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

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FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended March 31, 2008                
|OR                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission File Number 000-30229

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

|DELAWARE(State or other jurisdiction
of incorporation or organization)                                             |  | 04-3387074(I.R.S. employer
identification no.)
|------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------
|7 Technology Park Drive, Westford, Massachusetts 01886(Address of principal executive offices, including zip code)
|(978) 614-8100(Registrant's telephone number, including area code)                                                

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition 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 May 2, 2008, there were 271,138,012 shares of the registrant's common stock, $0.001 par value, outstanding.



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SONUS NETWORKS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2008
TABLE OF CONTENTS



|                             |  |                                                                                                                |  | Page
|---------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|PART I FINANCIAL INFORMATION |  |                                                                                                               
|Item 1.                      |  | Financial Statements                                                                                           |  |     
|                             |  | Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 (unaudited)                   |  | 1   
|                             |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited) |  | 2   
|                             |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited) |  | 3   
|                             |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                               |  | 4   
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                          |  | 25  
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 33  
|Item 4.                      |  | Controls and Procedures                                                                                        |  | 33  
|PART II OTHER INFORMATION    |  |                                                                                                               
|Item 1.                      |  | Legal Proceedings                                                                                              |  | 35  
|Item 1A.                     |  | Risk Factors                                                                                                   |  | 35  
|Item 2.                      |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                    |  | 49  
|Item 6.                      |  | Exhibits                                                                                                       |  | 50  
|                             |  | Signatures                                                                                                     |  | 51  
|                             |  | Exhibit Index                                                                                                  |  | 52  

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PART IFINANCIAL INFORMATION

Item 1.    Financial Statements

SONUS NETWORKS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)

|                                              |                                                                                                                                                                                                                        | March 31,
2008            |                                            | December 31,
2007 |        
|--------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ----------------- | -------
|Assets                                        |                                                                                                                                                                                                                        |                           |                                            |                   |        
|Current assets:                               |                                                                                                                                                                                                                        |                           |                                            |                   |        
|                                              | Cash and cash equivalents                                                                                                                                                                                              |                           | $                                          | 179,029           |        
|                                              | Marketable securities                                                                                                                                                                                                  |                           |                                            | 197,305           |        
|                                              | Accounts receivable, net                                                                                                                                                                                               |                           |                                            | 66,939            |        
|                                              | Inventory                                                                                                                                                                                                              |                           |                                            | 47,714            |        
|                                              | Deferred income taxes                                                                                                                                                                                                  |                           |                                            | 30,380            |        
|                                              | Litigation settlement escrow                                                                                                                                                                                           |                           |                                            |                  |        
|                                              | Insurance receivablelitigation settlement                                                                                                                                                                             |                           |                                            |                  |        
|                                              | Other current assets                                                                                                                                                                                                   |                           |                                            | 17,578            |        
|                                              |                                                                                                                                                                                                                        |                           |                                            |                   |        
|                                              |                                                                                                                                                                                                                        | Total current assets      |                                            |                   | 538,945
|Property and equipment, net                   |                                                                                                                                                                                                                        |                           | 18,349                                     |                   |        
|Purchased intangible assets, net              |                                                                                                                                                                                                                        |                           | 2,463                                      |                   |        
|Goodwill                                      |                                                                                                                                                                                                                        |                           | 8,388                                      |                   |        
|Long-term investments                         |                                                                                                                                                                                                                        |                           | 31,222                                     |                   |        
|Deferred income taxes                         |                                                                                                                                                                                                                        |                           | 49,436                                     |                   |        
|Other assets                                  |                                                                                                                                                                                                                        |                           | 2,503                                      |                   |        
|                                              |                                                                                                                                                                                                                        |                           |                                            |                   |        
|                                              |                                                                                                                                                                                                                        |                           | Total assets                               |                   | $      
|                                              |                                                                                                                                                                                                                        |                           |                                            |                   |        
|Liabilities and stockholders' equity          |                                                                                                                                                                                                                        |                           |                                            |                   |        
|Current liabilities:                          |                                                                                                                                                                                                                        |                           |                                            |                   |        
|                                              | Accounts payable                                                                                                                                                                                                       |                           | $                                          | 10,390            |        
|                                              | Accrued expenses                                                                                                                                                                                                       |                           |                                            | 23,204            |        
|                                              | Litigation settlement liability                                                                                                                                                                                        |                           |                                            |                  |        
|                                              | Current portion of deferred revenue                                                                                                                                                                                    |                           |                                            | 90,785            |        
|                                              | Current portion of long-term liabilities                                                                                                                                                                               |                           |                                            | 1,103             |        
|                                              |                                                                                                                                                                                                                        |                           |                                            |                   |        
|                                              |                                                                                                                                                                                                                        | Total current liabilities |                                            |                   | 125,482
|Long-term deferred revenue                    |                                                                                                                                                                                                                        |                           | 17,077                                     |                   |        
|Deferred income taxes                         |                                                                                                                                                                                                                        |                           | 759                                        |                   |        
|Long-term liabilities, net of current portion |                                                                                                                                                                                                                        |                           | 2,617                                      |                   |        
|                                              |                                                                                                                                                                                                                        |                           |                                            |                   |        
|                                              |                                                                                                                                                                                                                        |                           | Total liabilities                          |                   |        
|                                              |                                                                                                                                                                                                                        |                           |                                            |                   |        
|Commitments and contingencies (Note 17)       |                                                                                                                                                                                                                        |                           |                                            |                   |        
|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; 273,432,146 and
    272,565,951 shares issued; 271,135,236 and 270,269,041 shares outstanding at
    March 31, 2008 and December 31, 2007, respectively |                           |                                            | 273               |        
|                                              | Additional paid-in capital                                                                                                                                                                                             |                           |                                            | 1,254,861         |        
|                                              | Accumulated deficit                                                                                                                                                                                                    |                           |                                            | (751,354          | )      
|                                              | Accumulated other comprehensive income                                                                                                                                                                                 |                           |                                            | 1,858             |        
|                                              | Treasury stock, at cost; 2,296,910 common shares at March 31, 2008 and December 31,
    2007                                                                                                                           |                           |                                            | (267              | )      
|                                              |                                                                                                                                                                                                                        |                           |                                            |                   |        
|                                              |                                                                                                                                                                                                                        |                           | Total stockholders' equity                 |                   |        
|                                              |                                                                                                                                                                                                                        |                           |                                            |                   |        
|                                              |                                                                                                                                                                                                                        |                           | Total liabilities and stockholders' equity |                   | $      
|                                              |                                                                                                                                                                                                                        |                           |                                            |                   |        

See notes to condensed consolidated financial statements (unaudited).

1

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

|                                                      |                            | Three months ended March 31, |       
|----------------------------------------------------- | -------------------------- | ---------------------------- | ------
|
|Revenue:                                              |                            |                              |       
|                                                      | Product                    |                              | $     
|                                                      | Service                    |                              |       
|                                                      |                            |                              |       
|                                                      |                            | Total revenue                |       
|                                                      |                            |                              |       
|Cost of revenue:                                      |                            |                              |       
|                                                      | Product                    |                              |       
|                                                      | Service                    |                              |       
|                                                      |                            |                              |       
|                                                      |                            | Total cost of revenue        |       
|                                                      |                            |                              |       
|Gross profit                                          |                            |                              | 46,128
|                                                      |                            |                              |       
|Operating expenses:                                   |                            |                              |       
|                                                      | Research and development   |                              |       
|                                                      | Sales and marketing        |                              |       
|                                                      | General and administrative |                              |       
|                                                      |                            |                              |       
|                                                      |                            | Total operating expenses     |       
|                                                      |                            |                              |       
|Loss from operations                                  |                            |                              | (3,308
|Interest expense                                      |                            |                              | (21   
|Interest income                                       |                            |                              | 3,969 
|Other income (expense), net                           |                            |                              | 379   
|                                                      |                            |                              |       
|Income (loss) before income taxes                     |                            |                              | 1,019 
|Income tax benefit (provision)                        |                            |                              | (453  
|                                                      |                            |                              |       
|Net income (loss)                                     |                            | $                            | 566   
|                                                      |                            |                              |       
|Net income (loss) per share:                          |                            |                              |       
|                                                      | Basic                      |                              | $     
|                                                      | Diluted                    |                              | $     
|Shares used in computing net income (loss) per share: |                            |                              |       
|                                                      | Basic                      |                              |       
|                                                      | Diluted                    |                              |       

See
notes to condensed consolidated financial statements (unaudited).

2

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

|                                                             |                                                                                                        | Three months ended
March 31,                                              |                                                                   
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------- | ------------------------------------------------------------------
|
|Cash flows from operating activities:                        |                                                                                                        |                                                                           |                                                                   
|                                                             | Net income (loss)                                                                                      |                                                                           | $                                                                 
|                                                             | Adjustments to reconcile net income (loss) to cash flows provided by operating activities:             |                                                                           |                                                                   
|                                                             |                                                                                                        | Depreciation and amortization of property and equipment                   |                                                                   
|                                                             |                                                                                                        | Amortization of purchased intangible assets                               |                                                                   
|                                                             |                                                                                                        | Stock-based compensation                                                  |                                                                   
|                                                             |                                                                                                        | Deferred income taxes                                                     |                                                                   
|                                                             |                                                                                                        | Increase in fair value of modified stock options held by former employees |                                                                   
|                                                             |                                                                                                        | Changes in operating assets and liabilities:                              |                                                                   
|                                                             |                                                                                                        |                                                                           | Accounts receivable                                               
|                                                             |                                                                                                        |                                                                           | Inventory                                                         
|                                                             |                                                                                                        |                                                                           | Insurance receivablelitigation settlement                        
|                                                             |                                                                                                        |                                                                           | Other operating assets                                            
|                                                             |                                                                                                        |                                                                           | Accounts payable                                                  
|                                                             |                                                                                                        |                                                                           | Accrued expenses, deferred rent and accrued restructuring expenses
|                                                             |                                                                                                        |                                                                           | Litigation settlement liability                                   
|                                                             |                                                                                                        |                                                                           | Deferred revenue                                                  
|                                                             |                                                                                                        |                                                                           |                                                                   
|                                                             |                                                                                                        |                                                                           |                                                                   
|                                                             |                                                                                                        |                                                                           |                                                                   
|Cash flows from investing activities:                        |                                                                                                        |                                                                           |                                                                   
|                                                             | Purchases of property and equipment                                                                    |                                                                           |                                                                   
|                                                             | Purchases of available-for-sale marketable securities                                                  |                                                                           |                                                                   
|                                                             | Maturities of available-for-sale marketable securities                                                 |                                                                           |                                                                   
|                                                             | Purchases of held-to-maturity marketable securities and long-term investments                          |                                                                           |                                                                   
|                                                             | Maturities of held-to-maturity marketable securities and long-term investments                         |                                                                           |                                                                   
|                                                             | Decrease in litigation settlement escrow                                                               |                                                                           |                                                                   
|                                                             | Decrease in restricted cash                                                                            |                                                                           |                                                                   
|                                                             |                                                                                                        |                                                                           |                                                                   
|                                                             |                                                                                                        |                                                                           |                                                                   
|                                                             |                                                                                                        |                                                                           |                                                                   
|Cash flows from financing activities:                        |                                                                                                        |                                                                           |                                                                   
|                                                             | Sale of common stock in connection with employee stock purchase plan                                   |                                                                           |                                                                   
|                                                             | Proceeds from exercise of stock options                                                                |                                                                           |                                                                   
|                                                             | Payment of tax withholding obligations related to net share settlements of restricted stock
    awards |                                                                           |                                                                   
|                                                             | Principal payments of capital lease obligations                                                        |                                                                           |                                                                   
|                                                             |                                                                                                        |                                                                           |                                                                   
|                                                             |                                                                                                        |                                                                           |                                                                   
|                                                             |                                                                                                        |                                                                           |                                                                   
|Effect of exchange rate changes on cash and cash equivalents |                                                                                                        |                                                                           | (275                                                              
|                                                             |                                                                                                        |                                                                           |                                                                   
|Net increase in cash and cash equivalents                    |                                                                                                        |                                                                           | 60,096                                                            
|Cash and cash equivalents, beginning of period               |                                                                                                        |                                                                           | 118,933                                                           
|                                                             |                                                                                                        |                                                                           |                                                                   
|Cash and cash equivalents, end of period                     |                                                                                                        | $                                                                         | 179,029                                                           
|                                                             |                                                                                                        |                                                                           |                                                                   
|Supplemental disclosure of cash flow information:            |                                                                                                        |                                                                           |                                                                   
|                                                             | Interest paid                                                                                          |                                                                           | $                                                                 
|                                                             | Income taxes paid                                                                                      |                                                                           | $                                                                 
|Supplemental disclosure of non-cash investing activities:    |                                                                                                        |                                                                           |                                                                   
|                                                             | Capital expenditures incurred, but not yet paid                                                        |                                                                           | $                                                                 
|                                                             | Property and equipment acquired under capital lease                                                    |                                                                           | $                                                                 

See notes to condensed consolidated financial statements (unaudited).

