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Article by DailyStocks_admin    (07-01-08 07:22 AM)

Filed with the SEC from June 19 to June 25:

Sonus Networks (SONS)
Legatum Global Holdings denounced Sonus Networks' recent statement that accused it of having violated a federal law in connection with certain disclosure filings. Legatum, a Dubai-based investment fund, said that Sonus' June 20 letter to it had tried to "obscure matters by raising counterfeit issues about the company's largest shareholder." Legatum withheld votes for Sonus' nominees after Sonus rebuffed its request to add two officers to the seven-member board and to make various corporate-governance changes. Legatum said that it's "not going away any- time soon," and will take action to "help move the company in the direction that will increase transparency, board accountability and best serve the interests of all shareholders." Legatum holds 67,295,079 shares (24.8%).

BUSINESS OVERVIEW

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 Project ("3GPP"). This IMS architecture is being accepted by network operators globally as the common approach for building converged voice, data, wireline and wireless networks. The IMS architecture is based primarily on IP packets and the Session Initiation Protocol ("SIP"), which has been the foundation of our products since our formation.

Our IMS-based solution product suite includes the GSX9000™ Open Services Switch, GSX4000™ Open Services Switch, SGX™ Signaling Gateway, the PSX™ Call Routing Server, the ASX™ Call Feature Server, the NBS™ Network Border Switch, the Sonus Insight™ Management System, the IMX® Application Platform and the mobilEdge™ Wireless Access Node. Our products, designed for deployment as the platform of a service provider's voice network, can significantly reduce the cost to build and operate voice services compared to traditional alternatives. Moreover, our products offer a powerful and open platform for network operators to increase their revenues through the creation and delivery of new and innovative voice and data services. Our infrastructure equipment and software can be rapidly and easily deployed, and readily expanded to accommodate growth in traffic volume. Our products also interoperate with network operators' existing telephone infrastructure, allowing them to preserve the investment in their current networks.

We have been recognized by independent market research firms as a worldwide market share leader in several key segments of the carrier-class packet voice infrastructure equipment market. Our announced customers include many of the world's major service providers including: AT&T (including Cingular Wireless, BellSouth and AT&T Inc.), BT Group, Carphone Warehouse, France Telecom, Global Crossing, KDDI, Level 3, Qwest, Softbank Corporation, T-Systems Business Services (a division of Deutsche Telekom Group), Verizon and XO Communications. We sell our products principally through a direct sales force in the United States, Europe, the Middle East and Africa, Japan and Asia-Pacific. We have expanded our access to new geographies and into new markets through our relationships with Motorola, Embarq Logistics and regional channel partners. We also collaborate with our customers to identify and develop new advanced services and applications that they can offer to their customers.

Following a period of restricted spending by communications providers, the telecommunications industry witnessed growth in 2006 and 2007 with the investment in new IP-based and wireless infrastructure technologies. Over the last few years, VoIP has been widely accepted as the protocol on which next generation networks will be built. While the speed and extent of the adoption of carrier packet voice infrastructure products by large carriers remains uncertain, we believe that over time the market opportunity for packet voice solutions is substantial. Synergy Research Group projects that the market for service provider VoIP/IMS infrastructure will approximate $3 billion in 2008. Our objective is to capitalize on our early technology and market lead and build a premier franchise in packet voice infrastructure solutions. The following are key elements of our strategy:


leverage our technology leadership to achieve key service provider wins;


continue to extend our technology platform from the core of the network to the access edge;


embrace the principles outlined by the 3GPP and deliver the industry's most advanced IMS-ready product suite;


expand and broaden our customer base by targeting specific market segments, such as wireless operators;


assist our customers' ability to differentiate themselves by offering the industry's most sophisticated application development platform and service creation environment;


expand our solutions to address emerging IP-based markets, such as network border switching and wireless switching;


expand our global sales, marketing, support and distribution capabilities;


grow our base of software applications and development partners;


actively contribute to the standards definition and adoption process; and


pursue strategic acquisitions and alliances.

Industry Background

The public telephone network is an integral part of our everyday lives. For most of its history, the telephone industry has been heavily regulated, which has slowed the evolution of its underlying switching and infrastructure technologies, limiting innovation in service offerings and the pricing of telephone services. Two global forces—deregulation and the expansion of the Internet—have revolutionized the public telephone network worldwide.

Deregulation of the telephone industry accelerated with the passage of the Telecommunications Act of 1996. The barriers that once restricted service providers to a specific geography or service offering, such as local or long distance services, are eroding. The opportunity created by accessibility to the telephone services market has encouraged new participants to enter the market and incumbent service providers to expand into new markets, both domestic and international.

Competition between new providers and incumbents is driving down service prices. With limited ability to reduce the cost structure of the public telephone network, profit margins for traditional telephone services have declined. In response, service providers are seeking new, creative and differentiated services as a means to increase revenues and as an opportunity to reduce costs.

Simultaneously, the rapid adoption of the Internet and broadband connectivity has driven the dramatic growth of data traffic and the need for service providers to offer more efficient and scalable services to its customers. VoIP networks more efficiently fill available network bandwidth with packets of data and voice from many users. As the volume of data and voice traffic continues to increase with the growth of broadband access, service providers need to build large-scale, more efficient packet networks.

