2008, we
had accrued $10.0 million for the 2002 Securities Litigation settlement, including the aforementioned $9.6 million for the settlement and class notice process as well as
$0.4 million for costs related to the confirmatory discovery process. The $0.4 million for discovery costs is included as a component of General and administrative expenses for both the
three and nine month periods ended September 30, 2008. On February 17, 2009, we placed $9.5 million into escrow related to this settlement. On July 16, 2009, the escrow
amount was released to the plaintiff. We did not record any expense reported as Litigation Settlements in our consolidated statements of operations for either the three or nine months ended
September 30, 2009.

Restructuring.In the three months ended September 30, 2009, we recorded $1.5 million of restructuring expense related
to our
August 12, 2009 headcount reduction restructuring initiative, which reduced our then-current workforce by approximately 93 people, or 10% of our employees worldwide. In the three
months ended March 31, 2009, we recorded restructuring expenses aggregating $2.0 million related to two headcount reduction restructuring initiatives implemented as part of our efforts
to right-size the business to align with market opportunities while managing costs to position Sonus for profitable growth. We recorded $0.9 million of severance and related
expenses for our January 9, 2009 headcount reduction restructuring initiative, which reduced our workforce by approximately 40 people, or 4% of employees worldwide. We recorded
$1.1 million of severance and related expenses for our March 10, 2009 headcount reduction restructuring initiative, which further reduced our workforce by approximately 60 people, or 6%
of employees worldwide.

Interest Income, net.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 in the three and nine month periods ended September 30, 2009 and 2008. Interest income, net of interest
expense, was $0.8 million and $2.7 million in the three months ended September 30, 2009 and 2008, respectively, and $3.4 million and $9.8 million in the nine month
periods, respectively. The reductions in interest income, net, in the current year periods reflect a lower average portfolio yield, coupled with lower cash and investment balances compared to the
prior year.

Other Income (Expense), net.We recorded approximately $12,000 and $2,000 of other income in the three months ended
September 30, 2009 and
2008, respectively, and $24,000 and $387,000 of other income in the nine months then ended. The amount for the nine months ended September 30, 2008

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relates
to a change in estimate to our loss contingency for the settlement of an employment tax audit by the Internal Revenue Service in 2008.

Income Taxes.The provision for income taxes reflects our estimate of the effective rate expected to be applicable for the full
fiscal year, adjusted
for any discrete events, which are recorded in the period that they occur. This estimate is reevaluated each quarter based on our estimated tax expense for the full fiscal year.

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 effective rate for the year ended
December 31, 2009 does not include any benefit for our projected domestic losses as we have continued to conclude that a valuation allowance is appropriate.

Our
benefit for the nine months ended September 30, 2009 includes a discrete benefit of $1.1 million realized during the second quarter related to our United Kingdom
operations, as the result of a settlement with the tax authorities, offset by a tax provision applicable to certain taxable jurisdictions. Our effective tax rates, including discrete items, were 2.2%
and 27.7% for the nine months ended September 30, 2009 and 2008, respectively. Our income tax benefit of $6.4 million in the nine months ended September 30, 2008, primarily
reflected a benefit for federal, state and foreign taxes and differed from the statutory federal and state rates due to losses in certain foreign jurisdictions for which we were unable to recognize a
tax benefit, and the impact of permanent nondeductible items, such as stock-based compensation expense.

Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

At September 30, 2009, our cash, cash equivalents, marketable securities and investments totaled $394.2 million.

Our
operating activities provided $10.7 million of cash in the nine months ended September 30, 2009, compared to $2.9 million of cash used in operating activities
during the nine months ended September 30, 2008. Cash provided by operating activities during the nine months ended September 30, 2009 was primarily the result of a net decrease in
accounts receivable, which was mainly driven by strong cash collections, partially offset by increases in inventory and other operating assets, as well a net reduction in our operating liabilities.
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. The decrease in our operating liabilities is primarily attributable to the payment of litigation settlements and related costs, 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 ESPP, lower taxes payable,
accrued royalties and professional fees. Our net loss (adjusted for non-cash items such as depreciation, amortization and stock-based compensation) contributed $2.4 million to the
cash provided by operating activities.