3

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

(1) BASIS OF PRESENTATION

Business

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

Basis of Presentation

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

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

On
April 13, 2007, the Company completed the acquisition of Zynetix Limited ("Zynetix") (see Note 5). The operating results of Zynetix have been included in the Company's
condensed consolidated financial statements for the period subsequent to its acquisition.

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, Chief Executive Officer and Chairman.

Use of Estimates and Judgments

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Significant estimates and judgments relied upon in preparing these financial statements include revenue recognition for multiple element arrangements, allowances for doubtful accounts, 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

4

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

the
fair value of stock-based compensation, assumptions used to determine the fair value of purchased intangible assets, contingent liabilities and recoverability of Sonus' net deferred tax assets and
related valuation allowance. Sonus regularly assesses these estimates and records changes in estimates in the period in which they become known. Sonus bases its estimates on historical experience and
various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Principles of Consolidation

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

Recent Accounting Pronouncements

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

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

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities("SFAS 159"). SFAS 159 permits an entity to measure certain financial assets and financial liabilities at fair value. Under SFAS 159, entities that elect the fair value option
will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few
exceptions, as long as it is applied to the instrument in its entirety. SFAS 159 establishes presentation and disclosure requirements, but does not eliminate disclosure requirements of other
accounting standards. Assets and liabilities that are

5

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(1) BASIS OF PRESENTATION (Continued)

measured
at fair value must be displayed on the face of the balance sheet. SFAS 159 became effective for fiscal years beginning after November 15, 2007. The Company did not elect to
apply the fair value option under SFAS 159 to any instrument as of March 31, 2008.

In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements("SFAS 157"). SFAS 157 provides a single
definition of fair value, along with a framework for measuring it, and requires additional disclosure about using fair value to measure assets and liabilities. SFAS 157 emphasizes that fair
value measurement is market-based, not entity-specific, and establishes a fair value hierarchy in which the highest priority is quoted prices in active markets. Under SFAS 157, fair value
measurements are disclosed according to their level within this hierarchy. While SFAS 157 does not add any new fair value measurements, it does change current practice in certain ways,
including requiring entities to include their own credit standing when measuring their liabilities. SFAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position FAS 157-2,Effective Date of
FASB Statement No. 157("FSP 157-2"), which delays the effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets
and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The nonfinancial assets and nonfinancial liabilities to which SFAS 157 was not applied for the three
months ended March 31, 2008 are included under the captions Property and equipment, net; Purchased intangible assets, net; and Goodwill in the Company's condensed consolidated balance sheets.
The partial adoption of SFAS 157 for financial assets and financial liabilities did not impact the Company's consolidated results of operations or financial condition. See Note 10.

(2) REVENUE RECOGNITION

Sonus' products are primarily marketed based on the software elements contained therein. In addition, hardware sold generally can not 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; any undelivered elements that are not essential
to the functionality of the product and for which VSOE has been established is deferred based on the VSOE value and any remaining arrangement fee is then allocated to, and recognized as, product
revenue. VSOE is determined based upon the price charged when the same element is sold separately or 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

6

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(2) REVENUE RECOGNITION (Continued)

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 are 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 are recognized as services are rendered.

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 satisfied. Deferred revenue includes customer deposits and amounts associated with maintenance contracts. Deferred revenue expected to be recognized as revenue more
than one year subsequent to the balance sheet date is classified as long-term deferred revenue.

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

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

During
the fourth quarter of 2007, Sonus began reporting revenue from one of its distributors on a sell-in basis, where revenue is recognized upon the shipment of products to
the distributors, assuming all other requirements for revenue recognition have been met. The Company had previously recognized revenue for sales to this distributor when products had been sold through
by the distributor to its customers. This change reflects two years of commercial activity with this distributor during which the Company has not authorized or incurred any return of Sonus products or
provided any other form of price protection or concession. As a result of this history, the Company determined that the price for products sold to this distributor was fixed or determinable upon sale
to the distributor and collection was probable. During the three months ended March 31, 2008, the Company would have recognized approximately $60,000 more revenue, with an immaterial impact to
income before income taxes and net income and no impact on diluted net income per share, in connection with sales of products to this distributor if revenue recognition for sales to this distributor
had not switched to a sell-in basis and the revenue recognized in the fourth quarter of fiscal 2007.

7

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(3) NET INCOME (LOSS) PER SHARE

Net income (loss) per share is computed in accordance with SFAS No. 128,Earnings per Share. Basic net
income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. For periods in which the Company reports net
income, diluted net income per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period unless the effect is antidilutive.
Potential dilutive common shares consist of common stock issuable upon the exercise of stock options under the Company's 2007 Stock Incentive Plan (the "2007 Stock Plan"), 1997 Stock Incentive Plan
(the "1997 Stock Plan") and purchases of shares of common stock under the Company's 2000 Employee Stock Purchase Plan (the "ESPP") prior to the effective date of the Amended and Restated ESPP (see
Note 11) using the treasury stock method.

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

Three months ended
March 31,2008

2007Weighted average shares outstandingbasic

270,590

259,768Potential dilutive common shares

632

Weighted average shares outstandingdiluted

271,222

259,768


The
calculations above for the three months ended March 31, 2008 and 2007 exclude options to purchase shares of common stock aggregating approximately 37.3 million shares
and 17.3 million shares, respectively, as their effect would be antidilutive.

(4) COMPREHENSIVE INCOME (LOSS)

Sonus' comprehensive income (loss) for the three months ended March 31, 2008 and 2007 is as follows (in thousands):

Three months ended
March 31,2008

2007Net income (loss)

$
566

$
(3,978
)Changes in accumulated other comprehensive income (loss):Foreign currency translation adjustments


612


61Unrealized loss on equity securities held as available for sale


(22
)

Comprehensive income (loss)

$
1,156

$
(3,917
)


8

---



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(5) ACQUISITION OF ZYNETIX LIMITED

In connection with the acquisition of Zynetix Limited ("Zynetix"), completed on April 13, 2007, the share purchase agreement, as amended, also includes two
additional potential payments (the "earnouts") to the selling shareholders: (1) £1,500,000 (U.S. $3.0 million at March 31, 2008) payable on December 31, 2008;
and (2) 175,000 shares of Sonus common stock deliverable on April 30, 2009. Both earnouts are contingent upon the business achieving certain predetermined financial and business metrics
related to revenue, operating expenses and customer trials. The shares of common stock have been placed into escrow and will be released if the earnout is achieved. Each earnout will be recorded as an
addition to the purchase price at the time the contingency is resolved and consideration is distributable. In addition, the Company paid $0.3 million in transaction costs related to the
acquisition. The changes in the carrying amounts of goodwill arising from this transaction in the three months ended March 31, 2008 are the result of currency translation adjustments.

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

Cash equivalents and marketable securities are invested in debt and equity instruments, primarily U.S. government, municipal and corporate obligations, which
management believes to be high quality instruments. Current marketable securities include held-to-maturity investments with remaining maturities of less than one year as of the
balance sheet date and available-for-sale investments that are expected to be sold in the current period or are available for current operations. Long-term
investments include held-to-maturity investments with remaining maturities of one to two years as of the balance sheet date. Investments in U.S. government and corporate
obligations are classified as held-to-maturity, as Sonus has the intent and ability to hold them to maturity. Held-to-maturity marketable debt
securities are reported at amortized costs. The municipal obligations acquired during the three months ended March 31, 2008 are recorded as held-to-maturity. Unrealized
gains and
losses from available-for-sale marketable securities are not material for all periods presented. The unrealized losses related to these securities at March 31, 2008 are
not considered to be a permanent decline in the fair value of such securities. There have been no material realized gains or losses during the three months ended March 31, 2008 and 2007. At
December 31, 2007, the Company's investments in state and municipal obligations (auction rate securities) were classified as available for sale and recorded at fair value. These obligations
were sold in the first quarter of 2008 and consequently the Company no longer holds any auction rate securities.

9

---



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

At
March 31, 2008 and December 31, 2007, marketable debt and equity securities and long-term investments consisted of the following (in thousands):

|                                  |                              | March 31, 2008
|--------------------------------- | ---------------------------- | --------------
|
|Marketable securities             |                              |               
|Debt securities held-to-maturity: |                              |               
|                                  | U.S. government agency notes |               
|                                  | Corporate debt securities    |               
|                                  | Commercial paper             |               
|                                  |                              |               
|                                  |                              | $             
|                                  |                              |               
|Long-term investments             |                              |               
|Debt securities held-to-maturity: |                              |               
|                                  | Municipal obligations        |               
|                                  | U.S. government agency notes |               
|                                  | Corporate debt securities    |               
|                                  |                              |               
|                                  |                              | $             
|                                  |                              |               

|
|

|                                     |  | Cost |     | Unrealized
Gains |   | Unrealized
Losses |  | Fair
Value
|------------------------------------ |  | ---- | --- | ---------------- | - | ----------------- |  | ----------
|Equity securities available for sale |  | $    | 137 |                  | $ |                  |  | $         
|                                     |  |      |     |                  |   |                   |  |           

|
|

|                                    |                                 | December 31, 2007
|----------------------------------- | ------------------------------- | -----------------
|
|Marketable securities               |                                 |                  
|Debt securities available-for-sale: |                                 |                  
|                                    | State and municipal obligations |                  
|Debt securities held-to-maturity:   |                                 |                  
|                                    | U.S. government agency notes    |                  
|                                    | Corporate debt securities       |                  
|                                    | Commercial paper                |                  
|                                    |                                 |                  
|                                    |                                 | $                
|                                    |                                 |                  
|Long-term investments               |                                 |                  
|Debt securities held-to-maturity:   |                                 |                  
|                                    | U.S. government agency notes    |                  
|                                    | Corporate debt securities       |                  
|                                    |                                 |                  
|                                    |                                 | $                
|                                    |                                 |                  

|
|

|                                     |  | Cost |     | Unrealized
Gains |   | Unrealized
Losses |  | Fair
Value
|------------------------------------ |  | ---- | --- | ---------------- | - | ----------------- |  | ----------
|Equity securities available for sale |  | $    | 137 |                  | $ |                  |  | $         
|                                     |  |      |     |                  |   |                   |  |           

10

---



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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

A
reconciliation of the Company's debt securities and equity securities to the amounts reported in the condensed consolidated balance sheets under the caption Marketable
securities at March 31, 2008 and December 31, 2007 is as follows (in thousands):

March 31,
2008

December 31,
2007Debt securities carried at amortized cost

$
197,190

$
206,951Equity securities carried at fair value


115


137$
197,305

$
207,088


The
Company's cash, cash equivalents and investment portfolio holdings were diversified among three financial institutions at March 31, 2008.

The
Company's equity securities are comprised of 1,473 shares of Prudential Financial, Inc. common stock. The fair value of the common stock is determined using the closing price
per share on the New York Stock Exchange on the last trading day of each reporting period. The Company has classified these equity securities, which are reported as a component of Marketable
securities in the Company's condensed consolidated balance sheets at March 31, 2008 and December 31, 2007, as available-for-sale. Accordingly, the unrealized gain
or loss resulting from the change in the fair market value of the common stock is reported in Accumulated other comprehensive income in the Company's condensed consolidated balance sheets.

In
connection with the move to its new corporate headquarters in Westford, Massachusetts in January 2007, the Company issued a $500,000 standby letter of credit. On January 1,
2008, the amount of the letter of credit was reduced to $400,000. The standby letter of credit may be drawn upon in the event of the Company's noncompliance with the terms and conditions of the
sublease for the Westford headquarters facility.

In
connection with a customer sales order for which no revenue has been recognized, the Company has issued a €10.0 million (U.S. $15.8 million at
March 31, 2008) standby letter of credit. The standby letter of credit may be drawn upon in the event that the customer has a right to a refund of a portion or all of its initial deposit under
specific circumstances. The standby letter of credit expires in June 2008.

11

---



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(7) ACCOUNTS RECEIVABLE

Accounts receivable consist of the following (in thousands):

March 31,
2008

December 31,
2007Earned accounts receivable

$
50,261

$
54,896Unearned accounts receivable


17,059


30,529Accounts receivable, gross


67,320


85,425Allowance for doubtful accounts


(381
)

(474
)Accounts receivable, net

$
66,939

$
84,951


(8) INVENTORY

Inventory consists of the following (in thousands):

March 31,
2008

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

$
19,953

$
19,102Deferred cost of goods sold


32,341


30,018Evaluation inventory


6,737


6,285Inventory, gross


59,031


55,405Evaluation inventory reserve


(6,737
)

(6,285
)Excess and obsolescence reserve


(4,250
)

(3,560
)Inventory, net


48,044


45,560Less current portion


(47,714
)

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

$
330

$



(9) ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

March 31,
2008

December 31,
2007Employee compensation and related costs

$
10,365

$
20,892Employee stock purchase plan


413


2,367Professional fees


3,876


4,199Royalties


839


2,373Income taxes payable


981


1,442Sales taxes payable


1,113


1,203Other taxes


3,132


3,471Other


2,485


4,033$
23,204

$
39,980


12

---



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(10) FAIR VALUE MEASUREMENTS

The Company adopted SFAS 157 as of January 1, 2008 for financial assets and financial liabilities. SFAS 157 defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). SFAS 157 outlines a
valuation framework and creates a fair value hierarchy using the following three levels:



In
accordance with the fair value hierarchy described above, the following table shows the fair value of the Company's financial assets that are required to be measured at fair value at
March 31, 2008, which is comprised of the Company's available-for-sale equity securities, and are included as a component of Marketable securities in the condensed
consolidated balance sheet (in thousands):

|                                     |  |   |     | Fair value measurements at March 31, 2008 using:
|------------------------------------ |  | - | --- | ------------------------------------------------
|
|Available for sale equity securities |  | $ | 115 |                                                 

Available-for-sale
equity securities are recorded at fair value at each balance sheet date, based on quoted sales prices on the stock exchange on which the shares
are traded (see Note 6).