The Emergence of IMS

For the first time in the history of the telecommunications industry, both wireless and wireline network operators are converging on a standard architecture designed as a single communications network architecture. The IMS architecture is a set of principles defined by the 3GPP that describes a standard way of building telecommunications networks. In an IMS environment network, switching elements are distributed and applications, including voice, are IP-based.

We believe significant opportunities exist in uniting separate, parallel networks into a new, integrated public network capable of transporting both voice and data traffic on wireless or wireline devices. IP architectures are more efficient at moving data, more flexible and reduce equipment and operating costs. Significant potential savings can be realized by converging voice and data networks, as well as wireless and wireline networks, thereby reducing network operating costs and eliminating redundant or overlapping equipment purchases. Also, combining traditional voice services with Internet or web-based services in a single network is expected to enable new and powerful high-margin, revenue-generating service offerings such as voice virtual private networks, one-number/follow-me services, unified messaging, conferencing, prepaid and postpaid calling card services and sophisticated call centers and other IP voice services.

The public telecommunications network is large, highly complex and generates significant revenues, a substantial majority of which is derived from voice services. Given service providers' substantial investment in, and dependence upon, traditional circuit-switched technology, their transition to VoIP and IMS architectures will be gradual.

Requirements for Voice Infrastructure Products for VoIP and IMS-based Networks

Users demand high levels of quality and reliability from the public telephone network and service providers require a cost-efficient network that enables new revenue-generating services. As a result, leading carrier packet voice infrastructure products are being designed to meet some or all of the following requirements:

IMS-ready architecture. Increasingly, carriers recognize the benefit of voice infrastructure solutions that align with the IMS architecture and can serve as the foundation for building next-generation networks. The IMS architecture enables network operators to converge voice, video and other multimedia services to deliver innovative and compelling bundled solutions to consumers. Designed to standardize the delivery of IP services, IMS defines a standard that is distributed and supports interoperability among network components. Accordingly, solutions must allow service providers to seamlessly and cost-effectively migrate to the evolving IMS standards while maximizing their network investment by delivering converged multimedia services over their existing network.

Carrier-class performance. Service providers operate complex, mission-critical networks demanding clear infrastructure requirements, including extremely high reliability, quality and interoperability. For example, service providers typically require equipment that complies with their 99.999% availability standard.

Compatibility with standards and existing infrastructure. New infrastructure equipment and software must support the full range of telephone network standards, including signaling protocols such as SS7 or ISDN and international signaling variants, and various physical interfaces such as T1 and E1. It must also support data networking protocols such as IP and asynchronous transfer mode, or ATM, as well as telephony protocols such as SIP, SIP-I, SIP-T, MGCP and H.323. Infrastructure solutions must also seamlessly integrate with service providers' existing operations support systems.

Scalability and density. Carrier voice infrastructure solutions face challenging scalability requirements. Service providers' central offices typically support tens or even hundreds of thousands of simultaneous calls. In order to be economically attractive, the new infrastructure must compare favorably with existing networks in terms of cost per port, space occupied, power consumption and cooling requirements.

Intelligent software in an open and flexible platform. The architecture of packet voice infrastructure solutions decouples the capabilities of traditional circuit-switched equipment into robust hardware elements and highly intelligent software platforms that provide control, signaling and service creation capabilities. This approach is designed to transform the closed, proprietary circuit-switched public telephone network into a flexible, open environment accessible to a wide range of software developers. The objective is to permit service providers and third-party vendors to develop and implement new applications independent of switch vendors. Moreover, the proliferation of independent software providers promises to drive the creation of innovative voice and data services that could expand service provider revenues.

Simple and rapid installation, deployment and support. Infrastructure solutions must be easy to install, deploy, configure and manage. These attributes will enable rapid growth and effective management of dynamic and complex service provider networks.

The Sonus Solution

We develop, market and sell a comprehensive suite of IMS-ready voice infrastructure products with an architecture aligned with the principles of IMS that are purpose-built for the deployment and management of voice and data services over carrier packet networks. The Sonus solution consists of the following carrier-class products:


GSX9000™ Open Services Switch;


GSX4000™ Open Services Switch;


NBS™ Network Border Switch;


PSX™ Call Routing Server;


SGX™ Signaling Gateway;


ASX™ Call Feature Server;


IMX® Application Platform;


Sonus Insight Management System; and


mobilEdge™ Wireless Access Node

These products are designed to offer high reliability, toll-quality voice, improved economics, interoperability, rapid deployment and an open architecture enabling the design and implementation of new services and applications. Like the IMS architecture, our products are based on an open distributed IP-based architecture. As shown in the following diagram, our existing products and products in development offer an IMS-ready solution:

Carrier-class performance. Our products are designed to offer the highest levels of quality, reliability and interoperability, including:


full redundancy, enabling 99.999% availability;


voice quality equal or superior to that of today's circuit-switched network;


system hardware designed for Network Equipment Building Standards, or NEBS Level 3, compliance;


network monitoring and provisioning designed for Operations System Modifications for the Integration of Network Elements, or OSMINE, compliance;


a complete set of service features, addressing those found in the existing voice network and extending them to offer greater flexibility; and


sophisticated network management and configuration capabilities.