Our
investing activities provided $44.8 million of cash in the nine months ended September 30, 2009, which is primarily attributable to $49.6 million of net sales
and maturities of marketable securities and investments, net of $4.8 million for purchases of property and equipment. In the first quarter

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of 2009,
we had placed $9.5 million into escrow related to the agreement to settle the 2002 Securities Litigation. The escrow amount was released on July 16, 2009.

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

Based
on our current expectations, we believe our cash, cash equivalents, marketable debt securities and long-term investments will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least 12 months. Although it is difficult to predict future liquidity requirements with certainty, and the rate at which we will
consume cash will be dependent on the cash needs of future operations, including changes in working capital, which will, in turn, be directly affected by the levels of demand for our products, the
timing and rate of expansion of our business, the resources we devote to developing our products and any litigation settlements. We anticipate devoting substantial capital resources to continue our
research and development efforts, to maintain our sales, support and marketing operations, to improve our controls environment and for other general corporate activities, as well as to vigorously
defend against existing and potential litigation. See Note 16 to our condensed consolidated financial statements for a description of legal contingencies.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board ("FASB") issued its final Statement of Financial Accounting Standards ("SFAS")
No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement
No. 162("SFAS 168"). SFAS 168 made the FASB Accounting Standards Codification (the "Codification") the single source of U.S. GAAP used by
nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of
authoritative accounting guidance for SEC registrants. The Codification is meant to simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into
approximately 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The Codification supersedes all existing non-SEC
accounting and reporting standards and was effective for the Company beginning July 1, 2009. Following SFAS 168, the FASB will not issue new standards in the form of Statements, FASB
Staff Positions or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates ("ASU"). The FASB will not consider ASUs as authoritative in their own right; these updates
will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification.

In
October 2009, an update was made toRevenue RecognitionMultiple Deliverable Revenue Arrangements. This update removes the
objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting, replaces references to "fair value" with "selling price" to distinguish from the fair value measurements required under the Fair Value Measurements and
Disclosuresguidance, 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 update is effective for the Company 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.

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In
October 2009, an update was made 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 is effective for the Company 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, 2008.

Item 4.    Controls and Procedures

Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures.Our management (with the participation of our Chief Executive Officer and Chief
Financial Officer)
evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), as of September 30, 2009.

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 and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the
requisite time periods.

Limitations on Effectiveness of Controls.Our management has concluded that our disclosure controls and procedures and internal
controls provide
reasonable assurance that the objectives of our control system are met. However, our management (including our Chief Executive Officer and Chief Financial Officer) does not expect that the disclosure
controls and procedures or internal controls will prevent all error and/or fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if
any, within the company have been or will be detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple
errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any
system is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurances that any design will succeed in achieving its stated goals under all
potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

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Changes in Internal Control over Financial Reporting.No changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) were identified in connection with the evaluation as of September 30, 2009 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, 2008. Material developments to these legal proceedings during the quarter ended September 30, 2009 are detailed above in
Note 14 and Note 16 to our condensed consolidated financial statements.

Item 1A.    Risk Factors

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

There are no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2008, as modified and supplemented by the risk factors disclosed in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We have not announced any currently effective authorization to repurchase shares of our common stock. However, upon vesting of
restricted stock awards, employees are permitted to return to us a portion of the newly vested shares to satisfy the tax withholding obligations that arise in connection with such vesting. The
following table summarizes repurchases of
our common stock during the third quarter of fiscal 2009, which represent shares returned to satisfy tax withholding obligations:

Issuer Purchases of Equity Securities

Period

Total Number
of Shares
Purchased

Average
Price Paid
per Share

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

Approximate Dollar
Value of Shares That
May Yet be Purchased
Under the Plans or
ProgramsJuly 1, 2009 to July 31, 2009




$






August 1, 2009 to August 31, 2009


79,275

$
1.86





September 1, 2009 to September 30, 2009


12,210

$
2.10





Total


91,485

$
1.89








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Item 6.    Exhibits

Exhibit Number

Description31.1

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

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

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

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


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SIGNATURES

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

Dated: November 5, 2009

SONUS NETWORKS, INC.By:

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

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


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EXHIBIT INDEX

Exhibit Number

Description31.1

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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