13

---



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(11) STOCK-BASED COMPENSATION

The Company issues options to purchase its common stock ("stock options") and restricted shares of common stock ("restricted stock") pursuant to the 2007 Stock
Plan. The 2007 Stock Plan provides for the award of stock options and restricted stock to employees, officers, directors (including those directors who are not employees or officers of the Company),
consultants and advisors of the Company and its subsidiaries. The Company issued stock options and restricted stock pursuant to the 1997 Stock Plan through November 18, 2007, when the 1997
Stock Plan expired.

On
January 25, 2008, the Company's Board of Directors approved the Amended and Restated ESPP. Effective March 1, 2008, the Amended and Restated ESPP eliminates the original
ESPP's two-year offering periods comprised of four six-month purchase periods. The Amended and Restated ESPP provides for a six-month offering period commencing
with the March 1, 2008 purchase period. The purchase price of the stock is equal to 85% of the market price on the last day of the offering period. The approval of the Amended and Restated ESPP
resulted in the cancellation of future purchases under current offering periods of the original ESPP and accelerated recognition of unamortized expense related to those future purchases. The Company
recorded $4.1 million of stock-based compensation expense for the period from January 1, 2008 through February 29, 2008 related to the original ESPP, including $3.4 million
related to the cancellation of future purchases, and $0.1 million of stock-based compensation expense for the period from March 1, 2008 through March 31, 2008 related to the
Amended and Restated ESPP. Under the Company's Amended and Restated ESPP, because employees are entitled to purchase a variable number of shares for a fixed monetary amount, future awards are
classified as share-based liabilities and recorded at fair value. The Company will reclassify these liabilities to Additional paid-in capital at the time of the share purchase, which is
the date of the award.

During
December 2006, in order to remedy the unfavorable personal tax consequences for those who had not exercised stock options after December 31, 2005 subject to 409A, the
Company entered into agreements with its directors and executive officers who were subject to the disclosure requirements of Section 16 of the Securities Exchange Act of 1934 under which they
agreed to waive cash payment or restricted stock from the Company for the difference in exercise price of certain stock options affected by the stock option review. This agreement resulted in
additional stock-based compensation expense of $1.2 million in the three months ended March 31, 2007.

The
Company could not issue any securities under its registration statements on Form S-8 until it became current in its SEC reporting obligations for filing its
periodic reports under the Securities Exchange Act of 1934. During the first quarter of 2007, the Company extended the contractual terms of approximately 833,000 vested stock options held by former
executives and other former employees. The Company accounted for the modifications to extend the contractual term of the awards for former executives and other former employees in accordance with
SFAS 123R. Based on the guidance in SFAS 123R and related FASB Staff Positions, after the modification those stock options held by former executives and other former employees became
subject to the provisions of EITF 00-19. As a result, certain of those stock option awards were reclassified as liability awards within current liabilities. Accordingly, at the end
of each reporting period, the Company determined the fair value of those awards utilizing the Black-Scholes valuation model and recognized any change in fair value of those awards in its condensed
consolidated statement of operations in the period of change until the awards were exercised, expired or were otherwise settled. As a result of these modifications, the Company

14

---



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(11) STOCK-BASED COMPENSATION (Continued)

recorded
additional stock-based compensation expense of $3.6 million in the three months ended March 31, 2007. The Company also recorded Other expense of $0.7 million in the three
months ended March 31, 2007 as a result of changes in the fair value of the liability awards. All of the stock options related to these liability awards had either expired or were settled by
December 31, 2007.

During
the first quarter of 2007, as a result of the Company's inability to issue any securities under its registration statement on Form S-8, the Company extended the
contractual terms of approximately 185,000 vested stock options held by current employees which were due to expire. The Company accounted for the modifications to extend the contractual term of the
awards for current employees in accordance with SFAS 123R. As a result of the modification, the Company recorded additional stock-based compensation expense of $0.8 million in the three
months ended March 31, 2007.

The
Company was not able to issue shares under the original ESPP as scheduled on February 28, 2007, delaying the issuance of shares until after it became current in its SEC
reporting obligations. The Company also delayed the commencement of the next scheduled ESPP purchase period from March 1, 2007 to April 1, 2007. The modifications to the original ESPP
resulted in additional stock-based compensation expense of $1.2 million in the three months ended March 31, 2007.

The
Company recorded $8.2 million and $8.9 million of stock-based compensation for the three months ended March 31, 2008 and 2007, respectively. The amount recorded
in the three months ended March 31, 2008 includes $3.4 million of expense related to the cancellation of the original ESPP. These amounts are included as components of the following
expense categories in the condensed consolidated statements of operations (in thousands):

Three months ended
March 31,2008

2007Product cost of revenue

$
186

$
90Service cost of revenue


1,148


582Research and development


3,689


3,209Sales and marketing


1,893


3,522General and administrative


1,292


1,466$
8,208

$
8,869


In
addition, the Company included $0.2 million of stock-based compensation in inventory at both March 31, 2008 and December 31, 2007.

At
March 31, 2008, there was $50.2 million of unrecognized compensation cost related to share-based awards, which is expected to be recognized over a weighted average
period of approximately three years. The Company estimates that it will record $0.3 million of additional compensation cost related to the Amended and Restated ESPP through August 31,
2008, the purchase date for the current offering period.

15

---



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(11) STOCK-BASED COMPENSATION (Continued)

Valuation Assumptions

The grant-date fair value of options to purchase common stock granted in the three months ended March 31, 2008 and 2007 was estimated using the
Black-Scholes valuation model with the following assumptions:

Three months ended
March 31,2008

2007Risk-free interest rate

2.75
%
4.64
%Expected dividend yield



Expected volatility

70.94
%
57.50
%Weighted average volatility

70.94
%
57.50
%Expected life (years)

4.5

4.5


Based
on the above assumptions, the weighted average fair value of stock options granted during the three months ended March 31, 2008 and 2007 was $2.19 and $3.83, respectively.

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

Three months ended
March 31,2008

2007Risk-free interest rate

3.6%5.1%

3.59%5.10%Expected dividend yield



Expected volatility

46%79%

50.77%79.12%Expected life (years)

0.52.0

0.52.0


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

The
risk-free interest rate used is the average U.S. Treasury Constant Maturities Rate for the expected term. The expected dividend yield of zero is based on the fact that
the Company has never paid dividends and has no present intention to pay cash dividends. Expected volatility is based on a combination of historical and implied volatility; the Company believes that
such a combination provides a more accurate estimate of the grant-date fair value because it is a more accurate indicator of the market's expectations regarding future volatility. The
expected life for stock options is based on a combination of the Company's historical option patterns and exercise patterns within similar industries. The expected life for stock purchase rights under
the original ESPP is based on the purchase periods defined within the original ESPP.

16

---



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(11) STOCK-BASED COMPENSATION (Continued)

Stock Option and Restricted Stock Grant Activity

The activity related to the Company's outstanding stock options during the three months ended March 31, 2008 is as follows:

|Stock Options                                |           | Number of
Shares |          | Weighted
Average
Exercise Price |      | Weighted
Average
Remaining
Contractual Life
(Years) |      | Aggregate
Intrinsic Value
(in thousands)
|-------------------------------------------- | --------- | ---------------- | -------- | ------------------------------- | ---- | --------------------------------------------------- | ---- | ----------------------------------------
|Outstanding at January 1, 2008               |           | 38,769,859       |          | $                               | 5.35 |                                                     |      |                                         
|                                             | Granted   |                  | 646,700  |                                 | $    | 3.80                                                |      |                                         
|                                             | Exercised |                  | (65,136  | )                               | $    | 2.58                                                |      |                                         
|                                             | Forfeited |                  | (149,508 | )                               | $    | 5.93                                                |      |                                         
|                                             | Expired   |                  | (221,353 | )                               | $    | 5.28                                                |      |                                         
|                                             |           |                  |          |                                 |      |                                                     |      |                                         
|Outstanding at March 31, 2008                |           | 38,980,562       |          | $                               | 5.32 |                                                     | 6.37 |                                         
|                                             |           |                  |          |                                 |      |                                                     |      |                                         
|Vested or expected to vest at March 31, 2008 |           | 37,311,547       |          | $                               | 5.30 |                                                     | 6.24 |                                         
|Exercisable at March 31, 2008                |           | 26,476,284       |          | $                               | 5.08 |                                                     | 5.06 |                                         

The
total intrinsic value of stock options exercised during the three months ended March 31, 2008 was $0.1 million. There were no stock options exercised during the three
months ended March 31, 2007.

The
activity related to the Company's nonvested restricted stock awards for the three months ended March 31, 2008 is as follows:

Shares

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

3,290,100

$
5.86Granted




Vested

(26,250
)
$
4.47Forfeited

(32,600
)
$
5.64Nonvested balance at March 31, 2008

3,231,250

$
5.87


The
Company recorded stock-based compensation expense totaling $1.5 million and $0.5 million related to restricted stock awards in the three months ended March 31,
2008 and 2007, respectively.

(12) EMPLOYEE DEFINED CONTRIBUTION PLAN

During the fourth quarter of fiscal 2007, the Company enhanced its 401(k) savings plan for employees by implementing a matching contribution of 50% of employee
contributions, up to a maximum match of $3,000 per employee per year. In the first quarter of fiscal 2008, the Company's Board of Directors voted to increase the maximum match to $3,500 per employee
effective January 1, 2008. The Company recorded expense related to its 401(k) savings plan of $0.6 million in the three months ended March 31, 2008.

17

---



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(13) INCOME TAXES

The Company provides for income taxes during interim periods based on the estimated effective tax rate for the full fiscal year. The Company records cumulative
adjustments to the tax provision in an interim period in which a change in the estimated annual effective rate is determined.

In
June 2006, the FASB issued FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
No. 109("FIN 48"), which clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS
No. 109,Accounting for Income Taxes("SFAS 109"). Sonus adopted the provisions of FIN 48 on January 1, 2007. As a result of
the implementation of FIN 48, the Company recognized an increase of approximately $0.1 million in the liability for unrecognized tax benefits, which was accounted for as an increase to
the accumulated deficit. At March 31, 2008, the Company had $6.2 million of federal and state unrecognized tax benefits. To the extent these unrecognized tax benefits are ultimately
recognized, they will impact the effective tax rate in a future period.

At
March 31, 2008, the total amount of accrued interest and penalties was $91,000. The Company accounts for interest and penalties related to uncertain tax positions as part of
its provision for federal and state income taxes.

The
Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, as well as various states and foreign jurisdictions. Generally, the tax years 2003 through 2006
remain open to examination by the major taxing jurisdictions to which the Company and its subsidiaries are subject. The Company's federal net operating losses generated prior to 2003 could be adjusted
on examination even though the year in which the loss was generated is otherwise closed by the statute of limitations. In 2006, the Massachusetts Department of Revenue ("Mass. DOR") commenced an
examination of the Company's Massachusetts state income tax returns for 2002 and 2003. Sonus has extended the statute of limitations for the 2002 tax year to allow for additional time to complete this
audit. As of March 31, 2008, the Mass. DOR had not proposed any significant adjustments to the Company's tax positions.

(14) MAJOR CUSTOMERS

One customer contributed 35% and 43% of Sonus' revenue in the three months ended March 31, 2008 and 2007, respectively. No other customer contributed 10%
or more of the Company's revenue in either period.

At
March 31, 2008 and December 31, 2007, one customer and two customers, respectively, each accounted for at least 10% of the Company's accounts receivable balance,
representing totals of approximately 38% and 28%, respectively, of Sonus' accounts receivable balances. The Company performs ongoing credit evaluations of its customers and generally does not require
collateral on
accounts receivable. Sonus maintains an allowance for doubtful accounts and such losses have been within management's expectations.

18

---



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(15) GEOGRAPHIC AND OPERATING SEGMENT INFORMATION

The Company's classification of revenue by geographic area is determined by the location of the Company's customers. The following table summarizes revenue by
geographic area as a percentage of total revenue:

Three months ended
March 31,2008

2007United States

83
%
83
%Japan

4

7Other Asia Pacific

1

*Europe, Middle East and Africa

11

6Other

1

4100
%
100
%




(16) SETTLEMENT OF 2004 RESTATEMENT LITIGATION

On November 7, 2007, Sonus reached an agreement to settle litigation against the Company and certain of its former and current officers alleging violations
of federal securities laws in connection with the 2004 Restatement Litigation (see Note 17). Pursuant to the settlement, the Company agreed to pay $40.0 million to the shareholder
classes in the case. On March 31, 2008, the United States District Court for the District of Massachusetts approved the settlement.