Compatibility with industry standards and existing infrastructure. Our products are designed to be compatible with applicable voice and data networking standards and interfaces, including:


SS7 and other telephone network signaling protocols, including international signaling variants, advanced services and simple call management and routing;


IP, ATM, Ethernet and optical data networking standards;


call signaling standards including SIP, SIP-I, SIP-T, MGCP and H.323 and others;


voice coding standards such as G.711 and echo cancellation standard G.168; and


all common interfaces, including T1, T3, E1 and optical interfaces.

The Sonus solution is designed to interface with legacy circuit-switching equipment, supporting the transparent flow of calls and other information between the circuit and packet networks. As a result, our products allow service providers to migrate to a new packet voice infrastructure, while preserving their significant legacy infrastructure investments.

Cost effectiveness and high scalability. The Sonus solution can be used to cost-effectively build packet-based switch configurations supporting a range from a few hundred calls to hundreds of thousands of simultaneous calls. In addition, the capital cost of our equipment is typically lower than that of traditional circuit-switched equipment. At the same time, our GSX Family of Open Services Switches offers unparalleled density, requires significantly less space than needed by typical circuit-switching implementations and requires significantly less power and cooling. This makes possible a significant reduction in expensive central office facilities cost and allows service providers to deploy our equipment in locations where traditional circuit switches would not be an option given the limited space and environmental services.

MS architecture and flexible platform. The Sonus architecture is built on the basic principles defined by the IMS architecture that is being accepted by network operators globally as the common approach for next generation networks. Our solution is based on a software-centric design and a flexible platform, allowing for the rapid development of new products and revenue-generating services. New services may be developed by us, by network operators themselves or by any number of third parties including software developers and systems integrators. The Sonus IMS architecture also facilitates the creation of services that were previously not possible on the circuit-switched network. In addition, we have partnered with a number of third-party application software developers in our Open Services Partner Alliance, or OSPA®, to stimulate the growth of new applications available for our platform.

Ease of installation and deployment. Our equipment and software can be installed and placed in service by our customers more quickly than circuit-switched equipment. By offering comprehensive testing, configuration and management software, we expedite the deployment process as well as the ongoing management and operation of our products. We believe that typical installations of our solution require just weeks from product arrival to final testing, thereby reducing the cost of deployment and the time to market for new services.

The Sonus Strategy

Our objective is to capitalize on our early technology and market lead and build a premier franchise in packet voice infrastructure solutions for wireline and wireless carriers. The following are key elements of our strategy:

Leverage our technology leadership to achieve key service provider wins. As one of the first companies to offer IMS-ready carrier-class packet voice infrastructure products, we have achieved key wins with industry-leading service providers as they develop the architecture for their new voice networks. We expect service providers to select vendors that deliver leading technology and have the ability to maintain that technology leadership. Our equipment is an integral part of the network architecture and achieving these wins will enable us to expand our business as these networks are deployed. By working closely with our customers as they deploy these networks, we gain valuable knowledge regarding their requirements, positioning us to continue to develop product enhancements and extensions that address the evolving requirements of network operators globally.

Continue to extend our technology platform from the core of the network to the access edge. Our robust and sophisticated technology platform has been designed to operate in the core of the largest telecommunications networks in the world. The migration to VoIP began at the core of network operators' networks and is evolving toward the edge (or access segment) of their networks. From our leadership position in the long distance or trunking market, we are expanding into the access segments of the network. We enable network operators to deliver multiple services with a Sonus architecture. These services include long distance/international calling, tandem switching, network border switching, business access, residential access, H.323 termination, direct voice over broadband and enhanced features. This approach will allow our customers to design and execute a coordinated migration and expansion strategy as they build entirely new networks or transition from their legacy circuit-switched infrastructure to a converged, IMS architecture. We have announced the selection of our ASX Feature Server to provide consumer voice services with Alestra, AT&T, BT Group, Qwest, NTT Communications, Jupiter Communications (J:Comm), Cable and Wireless International and Carphone Warehouse.

Embrace the principles outlined by the 3GPP and deliver the industry's most advanced IMS-ready product suite. When we were founded in 1997, a standard architecture for IP-based networks did not yet exist. In order to deliver on the full promise of IP-based technologies, we developed one. Today's IMS architecture leverages many of the same distributed, IP-based principles that we used to develop our product framework. As a result, our customers do not need to undergo architectural upgrades to achieve IMS-compliance, but may stay current with emerging IMS protocols through upgrades to future releases of our software. This evolutionary path is one of our key competitive differentiators. In recognition of our leading position in IMS, Frost and Sullivan awarded us a 2006 Technology Innovation & Leadership of the Year Award.

Expand and broaden our customer base by targeting specific market segments, such as wireless operators. We plan to leverage our early success to penetrate new customer segments. We believe new and incumbent service providers will build out their VoIP infrastructures at different rates. The next-generation service providers, who are relatively unencumbered by legacy equipment, have been among the initial purchasers of our equipment and software. Other newer entrants, including wireless operators, cable operators and Internet service providers, or ISPs, have also been early adopters of our products. Incumbents, including interexchange carriers, Regional Bell Operating Companies and international operators are also adopting packet voice technologies.

Assist our customers' ability to differentiate themselves by offering the industry's most sophisticated application development platform and service creation environment. The competitive landscape in the communications industry has changed dramatically in the wake of the 1996 Telecommunications Act, the introduction of new wireless, broadband and IP-based technologies. Today's communications providers face unprecedented challenges in attracting and retaining customers and driving revenue streams. One approach to win new customers and foster loyalty among existing customers is to introduce new services that redefine how users communicate. Our technology drives down the cost of experimentation, stimulating new innovation. With IP-based technologies and our IMX Application Platform, our customers have powerful tools at their disposal for the development, integration and deployment of exciting new services.

Expand our solutions to address emerging IP-based markets, such as network border switching. There are three primary market factors necessitating enhanced network security features beyond basic Session Border Controllers that offer security and call control where multiple IP-based networks connect. First, network operators looking to grow their markets by expanding their presence or offering new services are pairing with other networks on a much larger scale. Secondly, the recent flurry of mergers and acquisitions among network operators has created heterogeneous networks that need to be integrated in a secure manner. Lastly, more and more network operators are responding to consumer demand for services that connect to the public Internet, which creates a unique set of obstacles. To address these emerging dynamics, we deliver a comprehensive Network Border Switching solution as an integrated element in our network solution that offers enhanced security and control over interconnection, while reducing cost and complexity. Our Network Border Switching solution supports a full range of IP signaling protocols including SIP, SIP-I, SIP-T and H.323 as well as fax interworking and codecs standards. The Sonus Network Border Switch is deployed at several large service providers.

Expand our global sales, marketing, support and distribution capabilities. Becoming the primary supplier of carrier packet voice infrastructure solutions will require a strong worldwide presence. We are broadening our sales, marketing, support and distribution capabilities to address this need. We have established offices throughout the United States, China, India, Japan, Singapore, Germany, the Czech Republic, France and in the United Kingdom. In addition, we have augmented our global direct sales effort by partnering with Embarq Logistics in the United States, international distribution partners in key markets around the world and with our global partner, Motorola. As a carrier-class solution provider, we are making a significant investment in professional services and customer support.

Grow our base of software applications and development partners. We have established and promote a partner program, the Open Services Partner Alliance, or OSPA, which brings together a broad range of development partners to provide our customers with a variety of advanced services, application options and interoperability testing. Our OSPA partners, many of whom have completed interoperability testing with Sonus solutions, include a number of application developers. We have also recently launched a technology certification program in tandem with the University of New Hampshire InterOperability Lab to meet the growing number of requests by third party vendors that wish to integrate with the Sonus platform.

Actively contribute to the standards definition and adoption process. To advance our technology and market leadership, we will continue to lead and contribute to standards bodies such as the IMS Forum, formerly the International Packet Communications Consortium, the Internet Engineering Task Force and the International Telecommunications Union. The definition of standards for carrier packet voice infrastructure is in an early stage and we intend to drive these standards to meet the requirements for an open, accessible, scalable and powerful IMS infrastructure.

Pursue strategic acquisitions and alliances. On April 13, 2007, we acquired privately held Zynetix Limited ("Zynetix"), a designer of innovative Global System for Mobile Communications ("GSM") infrastructure solutions. (See "Recent Developments" of Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 4, "Acquisition of Zynetix Limited" of the Notes to the Financial Statements.) We intend to expand our products and services through other select acquisitions and alliances. These may include acquisitions of complementary products, technologies and businesses that further enhance our technology leadership or product breadth. We also believe that teaming with companies providing complementary products or services will enable us to bring greater value to our customers and extend our lead over competitors.

Sonus Products

GSX9000 Open Services Switch

The GSX9000 Open Services Switch ("GSX9000") enables voice traffic to be transported over packet networks. The GSX9000 is compliant with NEBS Level 3, the requirement for telecommunications equipment used in the North American Public Switched Telecommunications Network. Its carrier-class hardware is designed to provide 99.999% availability with no single point of failure. The GSX9000 offers optional full redundancy and full hot-swap capability and upgrade to replace boards without turning off the equipment. It is powered from -48VDC sources standard in central offices and attaches to the central office timing network. The basic building block of a GSX9000 is a shelf. Each shelf is 28'' high, mounts in a standard 19'' or 23'' rack and provides 16 slots for server and adapter modules.

CEO BACKGROUND

Hassan M. Ahmed has been our Chief Executive Officer and a member of our board of directors since November 1998, Chairman of our board of directors since April 2004 and President since August 2007, which title he resumed. He had previously been President from November 1998 to April 2004. Mr. Ahmed was Executive Vice President and General Manager of the Core Switching Division of Ascend Communications, Inc., a provider of wide area network switches and access data networking equipment, and from July 1997 to July 1998 was a Vice President and General Manager of the Core Switching Division. From June 1995 to July 1997, Mr. Ahmed was Chief Technology Officer and Vice President of engineering for Cascade Communications Corp., a provider of wide area network switches. From 1993 to June 1995, Mr. Ahmed was a founder and president of WaveAccess, Inc., a supplier of wireless communications. Prior to that, he was an Associate Professor at Boston University, Engineering Manager at Analog Devices, Inc., a chip manufacturer, and director of VSLI Systems at Motorola Codex, a supplier of communications equipment. Mr. Ahmed holds a B.S. and an M.S. in engineering from Carleton University and a Ph.D. in engineering from Stanford University.