At
December 31, 2007, Sonus had $25.0 million of restricted cash in escrow related to the settlement. This amount is reported as Litigation settlement escrow in the
condensed consolidated balance sheet at December 31, 2007. In January 2008, the Company's insurer placed an additional $15.0 million into the escrow account and remitted the remaining
$328,000 available under the insurance policy directly to the Company. The total of $15.3 million was reported as Insurance receivablelitigation settlement in the Company's
condensed consolidated balance sheet at December 31, 2007.

The
total of $40.0 million in funds that had been placed into the escrow account, plus interest earned since the funds were deposited, have been released to the plaintiffs
effective March 31, 2008.

(17) CONTINGENCIES

2001 IPO Litigation

In November 2001, a purchaser of the Company's common stock filed a complaint in the United States District Court for the Southern District of New York against
Sonus, two of its officers and the lead underwriters alleging violations of the federal securities laws in connection with Sonus' initial public offering ("IPO") and seeking unspecified monetary
damages. The purchaser seeks to represent a class of persons who purchased the Company's common stock between the IPO on May 24, 2000 and December 6, 2000. An amended complaint was filed
in April 2002. The amended complaint alleges that the Company's registration statement contained false or misleading information or omitted to state

19

---



SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(17) CONTINGENCIES (Continued)

material
facts concerning the alleged receipt of undisclosed compensation by the underwriters and the existence of undisclosed arrangements between the underwriters and certain purchasers to make
additional purchases in the after market. The claims against Sonus are asserted under Section 10(b) of the Exchange Act and Section 11 of the Securities Act of 1933 (the "Securities
Act") and against the individual defendants under Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act. Other plaintiffs have filed substantially
similar class action cases against approximately 300 other publicly traded companies and their IPO underwriters which, along with the actions against Sonus, have been transferred to a single federal
judge for purposes of coordinated case management. On July 15, 2002, Sonus, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to
dismiss the consolidated amended complaints on various legal grounds common to all or most of the issuer defendants. The plaintiffs voluntarily dismissed the claims against many of the individual
defendants, including Sonus' officers named in the complaint. On February 19, 2003, the court granted a portion of the motion to dismiss by dismissing the Section 10(b) claims against
certain defendants including Sonus, but denied the remainder of the motion as to the defendants. In June 2003, a special committee of the Company's Board of Directors authorized Sonus to enter into a
proposed settlement with the plaintiffs on terms substantially consistent with the terms of a Memorandum of Understanding negotiated among representatives of the plaintiffs, the issuer defendants and
the insurers for the issuer defendants. In October 2004, the court certified the class in a case against certain defendants. On February 15, 2005, the court preliminarily approved the terms of
the proposed settlement contingent on modifications to the proposed settlement. On August 31, 2005, the court approved the terms of the proposed settlement, as modified. On April 24,
2006, the court held a hearing on a motion to approve the final settlement and took the matter under advisement. On December 5, 2006, the Court of Appeals for the Second Circuit reversed the
court's October 2004 order certifying a class. On June 25, 2007, the Court entered an order terminating the settlement. Accordingly, the Company is unable to determine the ultimate outcome or
potential range of loss, if any.

On
October 5, 2007, Vanessa Simmonds, a purported shareholder, filed a complaint in the Western District of Washington for recovery of short-swing profits under
Section 16(b) of the Exchange Act against the underwriters in the IPO in 2000. On February 28, 2008, the plaintiff filed an amended complaint asserting substantially similar claims as
set forth in the initial complaint. The amended complaint seeks recovery against the underwriters for profits they received from the sale of Sonus common stock in connection with the IPO. The Company
was named as a nominal defendant but has no liability for the asserted claims. No Sonus officers or directors were named in the amended complaint. Sonus does not expect that this claim will have a
material impact on its financial statements.

2002 Securities Litigation

Beginning in July 2002, several purchasers of the Company's common stock filed complaints in the United States District Court for the District of Massachusetts
against Sonus, certain officers and directors and a former officer under Sections 10(b) and 20(a) and Rule 10b-5 of the Exchange Act (the "Class Action Complaints"). The
purchasers seek to represent a class of persons who purchased the Company's common stock between December 11, 2000 and January 16, 2002, and seek unspecified monetary damages. The Class
Action Complaints were essentially identical and alleged that Sonus made false and misleading statements about its products and business. On March 3, 2003, the plaintiffs

20

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(17) CONTINGENCIES (Continued)

filed
a Consolidated Amended Complaint. On April 22, 2003, the Company filed a motion to dismiss the Consolidated Amended Complaint on various grounds. On May 11, 2004, the court held
oral argument on the motion, at the conclusion of which the court denied Sonus' motion to dismiss. The plaintiffs filed a motion for class certification on July 30, 2004. On February 16,
2005, the court certified the class and appointed a class representative. On March 9, 2005, the court appointed the law firm of Moulton & Gans as lead counsel. After the court requested
additional briefing on the adequacy of the class representative, the class representative withdrew. Lead counsel then filed a motion to substitute a new plaintiff as the class representative. On
May 19, 2005, the court held a hearing on the motion and took the matter under advisement. On August 15, 2005, the court issued an order decertifying the class and requiring the parties
to submit a joint report informing the court whether the cases have been settled and whether defendants would be seeking to recover attorney's fees from the plaintiffs. On September 30, 2005,
the plaintiffs filed motions to voluntarily dismiss their complaints with prejudice. On October 5, 2005, the court entered an order dismissing the cases. On June 26, 2006, the court
issued an order denying Sonus' motion for recovery of attorneys' fees.

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 the Consolidated Amended Complaint previously filed against the defendants. The Court has appointed the Public Employees' Retirement System of Mississippi as lead plaintiff. The lead plaintiff has
filed an Amended Consolidated Complaint. On April 19, 2007, the defendants filed a motion to dismiss the Amended Consolidated Complaint. There is no assurance Sonus will prevail in such a
motion or defending this action. A judgment or a settlement of the claims against the defendants could have a material impact on the Company's financial results. It is too early to determine the
ultimate outcome or potential range of loss, if any. The Company does not have any directors and officers insurance available for this claim.

2004 Restatement Litigation

Beginning in February 2004, a number of purported shareholder class action complaints were filed in the United States District Court for the District of
Massachusetts against Sonus and certain of its current officers and directors. On June 28, 2004, the court consolidated the claims. On December 1, 2004, the lead plaintiff filed a
consolidated amended complaint. The complaint asserts claims under the federal securities laws, specifically Sections 10(b) and 20(a) of the Exchange Act and Sections 11, 12(a), and 15
of the Securities Act, relating to the restatement of Sonus' financial results for 2001, 2002, and the first three quarters of 2003. Specifically, the complaint alleges that Sonus issued a series of
false or misleading statements to the market concerning its revenues, earnings and financial condition. Plaintiffs contend that such statements caused the Company's stock price to be artificially
inflated. The complaint seeks unspecified damages on behalf of a purported class of purchasers of the Company's common stock during the period from March 28, 2002 through March 26, 2004.
On January 28, 2005, Sonus filed a motion to dismiss the Section 10(b) and 12(a) claims and joined the motion to dismiss the Section 11 claim filed by the individual defendants.
On June 1, 2005, the court held a hearing on the motion and allowed the plaintiff to file an amended complaint. The plaintiff filed an amended complaint that included the same claims and
substantially similar allegations as set forth in the initial complaint. On September 12, 2005, the defendants filed motions to dismiss this amended complaint. On December 10, 2005, the
court held a hearing on the motions and took the matter under advisement. On May 10, 2006, the court issued an order granting the defendants' motions in part and

21

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(17) CONTINGENCIES (Continued)

denying
the motions in part. The court dismissed the Section 12(a)(2) claims against all the defendants and the Section 10(b) and Section 11 claims against the individual
defendants. The court denied the motions as to the Section 10(b) and Section 11 claims against Sonus and Section 15 claims against the individual defendants. On
September 25, 2007, the Court granted the plaintiff's motion for class certification. As discussed in Note 16, on November 7, 2007, the Company and the plaintiff agreed to settle
the litigation for $40 million. On March 31, 2008, the court approved the settlement.

Patent Litigation

On June 14, 2006, C2 Communications sued AT&T, Inc., Verizon Communications, Inc., Qwest, Bellsouth Corporation, Sprint Nextel Corporation,
Global Crossing and Level 3 in the Eastern District of Texas, Marshall Division. C2 Communications has alleged that each of the defendants infringe U.S. Patent
No. 6,243,373 entitled "Method and Apparatus for Implementing a Computer Network Internet Telephone System." Sonus has agreed, subject to certain conditions, to assume the defense of Qwest,
Global Crossing and Level 3 in this litigation to the extent the claim results from their use of products purchased from Sonus. There can be no assurance that other defendants who have
purchased Sonus products will not seek indemnification from Sonus. The court has scheduled the trial date for September 2008. Court-ordered mediation has been scheduled for May 29, 2008. Sonus
believes that the defendants have substantial legal and factual defenses to the infringement claim, which the Company intends to pursue vigorously on behalf of the defendants for whom Sonus agrees or
is required to assume defense of the litigation. However, there is no assurance any of the defendants will prevail in defending this action. There also can be no assurance that Sonus will not be
required to indemnify any
of the defendants from any judgment of infringement rendered against them. Sonus may be required to devote significant time and resources in connection with assuming the defense of the claim of
infringement on behalf of the defendants for whom Sonus has agreed to assume defense of the litigation. An adverse outcome with respect to the claim and Sonus' indemnification could have a material
adverse impact on Sonus' business, operating results and financial condition. Sonus cannot predict the ultimate outcome of this litigation or any potential impact on the Company's operating results or
financial position. Sonus has incurred and expects to continue to incur significant legal and expert fees in connection with this litigation.

On
January 24, 2008, Sprint Communications sued two of the Company's customers, Broadvox and Nuvox, in the District of Kansas for patent infringement. By letter dated
April 23, 2008, Broadvox requested that the Company assume the defense of the case on its behalf. The Company has agreed, subject to certain conditions, to assume the defense in this litigation
on behalf of Broadvox to the extent the claims result from its use of Sonus products. There can be no assurance that the Company will not be required to indemnify Broadvox or Nuvox from any judgment
of infringement rendered against them. Sonus cannot predict the ultimate outcome of this litigation or any potential impact on the Company's operating results or financial position.

Sonus
includes standard intellectual property indemnification provisions in its product agreements in the ordinary course of business. Pursuant to its product agreements, Sonus will
indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent,
copyright or other intellectual property infringement claims by third parties with respect to Sonus products. Other

22

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(17) CONTINGENCIES (Continued)

agreements
with Sonus' customers provide indemnification for claims relating to property damage or personal injury resulting from the performance of services by Sonus or its subcontractors.
Historically, Sonus' costs to defend lawsuits or settle claims relating to such indemnity agreements have been insignificant. Accordingly, the estimated fair value of these indemnification provisions
is immaterial.

2006 Stock Option Accounting Litigation

On November 14, 2006, a purported shareholder derivative lawsuit was filed in the United States District Court for the District of Massachusetts against
Sonus and certain of its officers and directors, naming Sonus as a nominal defendant. Other purported shareholders filed virtually identical complaints. The suits claim that certain of Sonus' officers
and directors breached their fiduciary duties to its stockholders and to Sonus in connection with its announced stock option review. The complaints are derivative in nature and do not seek relief from
Sonus. However, Sonus has entered into indemnification agreements in the ordinary course of business with certain of the defendant officers and directors and may be obligated throughout the pendency
of these actions to advance payment of legal fees and costs incurred by the defendants pursuant to the Company's obligations under the indemnification agreements or applicable Delaware law. By order
dated December 18, 2006, the Court consolidated the actions. The plaintiffs have filed a consolidated complaint. The defendants filed on
March 19, 2007 a motion to dismiss the consolidated complaint. The Court held a hearing on July 11, 2007, and took the motion under advisement. On January 25, 2008, the Court
issued an order granting the motion to dismiss. The Company cannot predict whether the plaintiff will appeal that order. On February 15, 2008, one of the plaintiffs in this case sent the
company a shareholder demand letter, seeking the same relief sought in the derivative litigation that the Court dismissed. On March 25, 2008, the Company's Board of Directors rejected the
demands set forth in the demand letter. The Company does not expect that the resolution of this claim will have a material impact on its financial statements.

On
January 19, 2007, a purported shareholder derivative lawsuit was filed in the Superior Court Department of Middlesex County of Massachusetts against certain of Sonus' directors
and officers, also naming Sonus as a nominal defendant. Another purported shareholder filed a virtually identical complaint. The suits assert similar claims and seek relief similar to the derivative
suits filed in federal court. On May 7, 2007, the plaintiffs filed a consolidated complaint. On June 6, 2007, the defendants moved to dismiss the consolidated complaint. The Court held a
hearing on the motion on August 14, 2007 and took the matter under advisement. On November 12, 2007, the plaintiffs filed a motion to voluntarily dismiss the complaint without prejudice
so plaintiffs could pursue an action in the Delaware Chancery Court to enforce their rights to inspect Sonus' books and records under Section 220 of the Delaware Code. The defendants opposed
the motion. On December 7, 2007, the Court granted the motion to voluntarily dismiss the complaint without prejudice subject to plaintiffs' paying the defendants' reasonable legal fees within
30 days of the Court's order. The Court further ruled that the case would be dismissed with prejudice if the plaintiff did not pay the defendants' legal fees within 30 days. Accordingly,
on January 8, 2008, the defendants requested entry of judgment for dismissal with prejudice. The plaintiffs have opposed the request. On January 16, 2008, the Court issued an order
allowing the request and dismissing the case with prejudice. On February 5, 2008, the plaintiff filed a notice of appeal of that order. The plaintiff subsequently notified the Company of its
intent to dismiss the appeal and, on April 23, 2008, the appeals court dismissed the appeal with prejudice.

23

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SONUS NETWORKS, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(17) CONTINGENCIES (Continued)

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

IRS Employment Tax Audit

The Internal Revenue Service ("IRS") notified the Company that its payroll tax returns for the years ended December 31, 2004, 2005 and 2006 had been
selected for audit in connection with its stock option review. In connection with the restatement of its financial statements, Sonus had recorded approximately $1.6 million of accrued
liabilities for additional federal and state payroll tax, penalties and
interest related to adjustments resulting from errors in stock option accounting. In April 2008, the Company reached an agreement with the IRS and paid $496,000 to settle this audit. As a result of
this settlement, the Company reduced its liability estimate by $0.9 million at March 31, 2008.

Employment Litigation

On February 19, 2008, James Collier, Sonus' former Vice President of Sales, filed a complaint against the Company in federal district court in the District
of New Jersey. The complaint alleges that the Company breached Mr. Collier's employment agreement by failing to pay severance in the amount of $600,000 and provide benefits claimed to be owed
under the employment agreement. The Company believes that Mr. Collier was properly terminated for cause and therefore is not owed any severance or other benefits under the employment agreement.
On March 17, 2008, the Company filed its answer denying Mr. Collier's claims. The Company intends to defend the case vigorously. The Company may incur significant legal fees in defending
this claim and there is no assurance as to the ultimate outcome of the litigation.

(18) SUBSEQUENT EVENT

On April 18, 2008, the Company completed the acquisition of Atreus Systems, Inc. ("Atreus"), a privately-held company with its principal
office located in Ottawa, Canada. Atreus is a leading supplier of service provisioning software for Voice over IP ("VoIP") and IP Multimedia Subsystem ("IMS")-based services. In consideration, the
Company paid the selling stockholders $4.8 million and incurred $0.1 million of transaction reimbursement costs. The Company believes that the addition of Atreus solutions to the Sonus
Access portfolio will allow Sonus to provide comprehensive integration services for operators' growing IP-service portfolios. The financial results of Atreus will be included in the
Company's condensed consolidated financial statements for the periods subsequent to the date of acquisition.

24

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

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. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our industry and ourselves, and we
do not undertake an obligation to update our forward-looking statements to reflect 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 the factors set forth in Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q. This discussion
should be read in conjunction with the unaudited condensed consolidated financial statements and related notes for the periods specified. Further reference should be made to our Annual Report on
Form 10-K for the year ended December 31, 2007.

Overview

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

Our
suite of voice infrastructure solutions allows wireline and wireless operators to build converged voice over IP ("VoIP") networks. Our products are built on the same distributed,
IP-based principles embraced by the IP Multimedia Subsystem ("IMS") architecture, as defined by the Third Generation Partnership Program ("3GPP"). This IMS architecture is being accepted
by network operators globally as the common approach for building converged voice, data, wireline and wireless networks. The IMS architecture is based primarily on IP packets and the SIP protocol,
which has been the foundation of our products since our formation.

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

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



25

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Acquisition of Zynetix Limited

In connection with the acquisition of Zynetix Limited ("Zynetix"), completed on April 13, 2007, the share purchase agreement, as amended, also includes two
additional potential payments to the selling
shareholders: (1) £1,500,000 payable on December 31, 2008 (U.S. $3.0 million at March 31, 2008); and (2) 175,000 shares of our common stock deliverable
on April 30, 2009, both contingent upon the business achieving certain predetermined financial and business metrics related to revenue, operating expenses and customer trials. The operating
results of Zynetix have been included in our condensed consolidated financial statements for the period subsequent to its acquisition.

Stock-Based Compensation

We recorded $8.2 million and $8.9 million of stock-based compensation in the Condensed Consolidated Statements of Operations for the three months
ended March 31, 2008 and 2007, respectively. These amounts are included in the following expense categories (in thousands):

Three months ended
March 31,2008

2007Product cost of revenue

$
186

$
90Service cost of revenue


1,148


582Research and development


3,689


3,209Sales and marketing


1,893


3,522General and administrative


1,292


1,466$
8,208

$
8,869


In
addition, we included $0.2 million of stock-based compensation in inventory at March 31, 2008 and December 31, 2007.

On
January 25, 2008, our Board of Directors approved the Amended and Restated Employee Stock Purchase Plan ("ESPP"). Effective March 1, 2008, the Amended and Restated ESPP
eliminates the original ESPP's two year offering periods comprised of four six-month purchase periods. The Amended and Restated ESPP provides for a six-month offering period
commencing with the March 1, 2008 purchase period. The purchase price of the stock is equal to 85% of the market price on the last day of the offering period. The Amended and Restated ESPP
resulted in the cancellation of future purchases under current offering periods of the original ESPP and accelerated recognition of unamortized expense related to those future purchases. We recorded
$4.1 million of stock-based compensation expense for the period from January 1, 2008 through February 29, 2008 related to the original ESPP, including $3.4 million related
to the cancellation of future purchases, and $0.1 million of stock-based compensation expense for the period from March 1, 2008 through March 31, 2008 related to the Amended and
Restated ESPP.

During
December 2006, in order to remedy the unfavorable personal tax consequences for those who had not exercised stock options after December 31, 2005 subject to
Section 409A, we entered into agreements with our directors and executive officers who were subject to the disclosure requirements of Section 16 of the Securities Exchange Act of 1934
under which they agreed to waive cash payment or restricted stock from us for the difference in exercise price of certain stock options affected by the stock option review. This agreement resulted in
additional stock-based compensation expense of $1.2 million in the three months ended March 31, 2007.

We
could not issue any securities under our registration statement on Form S-8 until we became current in our SEC reporting obligations for filing our periodic reports
under the Exchange Act. Consequently, during the first quarter of 2007, we extended the contractual terms of approximately

26

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833,000
vested stock options held by former executives and other former employees. We accounted for the modifications to extend the contractual term of the awards for former employees in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 123(R),Share-based Payment("SFAS 123R"). Based on the guidance in
SFAS 123R and related Financial Accounting Standards Board ("FASB") Staff Positions, after the modification those stock options held by former employees became subject to the provisions of
Emerging Issues Task Force ("EITF") Issue No. 00-19,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock. As a result, certain of those stock option awards were reclassified as liability awards within current liabilities. Accordingly, at the end of each reporting period, we
determined the fair value of those awards utilizing the Black-Scholes valuation model and recognized any change in fair value in our Condensed Consolidated Statement of Operations in the period of
change until the awards were exercised, expired or were otherwise settled. As a result of these modifications, we recorded additional stock-based compensation expense of $3.6 million in the
three months ended March 31, 2007. We also recorded Other expense of $0.7 million in the three months ended March 31, 2007 as a result of changes in the fair value of the
liability awards. All of the stock options related to these liability awards had either expired or were settled by December 31, 2007.

During
the first quarter of 2007, as a result of our inability to issue any securities under our registration statement on Form S-8, we extended the contractual terms
of approximately 185,000 vested stock options held by current employees which were due to expire. We accounted for the modifications to extend the contractual term of the awards for current employees
in accordance with SFAS 123R, and recorded additional stock-based compensation expense of $0.8 million in the three months ended March 31, 2007.

We
were unable to issue shares under our ESPP as scheduled on February 28, 2007, delaying the issuance of shares until after we became current in our SEC reporting obligations. We
also delayed the commencement of the next scheduled ESPP period from March 1, 2007 to April 1, 2007. The modifications to the ESPP resulted in additional stock-based compensation expense
of $1.2 million in the three months ended March 31, 2007.

Fair Value of Financial Instruments

We adopted SFAS 157 as of January 1, 2008 for financial assets and financial liabilities. SFAS 157 defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). SFAS 157 outlines a valuation
framework and creates a fair value hierarchy using the following three levels:



We
disclosed the fair value of our financial instruments that are required to be remeasured at March 31, 2008 in a table in Note 10 to our condensed consolidated financial
statements. Our available-for-sale equity securities are marked to market at each measurement date, based on quoted sales prices on the stock exchange on which the shares are
traded.

27

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Critical Accounting Policies and Estimates

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



For
a complete discussion of our critical accounting policies and estimates, refer to our Annual Report on Form 10-K for the fiscal year ended December 31,
2007, which was filed with the SEC on March 6, 2008. There were no significant changes to the Company's critical accounting policies during the three months ended March 31, 2008.

Results of Operations

Three Months Ended March 31, 2008 and 2007

Revenue.Revenue for the three months ended March 31, 2008 and 2007 was as follows
(in thousands):

Three months ended
March 31,2008

2007Product

$
50,984

$
51,627Service


23,039


19,519Total revenue

$
74,023

$
71,146


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 Feature Server, the Sonus Insight Management System and related product offerings. Product revenue for the three months ended
March 31, 2008 decreased $0.6 million, or 1.2%, compared to the same period in the prior year.

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Service
revenue is primarily comprised of hardware and software maintenance and support, network design, installation and other professional services. Service revenue increased 18.0% in
the three months ended March 31, 2008, compared to the same prior year period. The increase in the current period is primarily attributable to higher maintenance revenue related to our growing
installed base, as well as the timing of cash collections from a customer for whom revenue is recognized as cash is collected.

AT&T
contributed more than 10% of our revenue in both the three months ended March 31, 2008 and 2007. There were no other customers that contributed more than 10% of our revenue
in either period.

International
revenue was approximately 17% of revenue for both three month periods ended March 31, 2008 and 2007. We expect that international revenue will fluctuate as a
percentage of revenue from quarter to quarter.

Our
deferred product revenue was $47.3 million and $44.1 million at March 31, 2008 and December 31, 2007, respectively. Our deferred service revenue was
$60.6 million and $55.1 million at March 31, 2008 and December 31, 2007, respectively. Our deferred revenue balance may fluctuate as a result of the timing of revenue
recognition, customer payments, maintenance contract renewals, contractual billing rights, customer creditworthiness and maintenance revenue deferrals included in multiple element arrangements.

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

Our
cost of revenue and gross profit as a percentage of revenue for the three months ended March 31, 2008 and 2007 were as follows (in thousands, except percentages):

Three months ended
March 31,2008

2007Cost of revenueProduct

$
16,820

$
17,082Service


11,075


8,579Total cost of revenue

$
27,895

$
25,661Gross profit margin (% of respective revenue)Product


67.0
%

66.9
%Service


51.9
%

56.0
%Total gross profit margin


62.3
%

63.9
%


The
slight increase in product gross profit as a percentage of revenue ("product gross margin") was primarily due to product mix. The decrease in service gross profit as a percentage of
service revenue ("service gross margin") was primarily due to increased personnel costs to support our global expansion efforts, as well as higher stock-based compensation costs of $0.6 million
in the three months ended March 31, 2008. Our service cost of revenue is relatively fixed in advance of any particular quarter and therefore, changes in service revenue will have a significant
impact on service gross margins. We believe that our gross margin over time will remain in 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 $20.5 million for the

29

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three
months ended March 31, 2008, an increase of $1.8 million, or 9.6%, from $18.7 million in the same prior year period. The current year increase primarily reflects a
$1.3 million increase in salary and related expenses associated with increased headcount and stock-based compensation, as well as $0.4 million of increased consulting costs. Some aspects
of our research and development efforts require significant short-term expenditures, the timing of which can cause significant variability in our expenses. We believe that rapid
technological innovation is critical to our long-term success, and we are tailoring our investments to meet the requirements of our customers and market.

Sales and Marketing Expenses.Sales and marketing expenses consist primarily of salaries and related
personnel costs, commissions, travel and entertainment expenses, promotions, customer evaluation inventory and other marketing and sales support expenses. Sales and marketing expenses were
$18.9 million for the three months ended March 31, 2008, a decrease of $4.1 million, or 17.8%, compared to $23.0 million in the three months ended March 31, 2007.
The current period decrease is primarily attributable to lower commission and stock-based compensation expense, coupled with a decrease in evaluation equipment costs. In the three months ended
March 31, 2007, commission expense included certain orders received in fiscal 2006 that were recognized in 2007 at an accelerated commission rate. Lower stock-based compensation costs accounted
for $1.6 million of the decrease in sales and marketing expenses in the three months ended March 31, 2008, compared to the same prior year period.