Richard J. Gaynor has served as our Chief Financial Officer since October 2007. Prior to that, he served as Chief Financial Officer, Vice President of Finance and Administration, Treasurer and Assistant Secretary of Sycamore Networks, Inc., a provider of intelligent bandwidth management solutions for fixed line and mobile network operators worldwide. From January 2001 to September 2004, Mr. Gaynor was Vice President, Corporate Controller and Principal Accounting Officer of Manufacturers' Services Ltd., a global provider of sub-contract electronic manufacturing services. From January 2000 to January 2001, Mr. Gaynor was Chief Financial Officer of Evans and Sutherland Computer Corporation, a developer and manufacturer of flight simulation hardware and software. From March 1994 to December 1999, Mr. Gaynor was Vice President of Finance and Operations Controller at Cabletron Systems, Inc., a global provider of enterprise networking products. Mr. Gaynor is a graduate of the National University of Ireland and holds an M.B.A. from Trinity College in Dublin, Ireland.

Paul K. McDermott has been our Vice President, Finance and Corporate Controller since August 2005. From 2002 to 2005, Mr. McDermott was the Chief Financial Officer, Treasurer and Secretary at Network Intelligence Corporation, a provider of appliance-based security event management products. From 1999 to 2002, he served as the Chief Financial Officer, Vice President of Finance & Administration, Treasurer and Secretary of Firepond, Inc., a provider of interactive sales software solutions. Mr. McDermott holds a bachelor's degree in accounting from Duquesne University and an M.B.A. from the University of Pittsburgh and is a licensed certified public accountant.

Matt Dillon has been our Vice President, Global Services since 2001. Prior to joining Sonus, from 1987 to 2000, he was a founding member of Boston Technology (later purchased by Comverse), which created the de-facto standard in scalable central office-based voicemail platforms for Bell Atlantic. From 1984 to 1987, Mr. Dillon was Vice President of Operations for Technology Enterprises.

Mohammed Shanableh joined Sonus in September 2004. He has been our Vice President, Worldwide Sales, since August 2007. From October 2006 to July 2007, he was Vice President, Sales Engineering, and was Vice President, Network Technology Solutions, from September 2004 to October 2006. Mr. Shanableh was Director, Carrier Strategy at Telica, a developer of intelligent multi-service broadband switching systems for next generation service providers from January 2002 to September 2004. He co-founded Valiant Networks, where he was served as Vice President, Professional Services, from December 1999 to December 2001. Mr. Shanableh holds both a B.S. and M.S. in Electrical Engineering from the University of Kansas.

Chuba Udokwu has been our Vice President, Worldwide Engineering since January 2006. Prior to that, he was Senior Director MPLS/RSVP development at Cisco Systems, Inc., a provider of IP-based networking and related products and services, from June 2005 to January 2006. From May 2004 through February 2005, Mr. Udokwu was Vice President, Engineering, of Seranoa Networks (which was acquired by White Rock Networks), a provider of carrier-class service edge solutions. Mr. Udokwu was Vice President, Engineering Optical Networking Division, of Alcatel from April 2002 to February 2004, after it acquired Astral Point Communications, Inc., where he was Vice President, Engineering since January 2001. Mr. Udokwu holds a B.S. in Materials Science and an M.S. in Operations Research from Columbia University School of Engineering.

MANAGEMENT DISCUSSION FROM LATEST 10K

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 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 Project ("3GPP"). This IMS architecture is being accepted by network operators globally as the common approach for building converged voice, data, wireline and wireless networks. 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 revenue 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 on the following aspects of our business:


winning new business from key service providers;


adding new products to our portfolio;


expanding our global sales and support capabilities; and


opening new channels and markets for our products.

Acquisition of Zynetix Limited

On April 13, 2007, we completed the acquisition of Zynetix Limited ("Zynetix"), a privately-held designer of innovative Global System for Mobile Communications ("GSM") infrastructure solutions located in the United Kingdom. In consideration we paid the selling shareholders £3,000,000 on the acquisition date (U.S. $5.9 million), and £1,330,583 on June 11, 2007 (U.S. $2.6 million). We also paid $0.3 million of transaction costs related to this acquisition. 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 December 31, 2007): 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 consolidated financial statements for the period subsequent to its acquisition.

Stock-based Compensation

On January 1, 2006, we adopted the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share-Based Payment ("SFAS 123R"). SFAS 123R supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Prior to our adoption of SFAS 123R, we provided the required disclosures in accordance with SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123").

In addition, we included approximately $0.2 million and $32,000 of stock-based compensation in inventory at December 31, 2007 and 2006, respectively.

At December 31, 2007, we had $52.7 million of unrecognized compensation cost related to unvested stock option and restricted stock awards, which is expected to be recognized over a weighted average period of approximately three years. At December 31, 2007, we had $4.1 million of unrecognized stock-based compensation expense to be recorded over the remaining 2000 Employee Stock Purchase Plan ("ESPP") purchase period.