General and Administrative Expenses.General and administrative expenses consist primarily of
salaries and related personnel costs for executive and administrative personnel, recruiting expenses, allowance for doubtful accounts and professional fees. General and administrative expenses were
$10.0 million for
the three months ended March 31, 2008, a decrease of $4.1 million, or 28.9%, compared to $14.1 million in the three months ended March 31, 2007. The decrease in the current
year period is primarily attributable to the recognition of $4.2 million of stock option review costs in the three months ended March 31, 2007. Lower stock-based compensation expense
accounted for $0.2 million of the decrease in general and administrative expenses in the three months ended March 31, 2008, compared to the same prior year period. These amounts were
partially offset by a $0.4 million increase in legal costs associated with litigation in the three months ended March 31, 2008, compared to the prior year quarter.

Interest Income, net.Interest income, net of interest expense, was $3.9 million in the three
months ended March 31, 2008, compared to $4.6 million in the three months ended March 31, 2007. Interest income consists of interest earned on our cash equivalents, marketable
securities and long-term investments. Interest expense in the current year primarily relates to interest on capital lease obligations. The reduction in interest income, net, in the current
year period is primarily the result of lower interest rates.

Other Income (Expense), net.We recorded $0.4 million of other income in the three months
ended March 31, 2008 as a change in estimate to our loss contingency related to the settlement of an employment tax audit by the Internal Revenue Service ("IRS"). We recorded
$0.7 million of other expense in the three months ended March 31, 2007, to reflect the change in fair value of stock options modified subsequent to the departure of the former employees
who are the optionees affected.

Income Taxes.We provide for income taxes during interim periods based on the estimated effective tax
rate for the full fiscal year, and record a cumulative adjustment to the tax provision in an interim period in which a change in the estimated annual effective tax rate is determined. Our effective
tax rate, including discrete items, was 44.5% and 37.7%, for the three months ended March 31, 2008 and 2007, respectively. The increase in our effective tax rate for the three months ended
March 31, 2008 over the statutory federal and state rates is primarily attributable to permanent nondeductible stock-based compensation expense. In addition, our effective tax rate for the
first quarter of 2008 does

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not
include any benefit related to the federal research and development tax credit, as this tax law expired at the end of 2007.

The
income tax provision of $0.5 million in the three months ended March 31, 2008 primarily reflects a current provision for federal, state and foreign taxes. The income
tax benefit of $2.4 million in the three months ended March 31, 2007 primarily reflects a current benefit for federal, state and foreign taxes.

Off-balance Sheet Arrangements

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

Liquidity and Capital Resources

At March 31, 2008, our cash, cash equivalents, marketable securities and long-term investments totaled $407.6 million.

Our
operating activities used $10.5 million of cash in the three months ended March 31, 2008, compared to $7.0 million provided by operating activities in the same
prior year period. Net income and adjustments for non-cash items including stock-based compensation, depreciation and amortization of property and equipment and purchased intangible assets
and deferred income taxes provided $12.5 million of cash. These non-cash adjustments were further benefited from decreases in accounts receivable and other operating assets, as well
as an increase in deferred revenue. These amounts were offset by the release of the $25.0 million in Litigation settlement escrow to the plaintiffs, as well as lower levels of accrued expenses,
deferred rent and accrued restructuring expenses, and accounts payable, as well as an increase in inventory. The lower accounts receivable levels are the result of our focused efforts on cash
collections in the first quarter of 2008. On March 31, 2008, our proposed litigation settlement was approved by the court. Accordingly, the amounts that had been placed into escrow by us and
our insurer were released to the plaintiff, and we eliminated the related liability and insurance receivable included in our condensed consolidated balance sheet at December 31, 2007. As a
result, our cash flows from operating activities were negatively affected by the release at March 31, 2008 of the $25.0 million we had previously placed into an escrow account. The
decrease in accrued expenses, deferred rent and accrued restructuring expenses is primarily attributable to lower employee compensation and related costs, including reductions for the payment of
bonuses to our executives and employees under our bonus programs, the completion of an employee stock purchase under our original ESPP, lower ESPP withholdings under the Amended and Restated ESPP and
accrued royalties.

Cash
provided by operating activities in the three months ended March 31, 2007 came from non-cash adjustments to our net loss for stock-based compensation, deferred
income taxes, depreciation and amortization of property and equipment and the increase in the fair value of modified stock options held by former employees. These non-cash adjustments were
further benefited from decreases in accounts receivable and other operating assets, as well as higher accounts payable. These amounts were partially offset by decreases in accrued expenses, deferred
rent and accrued restructuring expenses and deferred revenue, coupled with higher inventory levels.

Our
investing activities provided $68.4 million of cash in the three months ended March 31, 2008, primarily comprised of $45.1 million of net maturities of
marketable securities and long-term investments and $25.0 million related to the release at March 31, 2008 of the $25.0 million in the litigation settlement escrow
account as a result of the court's approval of the settlement agreement and the release of those funds to the plaintiffs. These amounts were partially offset by $1.7 million of investments in
property and equipment. Our investing activities provided $2.3 million of cash in the three months ended March 31, 2007, primarily comprised of $4.0 million of net maturities of

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marketable
securities and long-term investments, partially offset by $1.7 million of investments in property and equipment.

Our
financing activities provided $2.4 million of cash in the three months ended March 31, 2008, including $2.2 million of proceeds from the sale of common stock in
connection with our ESPP and $0.3 million of proceeds from the exercise of stock options. These proceeds were partially offset by $61,000 used for payments on our capital leases for office
equipment and $37,000 used to pay withholding obligations related to the net share settlement of restricted stock awards upon vesting. Our financing activities used $230,000 of cash in the three
months ended March 31, 2007, of which $189,000 was used to pay withholding obligations related to the net share settlement in December 2006 of a restricted stock award and $41,000 was used to
pay long-term liabilities related to capital leases for office equipment. Due to the stock option review and related restatement in the first half of 2007, we were unable to issue shares
of our common stock through either the ESPP or to allow any exercises of outstanding options to purchase our common stock during the quarter.

Based
on our current expectations, we believe our cash, cash equivalents, marketable debt securities and long-term investments will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least 12 months, including consideration and transaction costs aggregating $4.9 million in connection with our April 18,
2008 acquisition of Atreus Systems, Inc. It is difficult to predict future liquidity requirements with certainty, and the rate at which we will consume cash will be dependent on the cash needs
of future operations, including changes in working capital, which will, in turn, be directly affected by the levels of demand for our products, the timing and rate of expansion of our business, the
resources we devote to developing our products and any litigation settlements. We anticipate devoting substantial capital resources to continue our research and development efforts, to maintain our
sales, support and marketing operations, to improve our internal control environment and for other general corporate activities, as well as to vigorously defend against existing and potential
litigation. See Note 17 to our condensed consolidated financial statements.

Recent Accounting Pronouncements

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

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

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In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities("SFAS 159"). SFAS 159 permits an entity to measure certain financial assets and financial liabilities at fair value. Under SFAS 159, entities that elect the fair value option
will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few
exceptions, as long as it is applied to the instrument in its entirety. SFAS 159 establishes presentation and disclosure requirements, but does not eliminate disclosure requirements of other
accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. SFAS 159 became effective for fiscal years beginning after
November 15, 2007. We did not elect to apply the fair value option under SFAS 159 to any instrument at March 31, 2008.

In
September 2006, the FASB issued SFAS 157, which provides a single definition of fair value, along with a framework for measuring it, and requires additional disclosure about
using fair value to measure assets and liabilities. SFAS 157 emphasizes that fair value measurement is market-based, not entity-specific, and establishes a fair value hierarchy in which the
highest priority is quoted prices in active markets. Under SFAS 157, fair value measurements are disclosed according to their level within this hierarchy. While SFAS 157 does not add any
new fair value measurements, it does change current practice in certain ways, including requiring entities to include their own credit standing when measuring their liabilities. SFAS 157 became
effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the
FASB issued FASB Staff Position FAS 157-2,Effective Date of FASB Statement No. 157,which delays the effective date of
SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The nonfinancial assets
and nonfinancial liabilities to which SFAS 157 was not applied for the three months ended March 31, 2008 are included under the captions Property and equipment, net; Purchased intangible
assets, net; and Goodwill in our condensed consolidated balance sheets. The partial adoption of SFAS 157 for financial assets and financial liabilities did not impact our consolidated results
of operations or financial condition.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of market risks, including changes in interest rates affecting the return on our investments and foreign currency fluctuations. We do
not believe that a hypothetical 10% adverse movement in interest rates and foreign currency exchange rates would have a materially different impact than what was disclosed in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2007.

Item 4.    Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934 (the "Exchange Act"), as of March 31, 2008. The term "disclosure controls
and procedures," as defined in Rule 13a-15(e), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act
is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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In
our management's Report on Internal Control over Financial Reporting filed with our Annual Report on Form 10-K for the year ended December 31, 2007, we
reported material weaknesses in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). During the quarter ended March 31, 2008,
we continued to design enhancements to our controls and implemented a limited number of changes to address the reported material weaknesses. As a result of these material weaknesses, which were not
remediated as of March 31, 2008, we have concluded that our disclosure controls and procedures were not effective as of March 31, 2008.

Changes in Internal Control over Financial Reporting

Listed below are the changes to our internal control over financial reporting during the quarter ended March 31, 2008, organized by reference to the
material weakness to which they relate.

Inadequate financial statement preparation and review procedures:



Inadequate controls over the accounting for stock-based compensation:



In
addition, we will continue to design and implement additional policies, procedures and controls as required during the remediation of our reported material weaknesses.

Except
as described above, there was no change in our internal control over financial reporting during the quarter ended March 31, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

Risks and Inherent Limitations

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

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

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings

We are a party to the legal proceedings described in part I, Item 3, "Legal Proceedings" of our Annual Report on Form 10-K for
the year ended December 31, 2007. There have been no material developments with respect to the legal proceedings during the quarter ended March 31, 2008 other than as set forth below.

On
November 7, 2007, we and the plaintiff in the 2004 Restatement Litigation agreed to a settlement in the amount of $40.0 million. On March 31, 2008, the United
States District Court for the District of Massachusetts approved the settlement.

On
March 25, 2008, our Board of Directors rejected the demands set forth in a shareholder demand letter dated February 15, 2008 submitted by one of the plaintiffs in the
derivative litigation dismissed by the court on January 25, 2008.

On
March 17, 2008, we filed our answer denying the claims asserted by James Collier, our former Vice President of Sales, in a complaint filed in United States District Court for
the District of New Jersey.

By
letter dated April 23, 2008, Broadvox requested that we assume the defense of patent litigation filed by Sprint against Broadvox. We have agreed, subject to certain conditions,
to assume the defense of Broadvox in this litigation to the extent the claims result from its use of Sonus products.

On
April 23, 2008, the appeals court dismissed the plaintiff's appeal of the lower court's dismissal of the plaintiff's shareholder derivative claim filed in Massachusetts
Superior Court.

A
court-ordered mediation in the C2 patent litigation has been scheduled for May 29, 2008.

For
a more detailed discussion of our legal proceedings, please see Note 17 to our condensed consolidated financial statements.

Item 1A.    Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below before buying our
common stock. If any of the following risks actually occurs, the trading price of our common stock could decline and you may lose all or part of your investment.

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

To date, we have shipped our products to a limited number of customers. We expect that in the foreseeable future, the majority of our revenues will continue to
depend on sales of our products to a limited number of customers. One customer contributed approximately 35% of our revenue in the three months ended March 31, 2008. One customer contributed
approximately 32% of our revenue in fiscal 2007. Three customers each contributed more than 10% of our revenue in fiscal 2006, or approximately 43% of our revenue in the aggregate. Our future success
will depend on our ability to attract additional customers beyond our current limited number. The growth of our customer base could be adversely affected by:



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

If we fail to compete successfully against incumbent telecommunications equipment companies, our ability to increase our revenues and sustain
profitability will be impaired.

Competition in the telecommunications market is intense. This market has historically been dominated by large incumbent telecommunications equipment companies,
such as Alcatel-Lucent, NEC, Nortel Networks, Nokia Siemens, Huawei and Ericsson, all of which are our direct competitors. We also face competition from other large telecommunications and networking
companies, including Cisco Systems, some of which have entered our market by acquiring companies that design competing products. Alcatel and Lucent completed their merger. Siemens has combined its
networking business with Nokia's networking business. Other competitors may merge, intensifying competition. Additional competitors with significant financial resources also may enter our markets and
further intensify competition.

Many
of our current and potential competitors have significantly greater selling and marketing, technical, manufacturing, financial and other resources. Further, some of our competitors
sell significant amounts of other products to our current and prospective customers and have the ability to offer lower prices to win business. Our competitors' broad product portfolios, coupled with
already existing relationships, may cause our customers to buy our competitors' products or harm our ability to attract new customers.

To
compete effectively, we must deliver innovative products that:



If
we are unable to compete successfully against our current and future competitors, we could experience price reductions, order cancellations, loss of customers and revenues and reduced
gross profit margins.

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

International revenues approximated $12 million in the three months ended March 31, 2008, and $85 million and $78 million in fiscal
2007 and fiscal 2006, respectively, and we intend to expand our sales in international markets. This expansion will require significant management attention and financial resources to successfully
develop direct and indirect international sales and support channels. In addition, we may not be able to develop international market demand for our products, which could impair our ability to grow
our revenues. We have limited experience marketing, distributing and supporting our products internationally and, to do so, we expect that we will need to develop versions of our products that comply
with local standards. Furthermore, international operations are subject to other inherent risks, including:



Consolidation in the telecommunications industry could harm our business.

The industry has experienced consolidation and we expect this trend to continue. Consolidation among our customers may cause delays or reductions in capital
expenditure plans and/or increased competitive pricing pressures as the number of available customers declines and their relative purchasing power increases in relation to suppliers. Any of these
factors could adversely affect our business.

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

We have been named as a defendant in a number of securities class action and derivative lawsuits. We are generally obliged, to the extent permitted by law, to
indemnify our current and former directors and officers who are named as defendants in these lawsuits. Defending against existing and potential litigation may require significant attention and
resources of management. Regardless of the outcome, such litigation will result in significant legal expenses. On November 7, 2007, the Company and the plaintiff in the 2004 Restatement
Litigation agreed to a settlement in the amount of $40.0 million. The settlement was approved by the court on March 31, 2008. If our defenses in any of our pending litigation are
ultimately unsuccessful, or if we are unable to achieve a favorable settlement, we could be liable for large damage awards that could have a material adverse effect on our business, results of
operations and financial position.

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The investigation of our historical stock option practices and the restatement of our prior financial statements required us to incur substantial
expenses and diverted our management's attention from our business, which may continue to impact our business, financial position and results of operations and the trading price of our common stock.

Our internal review and our Audit Committee's investigation into our historical stock option practices and accounting required us to incur substantial expenses
for legal, accounting, tax and other professional services, diverted management's attention from our business, and could in the future harm our business, financial condition and results of operations.

While
we believe we have made appropriate judgments in determining the correct measurement dates for our stock option grants, the SEC may disagree with the manner in which we have
accounted for and reported, or not reported, the financial impact. Accordingly, there is a risk we may have to further restate our historical financial statements, amend prior filings with the SEC, or
take other actions not currently contemplated.

Matters related to the investigation into our historical stock option granting practices and the restatement of our financial statements may result in
additional litigation, regulatory proceedings and government enforcement actions for which we may be required to pay damages or penalties or have other remedies imposed.

Our historical stock option granting practices and the restatement of our financial statements have exposed us to greater risks associated with litigation,
regulatory proceedings and government enforcement action. We have provided the results of our internal review and investigation to the SEC, which has notified us of a formal order of private
investigation. We have responded to requests for documents and additional information and we intend to continue to cooperate with the SEC. No assurance can be given regarding the outcomes from
litigation, regulatory proceedings or government enforcement actions relating to our past stock option practices. The resolution of these matters will be time-consuming, expensive, and may
distract management from the conduct of our business. Furthermore, if we are subject to adverse findings in litigation, regulatory proceedings or government enforcement actions, we could be required
to pay damages or penalties or have other remedies imposed, which could harm our business, financial condition, results of operations and cash flows.

We have identified material weaknesses in our internal control over financial reporting, which, if not remedied effectively, could have an adverse
effect on the trading price of our common stock and impair our ability to timely file our SEC reports and otherwise seriously harm our business.

Through the documentation, testing and assessment of our internal control over financial reporting pursuant to the rules promulgated by the SEC under
Section 404 of the Sarbanes-Oxley Act of 2002 and Item 308 of Regulation S-K, management has concluded that our disclosure controls and procedures and our internal
control over financial reporting had material weaknesses as of December 31, 2007. Our inability to remedy such material weaknesses promptly and effectively could have a material adverse effect
on our business, results of operations and financial condition, as well as impair our ability to meet our quarterly and annual reporting requirements in a timely manner. Prior to the elimination of
these material weaknesses, there remains risk that the transitional controls on which we currently rely will fail to be sufficiently effective, which could result in a material misstatement of our
financial position or results of operations and require a restatement. In addition, even if we are successful in strengthening our controls and procedures, such controls and procedures may not be
adequate to prevent or identify irregularities or facilitate the fair presentation of our financial statements or SEC reporting.

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Failure or circumvention of our controls and procedures could impair our ability to report accurate financial results and could seriously harm our
business.

Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, and not absolute, assurances
that the objectives of the system are met. The failure or circumvention of our controls, policies and procedures could impair our ability to report accurate financial results and could have a material
adverse effect on our business, results of operations and financial position.

The limitations of our director and officer liability insurance may require us to pay significant legal expenses and settlement or damage awards.

Our director and officer liability insurance policies provide only limited liability protection relating to the securities class action and derivative lawsuits
against us and certain of our officers and directors. If these policies do not adequately cover expenses and certain liabilities relating to these lawsuits, our results of operations and our financial
position could be materially harmed. We have agreed to pay an amount in excess of available insurance coverage to settle the 2004 Restatement Litigation. To resolve an insurance coverage dispute with
our insurer regarding the coverage provided by one of our policies, we have purchased additional coverage for a one-time premium payment of $770,000. The facts underlying the lawsuits have
made director and officer liability insurance extremely expensive for us, and may make such insurance coverage unavailable for us in the future. Increased premiums could materially harm our financial
results in future periods. The inability to obtain this coverage due to its unavailability or prohibitively expensive premiums would make it more difficult to retain and attract officers and directors
and potentially expose us to self-funding any future liabilities ordinarily mitigated by director and officer liability insurance.

If we are not current in our SEC filings, we will face several adverse consequences.

From August 9, 2006 through August 2, 2007, we were not current in our SEC filings. In addition, our Annual Report on Form 10-K
for the fiscal year ended December 31, 2007 was due February 29, 2008 and was not filed until March 6, 2008. If we are unable to remain current in our SEC filings, we will not be
able to have a registration statement under the Securities Act of 1933, covering a public offering of securities, declared effective by the SEC, and we will not be able to make offerings pursuant to
existing registration statements (including registration statements on Form S-8 covering employee stock plans), or pursuant to certain "private placement" rules of the SEC under
Regulation D to any purchasers not qualifying as "accredited investors." In addition, our affiliates will not be able to sell our securities pursuant to Rule 144 under the Securities
Act. Finally, we will not be eligible to use a "short form" registration statement on Form S-3 until September 1, 2008 and we have lost our status as a "well known seasoned
issuer," including the registration advantages associated with such status. These restrictions may impair
our ability to raise capital in the public markets should we desire to do so, and to attract and retain key employees.

Our common stock may be delisted from the NASDAQ Global Select Market and transferred to the National Quotation Service Bureau ("Pink Sheets"), which
may, among other things, reduce the price of our common stock and the levels of liquidity available to our stockholders.

On August 2, 2007, we filed the Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (the "Second Quarter
Form 10-Q"), the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (the "Third Quarter Form 10-Q"), the Annual
Report on Form 10-K for the year ended December 31, 2006 (the "2006 Form 10-K") and the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2007 (the "First Quarter Form 10-Q") with the SEC. The filing of these reports remedied our non-compliance with Marketplace
Rule 4310(c)(14). However, if the SEC disagrees with the manner in which we have accounted for and reported, or not reported, the financial

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impact
of past stock option grants, there could be further delays in filing subsequent SEC reports or other actions that might result in the delisting of our common stock from the NASDAQ Global Select
Market.

In
addition, if we fail to timely file all of our future periodic reports under the Exchange Act, our common stock may be delisted from the NASDAQ Global Select Market and subsequently
would trade on the Pink Sheets. The trading of our common stock on the Pink Sheets may reduce the price of our common stock and the levels of liquidity available to our stockholders. Our delisting
from the NASDAQ Global Select Market and transfer to the Pink Sheets may also result in other negative implications, including the potential loss of confidence by suppliers, customers and employees,
the loss of institutional investor interest and fewer business development opportunities.

We have a limited number of shares available to issue to our employees, which could impact our ability to attract, retain and motivate key personnel.

We historically have used stock options as a significant component of our employee compensation program in order to align employees' interests with the interests
of our stockholders, encourage employee retention, and provide competitive compensation packages. In 2007, our shareholders approved a new stock incentive plan which includes a limited amount of
shares to be granted under the plan. The limited number of shares available for use as equity incentives to employees may make it more difficult for us to attract, retain and motivate key personnel.

The market for voice infrastructure products for the public network is new and evolving and our business will suffer if it does not develop as we
expect.

The market for our products continues to evolve. In particular, wireless, cable and broadband access networks are becoming important markets for our products.
Packet-based technology may not become widely accepted as a platform for voice and a viable market for our products may not be sustainable. If this market does not develop, or develops more slowly
than we expect, we may not be able to sell our products in significant volume. Additionally, the introduction of new products with higher capacity may result in a decrease in the manufacturing volumes
of our older products and a corresponding decrease in component purchase volume discounts. This could result in higher overall manufacturing costs.

If we do not anticipate and meet specific customer requirements or if our products do not interoperate with our customers' existing networks, we may not
retain current customers or attract new customers.

To achieve market acceptance for our products, we must effectively anticipate, and adapt in a timely manner to, customer requirements and offer products and
services that meet changing customer demands. Prospective customers may require product features and capabilities that our current products do not have. The introduction of new or enhanced products
also requires that we carefully manage the transition from older products in order to minimize disruption in customer ordering patterns and ensure that adequate supplies of new products can be
delivered to meet anticipated customer demand. If we fail to develop products and offer services that satisfy customer requirements, or to effectively manage the transition from older products, our
ability to create or increase demand for our products would be seriously harmed and we may lose current and prospective customers.

Many
of our customers will require that our products be designed to interface with their existing networks, each of which may have different specifications. Issues caused by an
unanticipated lack of interoperability may result in significant warranty, support and repair costs, divert the attention of our engineering personnel from our hardware and software development
efforts and cause significant customer relations problems. If our products do not interoperate with those of our customers'

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networks,
installations could be delayed or orders for our products could be cancelled, which would seriously harm our gross margins and result in loss of revenues or customers.

Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that may have an adverse effect on
our business.

Large telecommunications providers have substantial purchasing power and leverage in negotiating contractual arrangements with us. These customers may require us
to develop additional features, require penalties for failure to deliver such features and may seek discounted product or service pricing. As we sell more products to this class of customer, we may be
required to agree to such terms and conditions, which may affect the timing of revenue recognition, amount of deferred revenues or product and service margins and may adversely affect our financial
position in the applicable period affected.

We rely on distribution partners to sell our products in certain markets, and disruptions to or our failure to effectively develop and manage our
distribution channel and the processes and procedures that support it could adversely affect our ability to generate revenues from the sale of our products in those markets.

Our future success is highly dependent upon establishing and maintaining successful relationships with a variety of value-added reseller and distribution
partners. A portion of our revenues is derived through distributors, many of which sell competitive products. Our revenues depend in part on sales by these distributors. The loss of or reduction in
sales by these distributors could materially reduce our revenues. If we fail to maintain relationships with these distribution partners, fail to develop new relationships with distributors in new
markets, fail to manage, train, or provide incentives to existing distributors effectively or if these partners are not successful in their sales efforts, sales of our products may decrease and our
operating results could suffer.

In
addition, we recognize a portion of our revenue based on a sell-through model using information provided by our distributors. If those distributors provide us with
inaccurate or untimely information, the amount or timing of our revenues could be adversely affected.

The unpredictability of our quarterly results may adversely affect the trading price of our common stock.

Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of
which may cause our stock price to fluctuate. Generally, purchases by service providers of telecommunications equipment from manufacturers have been unpredictable and clustered, rather than steady, as
the providers build out their networks. The primary factors that may affect our revenues and operating results include the following:



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As
with other telecommunications product suppliers, we may recognize a portion of our revenue in a given quarter from sales booked and shipped in the last weeks of that quarter. As a
result, delays in customer orders may result in delays in shipments and recognition of revenue beyond the end of a given quarter.

A
significant portion of our operating expenses is fixed in the short-term. If revenues for a particular quarter are below expectations, we may not be able to reduce
operating expenses proportionally for the quarter. Any such revenue shortfall would, therefore, have a significant effect on our operating results for the quarter.

We
have incurred significant losses since inception and, at March 31, 2008, had an accumulated deficit of $751.4 million. Although we achieved profitability on an annual
basis in fiscal 2006, fiscal 2005 and fiscal 2004, we have incurred a net loss in certain quarters and in fiscal 2007 and may incur additional losses in future quarters and years. Our revenues may not
grow and we may never generate sufficient revenues to sustain profitability.

We
believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is likely that in some future
quarters, our
operating results may be below the expectations of public market analysts and investors, which may adversely affect our stock price.

We are entirely dependent upon our voice infrastructure products, and our future revenues depend upon their commercial success.

Our future growth depends upon the commercial success of our voice infrastructure products. We intend to develop and introduce new products and enhancements to
existing products in the future. We may not successfully complete the development or introduction of these products. If our target customers do not adopt, purchase and successfully deploy our current
or planned products, our revenues will not grow.

If we do not respond rapidly to technological changes or to changes in industry standards, our products could become obsolete.

The market for packet voice infrastructure products is likely to be characterized by rapid technological change and frequent new product introductions. We may be
unable to respond quickly or effectively to these developments. We may experience difficulties with software development, hardware design, manufacturing or marketing that could delay or prevent our
development, introduction or marketing of new products and enhancements. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies
or the emergence of new

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industry
standards could render our existing or future products obsolete. If the standards adopted are different from those that we have chosen to support, market acceptance of our products may be
significantly reduced or delayed. If our products become technologically obsolete, we may be unable to sell our products in the marketplace and generate revenues.