On December 21, 2005, our Board of Directors approved accelerating the vesting of out-of-the-money, unvested stock options held by all current employees, subject to employee approval to the extent accelerating of vesting would create a change in classification of any grant from an incentive stock option to a non-qualified incentive stock option. Non-employee members of the Board of Directors were excluded from the acceleration. Unvested options having an exercise price of $4.00 per share or greater at that time, representing the right to purchase a total of approximately 18.9 million shares, became exercisable as a result of the vesting acceleration. All other terms and conditions in the original grants remained unchanged. The acceleration of vesting did not result in the recognition of incremental compensation expense in fiscal 2005 as the exercise price of the accelerated stock options exceeded the fair market value of the underlying common stock on the date of modification. The decision to accelerate vesting of these stock options was made primarily to reduce compensation expense that would otherwise be recognized after the adoption of SFAS 123R on January 1, 2006.

During December 2006, in order to remedy the unfavorable personal tax consequences for those who had not exercised stock options subject to Section 409A of the Internal Revenue Code ("Section 409A") after December 31, 2005, we entered into agreements with our directors and executives who are or were designated as Section 16 filers with the Securities and Exchange Commission ("SEC"). Pursuant to the agreements, we agreed to make cash payments to the directors and executives in an amount equal to the difference between the exercise price of the original option and the amended price of the new option. We recorded $1.2 million of stock-based compensation expense in fiscal 2007 related to these agreements.

On September 10, 2007, we completed a tender offer to amend stock options issued in previous years for which it was subsequently determined that the exercise price was less than the fair value on the revised date of grant, in order to mitigate the unfavorable personal tax consequences under Section 409A. The impact of the amendment of such options resulted in a stock option modification under SFAS 123R. The terms of such tender offer required us to make cash payments to option holders in an amount equal to the difference between the exercise price of the original option and the amended exercise price of the new option. We recorded a liability of $3.5 million in the third quarter of 2007 for the present value of the fully vested cash payments to be made in January 2008, of which $1.9 million was recorded as stock-based compensation expense and $1.6 million was recorded as a reduction to Additional paid-in capital. The stock-based compensation expense amount represents the incremental fair value of the new options, and was recognized in the third quarter of fiscal 2007 due to the fact that the future cash payments were fully vested as of September 10, 2007, the conclusion of the tender offer. We made the payments related to the tender offer on January 15, 2008.

We could not issue any securities under our registration statements 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 fourth quarter of fiscal 2006 and in fiscal 2007, we extended the contractual terms of 0.8 million and 2.1 million vested stock options, respectively, held by former executives and other former employees. We accounted for the modifications to extend the contractual term of the awards for individuals in accordance with SFAS 123R. As a result of the modifications, we recorded additional stock-based compensation of $11.7 million in fiscal 2007. Based on the guidance in SFAS 123R and related 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 determine the fair value of those awards utilizing the Black-Scholes valuation model and recognize any change in fair value in our Consolidated Statement of Operations in the period of change until the awards are exercised, expire or are otherwise settled. We recorded Other income of $1.1 million in fiscal 2007 and Other expense of approximately $39,000 in the fourth quarter of fiscal 2006 as a result of changes in the fair value of the liability awards. The fair values of these awards were remeasured on the respective dates of exercise or expiration and recorded as an increase to additional paid-in capital. As of December 31, 2007, these options were exercised or had expired. The aggregate fair value of these liability awards included in current liabilities was $1.1 million at December 31, 2006.

During the first quarter of fiscal 2007, as a result of our inability to issue any securities under our registration statements 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. We recorded $0.8 million of stock-based compensation expense in fiscal 2007 related to these modifications.

We were not able 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. In addition, we delayed the commencement of the next scheduled ESPP period from March 1, 2007 to April 1, 2007. We recorded stock-based compensation expense of $8.8 million in fiscal 2007 related to these modifications.

On November 14, 2007, we entered into a Retention and Restricted Stock Agreement (the "Agreement") with our President, Chief Executive Officer and Chairman (the "Executive"). Pursuant to the Agreement, the Executive was granted 750,000 shares of restricted stock that will vest on November 14, 2009, subject to the Executive's continued service as an executive or director of the Company. Any unvested restricted stock would be forfeited by the Executive in the event of the termination of his employment by the Company for Cause or by the Executive without Good Reason, both as defined in the Agreement. The vesting of a portion of the restricted stock will accelerate based on the achievement of two performance metrics: (1) 187,500 shares will vest on the date on which the closing price of the Company's stock exceeds $10.00 per share for 10 consecutive trading days, provided the Executive is then an employee or director; and (2) 187,500 shares will vest on the date the Company reports operating results for the fiscal year ending December 31, 2008 with revenue at least equal to the revenue target set forth in the Company's 2008 operating plan, provided the Executive is then an employee or director. In addition, if the Company hires a successor President or Chief Executive Officer or appoints a successor Chairman, 375,000 shares will vest three months after the date on which such successor commences employment or board service, provided the Executive assists with transitional matters during such three-month period. The restricted stock will vest in full upon: (1) an acquisition of the Company, provided the Executive is then an employee or director; (2) the termination of the Executive's employment or removal as Chairman without Cause; (3) the termination of the Executive's employment by the Executive for Good Reason other than in connection with the Company's hiring of a successor President or Chief Executive Officer or appointment of a successor Chairman; or (4) termination of the Executive's employment or service as Chairman as a result of his death or total or partial incapacity due to physical or mental illness. The fair value of the restricted stock at the date of the award was $6.80 per share. The Company will monitor the progress on the achievement of the performance metrics and record expense related to the accelerated vesting of the shares at the time such achievement becomes probable. The Company recorded $0.3 million of stock-based compensation expense related to these restricted shares in 2007. The Agreement also modified the Executive's existing stock options to provide for the continued vesting of any unvested stock options and the ability to exercise any vested stock options for 18 months from the date of the Executive's separation from the Company under certain conditions. We recorded stock-based compensation expense of $1.8 million in the fourth quarter of fiscal 2007 related to this stock option modification.

On October 15, 2007, pursuant to his employment agreement with us, we granted 35,000 shares of restricted common stock to our Chief Financial Officer. The shares, which vest over four years, had a fair value of $5.98 per share on the date of grant. We recorded approximately $9,000 of stock-based compensation expense related to these restricted shares in 2007.

On May 15, 2007, we granted two employees shares of restricted common stock aggregating 15,000 shares. The shares, which vest over four years, had a fair value of $7.62 per share on the date of grant. We recorded approximately $15,000 of stock-based compensation expense related to these restricted shares in 2007.

On January 25, 2008, our Board of Directors approved an Amended and Restated ESPP. Effective March 1, 2008, the Amended and Restated ESPP eliminates the 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 and accelerated recognition of unamortized expense related to those future purchases. We will incur approximately $4 million of non-cash stock-based compensation expense in the first quarter of fiscal 2008 related to the amendment of our ESPP. Expense related to the Amended and Restated ESPP will be recorded effective February 29, 2008.

Critical Accounting Policies and Estimates

Management's discussion and analysis of the financial condition and results of operations is based upon our 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:


Revenue recognition;


Deferred revenue;


Allowance for doubtful accounts;


Inventory reserves;


Warranty, royalty, litigation and other loss contingency reserves;


Stock-based compensation;

Acquisitions;


Goodwill and purchased intangible assets; and


Accounting for income taxes.

Revenue Recognition. We recognize revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility of the related receivable is probable under customary payment terms. When we have 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, we defer revenue recognition and related costs until those obligations are satisfied.

Many of our sales involve complex multiple-element arrangements. When a sale includes multiple elements, such as products, maintenance and/or professional services, we recognize revenue using the residual method as we have not established VSOE for our products or specified features/upgrades. Revenue associated with elements for which VSOE has been established is recorded based on the VSOE value; any undelivered elements that are not considered essential to the functionality of the product and for which VSOE has been established, is deferred based on the VSOE and any remaining arrangement fee is then allocated to, and recognized as, product revenue. We have established VSOE for maintenance arrangements (post-contract support) and some professional services. VSOE for maintenance and professional services is determined by either the price charged when the same element is sold separately or established by management having the relevant pricing authority. The Company's Pricing Committee has the relevant authority for establishing pricing for products and services. If we cannot establish VSOE for any undelivered element, including specified features and upgrades, we defer revenue on the entire arrangement until VSOE for all undelivered elements is known or all elements are delivered and all other revenue recognition criteria are met.

Revenue from maintenance and support services is recognized ratably over the service period. Earned maintenance revenue is deferred until the associated product is accepted by the customer and all other revenue recognition criteria 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 criteria have been met.

Revenue from consulting, custom development and other professional services-only engagements are recognized as services are completed.

We sell the majority of our products directly to our service provider customers. For products sold to resellers and distributors, we recognize revenue on a sell-through basis utilizing information provided to us from our resellers and distributors unless we have at least eight quarters of consistent history with a reseller which eliminates uncertainty regarding the potential of product returns or refunds, price protection or any other form of concession. Through December 31, 2005, no revenue had been recognized on a sell-in basis due to the limited return history associated with shipments to resellers and distributors.

During the fourth quarter of 2007, we began reporting revenue from one of our distributors on a sell-in basis, where revenue is recognized upon the shipment of products to the distributor, assuming all other requirements for revenue recognition have been met. We 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 during which we have not authorized or incurred any return of our product or provided any other form of price protection or concession. As a result of this history, the price for products sold to this distributor is now fixed or determinable upon sale to the distributor and collection is probable. During the year ended December 31, 2007, we recognized revenue totaling approximately $60,000 in connection with sales of products to these distributors through December 31, 2007 that had not yet sold through to their customers. This revenue would have been recognized in subsequent periods if we had not changed to a sell-in basis for this distributor. This additional revenue resulted in an immaterial amount of additional income before income taxes and net income and did not impact net loss per share for the year ended December 31, 2007.

Results of Operations

Years Ended December 31, 2007 and 2006

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 fiscal 2007 increased 11.1% from fiscal 2006. The increase in product revenue was primarily the result of increased product sales and shipments, including the successful completion of the deployment of our products into new and expanded customer networks.

Service revenue is primarily comprised of hardware and software maintenance and support, network design, installation and other professional services. Service revenue increased 24.0% in fiscal 2007, compared to fiscal 2006. The increase is primarily a result of increased maintenance revenue due to our growing installed customer base and completion of certain professional services projects.