Because our products are sophisticated and designed to be deployed in complex environments, they may have errors or defects that we find only after full
deployment, which could seriously harm our business.

Our products are sophisticated and are designed to be deployed in large and complex networks. Because of the nature of our products, they can only be fully tested
when substantially deployed in very large networks with high volumes of traffic. Some of our customers have only recently begun to commercially deploy our products and they may discover errors or
defects in the software or hardware, or the products may not operate as expected. As we continue to expand our distribution channel through distributors and resellers, we will need to rely on and
support their service and support
organizations. If we are unable to fix errors or other performance problems that may be identified after full deployment of our products, we could experience:



Because our products are deployed in large, complex networks around the world, failure to establish a support infrastructure and maintain required
support levels could seriously harm our business.

Our products are deployed in large and complex networks around the world. Our customers expect us to establish a support infrastructure and maintain demanding
support standards to ensure that their networks maintain high levels of availability and performance. To support the continued growth of our business, our support organization will need to provide
service and support at a high level throughout the world. If we are unable to provide the expected level of support and service to our customers, we could experience:



Changes in our business strategy related to product and maintenance offerings and pricing could affect vendor specific objective evidence ("VSOE") and
revenue recognition.

Our business strategy and competition within the industry could exert pricing pressure on our maintenance offerings. Changes in our product or maintenance
offerings/packages and related pricing could affect VSOE and require us to reestablish VSOE for some or all of our product or service offerings. If we are required to reestablish VSOE on any of our
products or services, we could be required to defer revenue recognition with an impact on the amount of revenue recognized in a reporting period.

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We have experienced changes in our senior management which could affect our business and operations.

We have made significant changes in our senior management team since January 1, 2007. Because of these significant changes, our management team may not be
able to work together effectively to successfully develop and implement our business strategies. In addition, management will need to devote significant attention and resources to preserve and
strengthen relationships with employees, customers and the investor community. If our new management team is unable to achieve these goals, our ability to grow our business and successfully meet
operational challenges could be impaired.

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

Our business depends upon highly skilled engineering, sales, marketing and customer support personnel. Any failure to hire or retain needed qualified personnel
could impair our growth.

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

If we are subject to employment claims, we could incur substantial costs in defending ourselves.

We are subject to employment claims in connection with employee terminations. In addition, companies in our industry whose employees accept positions with
competitors may claim that their competitors have engaged in unfair hiring practices. These claims may result in material litigation. We could incur substantial costs defending ourselves or our
employees against those claims, regardless of their merits. In addition, defending ourselves from those types of claims could divert our management's attention from our operations. The cost of
employment claims may also increase as a result of our increasing
international expansion. If we are found liable in connection with any employment claim, we may incur significant costs that could adversely impact our financial position and results of operations.

We depend upon a single contract manufacturer and any disruption in this relationship may cause us to fail to meet the demands of our customers and
damage our customer relationships.

We rely on a contract manufacturer to manufacture our products according to our specifications and to fill orders on a timely basis. Our contract manufacturer
provides comprehensive manufacturing services, including assembly and certain tests of our products and procurement of materials. Our contract manufacturer also builds products for other companies and
may not always have sufficient quantities of inventory available to fill our orders or may not allocate their internal resources to fill these orders on a timely basis. We do not have a
long-term supply contract with our manufacturer nor is our manufacturer required to manufacture products for any specified period. We do not have internal manufacturing capabilities to
meet our customers' demands. Qualifying a new contract manufacturer and commencing commercial scale production is expensive and time consuming and could result in a significant interruption in the
supply of our products. If a change in contract manufacturers results in delays in our fulfillment of customer orders or if a contract manufacturer fails to make timely delivery of orders, we may lose
revenues and suffer damage to our customer relationships.

We and our contract manufacturer rely on single or limited sources for supply of some components of our products and if we fail to adequately predict
our manufacturing requirements or if our supply of any of these components is disrupted, we will be unable to ship our products.

We and our contract manufacturer currently purchase several key components of our products, including commercial digital signal processors, from single or limited
sources. We purchase these

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components
on a purchase order basis. If we overestimate our component and finished goods requirements, we could have excess inventory, which would increase our costs. If we underestimate our
requirements, we may not have an adequate supply, which could interrupt manufacturing of our products and result in delays in shipments and revenues.

We
currently do not have long-term supply contracts with our component suppliers and they are not required to supply us with products for any specified periods, in any
specified quantities or at any set price, except as may be specified in a particular purchase order. In the event of a disruption or delay in supply, or inability to obtain products, we may not be
able to develop an alternate source in a timely manner or at favorable prices, or at all. A failure to find acceptable alternative sources could hurt our ability to deliver high-quality
products to our customers and negatively affect our operating margins. In addition, reliance on our suppliers exposes us to potential supplier production difficulties, quality variations and
unforeseen price increases. Our customers rely upon our
ability to meet committed delivery dates, and any disruption in the supply of key components would seriously adversely affect our ability to meet these dates and could result in legal action by our
customers, loss of customers or harm our ability to attract new customers. Additionally, any unforeseen price increases could reduce our profitability or force us to increase our prices, which could
result in a loss of customers or harm our ability to attract new customers.

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

Due to the long-term nature of certain customer contracts, we are dependent on the continued financial strength of our customers. If one or more of
our significant customers experience financial difficulties, it could result in uncollectible accounts receivable and our loss of significant customers and anticipated service revenue.

If we are not able to obtain necessary licenses of third-party technology at acceptable prices, or at all, our products could become obsolete.

We have incorporated third-party licensed technology into our current products. From time to time, we may be required to license additional technology from third
parties to develop new products or product enhancements. Third-party licenses may not be available or continue to be available to us on commercially reasonable terms. The inability to maintain or
re-license any third-party licenses required in our current products or to obtain any new third-party licenses to develop new products and product enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater cost, and delay or prevent us from making these products or enhancements, any of which could seriously harm the
competitiveness of our products.

Failure by our strategic partners or by us in integrating products provided by our strategic partners could seriously harm our business.

Our solutions include the integration of products supplied by strategic partners, who offer complementary products and services. We rely on these strategic
partners in the timely and successful deployment of our solutions to our customers. If the products provided by these partners have defects or do not operate as expected or if we do not effectively
integrate and support products supplied by these strategic partners, then we may have difficulty with the deployment of our solutions that may result in:



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In
addition to cooperating with our strategic partners on specific customer projects, we also may compete in some areas with these same partners. If these strategic partners fail to
perform or choose not to cooperate with us on certain projects, in addition to the effects described above, we could experience:



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

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

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



Any
lawsuits regarding intellectual property rights, regardless of their success, would be time-consuming, expensive to resolve and would divert our management's time and
attention.

On
June 14, 2006, C2 Communications sued AT&T, Inc., Verizon Communications, Inc., Qwest, Bellsouth, Sprint Nextel Corporation, Global Crossing and Level 3 in
the Eastern District of Texas, Marshall Division. C2 Communications has alleged that each of the defendants infringe U.S. Patent No. 6,243,373 entitled "Method and Apparatus for Implementing a
Computer Network Internet Telephone System." We have agreed, subject to certain conditions, to assume the defense of Qwest, Global Crossing and Level 3 in this litigation to the extent the
claim results from their use of products purchased from us. There can be no assurance that other defendants who have purchased our products will not seek indemnification from us. On December 3,
2007, the Court held a pre-trial, or Markman hearing, on the claim construction of the patent. The court has scheduled the trial date for September 2008. Court-ordered mediation has been
scheduled for May 29, 2008. We believe that the defendants have substantial legal and factual defenses to the infringement claim, which we intend to pursue vigorously on behalf of the
defendants for whom we agree or are required to assume defense of the litigation. However, there is no assurance any of the defendants will prevail in defending this action. There also can be no
assurance that we will not be required to indemnify any of the defendants from any judgment of infringement rendered against them. We may be required to devote significant time

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and
resources in connection with assuming the defense of the claim of infringement on behalf of the defendants for whom we have agreed to assume defense of the litigation. An adverse outcome with
respect to the claim and our indemnification could have a material adverse impact on our business, operating results and financial condition.

On
January 24, 2008, Sprint Communications sued two of our customers, Broadvox and Nuvox, in the District of Kansas for patent infringement. There also can be no assurance that we
will not be required to indemnify them from any judgment of infringement rendered against them.

Any investments or acquisitions we make could disrupt our business and seriously harm our financial condition.

On April 13, 2007, we acquired Zynetix, designers of innovative GSM infrastructure solutions. On April 18, 2008, we acquired Atreus
Systems, Inc., a developer of service provisioning software for VoIP and IMS-based services. We intend to continue investing in, or acquiring, complementary products, technologies
or businesses. In the event of future investments or acquisitions, we could:



Our
integration of any acquired products, technologies or businesses will also involve numerous risks, including:



We
may be unable to successfully integrate any products, technologies, businesses or personnel that we might acquire in the future without significant costs or disruption to our
business.

If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.

Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the
carrying value may not be recoverable. Goodwill is tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill
or amortizable intangible assets may not be recoverable include significant underperformance relative to plan or long-term projections, strategic changes in business strategy,, significant
negative industry or economic trends, a

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significant
change in circumstances relative to a large customer, a significant decline in our stock price for a sustained period and a decline in our market capitalization to below net book value. We
may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined,
negatively impacting our results of operations.

Regulation of the telecommunications industry could harm our operating results and future prospects.

The telecommunications industry is highly regulated and our business and financial condition could be adversely affected by the changes in the regulations
relating to the telecommunications industry. Currently, there are few laws or regulations that apply directly to access to or delivery of voice services on IP networks. We could be adversely affected
by regulation of IP networks and commerce in any country where we operate, including the United States. Such regulations could include matters such as voice over the Internet or using Internet
protocol, encryption technology, and access charges for service providers. The adoption of such regulations could decrease demand for our products, and at the same time increase the cost of selling
our products, which could have a material adverse effect on our business, operating results and financial position.

Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results.

Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher
than anticipated earnings in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or interpretations
thereof. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the
ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our
historical income tax provisions and accruals. Our payroll tax returns were selected for audit in connection with our stock option review and we settled this audit in the first quarter of 2008. In
addition, we are subject to the potential for examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes
resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these potential examinations will not have an adverse
effect on our operating results and financial condition.

Our stock price has been and may continue to be volatile.

The market for technology stocks has been and will likely continue to be volatile. The following factors could cause the market price of our common stock to
fluctuate significantly:



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Changes in foreign exchange rates could adversely affect our results.

Many of our sales transactions with foreign customers are denominated in the local currency of the customers' country of domicile. We currently do not actively
hedge transactions payable in foreign currencies. Significant fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect our operating results or financial
condition.

Provisions of our charter documents and Delaware law have anti-takeover effects that could prevent a change of control.

Provisions of our amended and restated certificate of incorporation, our amended and restated by-laws and Delaware law could make it more difficult
for a third party to acquire us, even if doing so would be beneficial to our stockholders.

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We have not announced any currently effective authorization to repurchase shares of our common stock. However, upon vesting of restricted stock awards, employees
are permitted to return to us a portion of the newly vested shares to satisfy the tax withholding obligations that arise in connection with such vesting. The following table summarizes repurchases of
our common stock during the first quarter of fiscal 2008, which represent shares returned to satisfy tax withholding obligations:

|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 Programs
|------------------------------------- |  | -------------------------------- |  | ---------------------------- | ---- | -------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------
|January 1, 2008 to January 31, 2008   |  |                                 |  |                              |     |                                                                                  |  |                                                                                         
|February 1, 2008 to February 29, 2008 |  | 9,583                            |  | $                            | 3.83 |                                                                                  |  |                                                                                         
|March 1, 2008 to March 31, 2008       |  |                                 |  |                              |     |                                                                                  |  |                                                                                         
|                                      |  |                                  |  |                              |      |                                                                                  |   |                                                                                         
|Total                                 |  | 9,583                            |  | $                            | 3.83 |                                                                                  |  |                                                                                         
|                                      |  |                                  |  |                              |      |                                                                                  |   |                                                                                         

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Item 6.    Exhibits

|Exhibit
Number |  | Description                                                                                        
|-------------- |  | ---------------------------------------------------------------------------------------------------
|10.1           |  | Nonstatutory Stock Option Agreement Granted Under 2007 Stock Incentive Plan.                       
|10.2           |  | Award of Restricted Stock and Restricted Stock Agreement Under the 2007 Stock Incentive Plan.      
|31.1           |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|31.2           |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1           |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|32.2           |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

|Dated: May 8, 2008 |  | SONUS NETWORKS, INC.
|------------------ |  | --------------------
|                   |  | By:                 
|                   |  | By:                 

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EXHIBIT INDEX

|Exhibit Number |  | Description                                                                                        
|-------------- |  | ---------------------------------------------------------------------------------------------------
|10.1           |  | Nonstatutory Stock Option Agreement Granted Under 2007 Stock Incentive Plan.                       
|10.2           |  | Award of Restricted Stock and Restricted Stock Agreement Under the 2007 Stock Incentive Plan.      
|31.1           |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|31.2           |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1           |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|32.2           |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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