AT&T contributed more than 10% of our revenue in the year ended December 31, 2007. Cingular Wireless (part of AT&T as of January 1, 2007), KDDI and Level 3 each contributed more than 10% of our revenue in the year ended December 31, 2006.

International revenue was approximately 27% and 28% of revenue in fiscal 2007 and fiscal 2006, respectively. Due to the uneven ordering patterns of our international customers, we expect that international revenue will continue to fluctuate as a percentage of revenue from quarter to quarter and year to year.

Our deferred product revenue was $44.1 million and $32.7 million at December 31, 2007 and 2006, respectively. Our deferred service revenue was $55.1 million and $61.5 million at December 31, 2007 and 2006, respectively. Our deferred revenue balance may fluctuate as a result of the timing of revenue recognition, customer payments, maintenance contract renewals, contractual billing rights and maintenance revenue deferrals included in multiple element arrangements.

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

The decrease in product gross profit as a percentage of revenue ("product gross margin") was primarily due to product mix, coupled with the writedown in the fourth quarter of $1.5 million of excess and obsolete inventory. The decrease in service gross profit as a percentage of service revenue ("service gross margin") was primarily due to higher stock-based compensation costs of $2.7 million in fiscal 2007, compared to the prior year, partially offset by higher service revenue relative to our fixed costs. Our service cost of revenue is relatively fixed in advance of any particular quarter and therefore, changes in service revenue will have a significant impact on service gross margins. We 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 $79.1 million in fiscal 2007, an increase of $23.7 million, or 42.7%, from $55.4 million in fiscal 2006. The increase in fiscal 2007 primarily reflects higher stock-based compensation, as well as higher salary and related expenses associated with additional headcount. Stock-based compensation costs accounted for $12.2 million of increased research and development expense in fiscal 2007, compared to fiscal 2006. Some aspects of our research and development efforts require significant short-term expenditures, the timing of which can cause significant variability in our expenses. We believe that rapid technological innovation is critical to our long-term success, and we are tailoring our investments to meet the requirements of our customers and market. We believe that our research and development expenses for fiscal 2008 will increase modestly from fiscal 2007 levels, primarily as a result of continued investment in new products.

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of salaries and related personnel costs, commissions, travel and entertainment expenses, promotions, customer evaluations inventory and other marketing and sales support expenses. Sales and marketing expenses were $81.9 million in fiscal 2007, an increase of $16.2 million, or 24.5%, from $65.7 million in fiscal 2006. The current year increase primarily reflects higher stock-based compensation and our continued expansion of our worldwide sales and support coverage. Stock-based compensation costs accounted for $10.1 million of increased sales and marketing expense in fiscal 2007, compared to fiscal 2006. We also recorded $1.9 million of higher evaluation equipment expenses in 2007, compared to the prior year. We believe that our sales and marketing expenses will increase in fiscal 2008 from fiscal 2007 levels, primarily related to personnel and related costs. The magnitude of the increase will be dependent in part upon our level of revenues as commission expenses fluctuate primarily based on revenue levels.

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 $56.8 million in fiscal 2007, an increase of $21.4 million, or 60.7%, from $35.4 million in fiscal 2006. Professional fees, including $9.9 million related to our stock option historical review, totaled $25.5 million in 2007. Professional fees, including $6.1 million related to our stock option historical review, totaled $13.4 million in 2006. Stock compensation costs accounted for $4.3 million of increased general and administration expense in fiscal 2007, compared to the prior year. In fiscal 2007, we recorded $2.6 million of charges related to the departures of the Company's President and Chief Operating Officer, and Chief Financial Officer, as well as $1.8 million of charges related to the modification of options held by our President and Chief Executive Officer in connection with his Retention and Restricted Stock Agreement, which was effective November 14, 2007. We believe that our general and administrative expenses will decrease in fiscal 2008 from fiscal 2007 levels.

In the fourth quarter of fiscal 2007, we resolved a coverage dispute with our insurer regarding coverage under our 2006-07 directors and officers' insurance policy (see "Settlement of Litigation" below). In exchange for our agreement that the 2006-07 policy did not cover the 2006 shareholders derivative litigation, our insurer agreed to issue a new policy providing coverage to our directors and officers for the 2006 shareholders derivative litigation with a premium of $770,000. The premium payment of $770,000 was recorded as insurance expense in the fourth quarter, and is included as a component of General and administrative expenses in our Consolidated Statement of Operations for the year ended December 31, 2007.

Settlement of Litigation, net. On November 7, 2007 we reached a preliminary settlement, subject to court approval, of the consolidated securities action lawsuit arising from our restatement in 2004 of our financial statements. Under the terms of the settlement, the plaintiffs agreed to release all claims against us and the other defendants in consideration for the payment of $40.0 million from us to the class of plaintiffs.

In connection with the settlement, in the third quarter of fiscal 2007, we recorded a charge of $40.0 million and a related liability for the full amount of the settlement. Following the resolution of an insurance coverage dispute with our insurer on December 28, 2007, we recorded a $15.3 million insurance recovery in the fourth quarter of fiscal 2007, as such recovery became probable following the resolution of the insurance coverage dispute in December 2007.

Pursuant to the settlement, in November 2007, we deposited $25.0 million in escrow toward the settlement fund. In January 2008, our insurer deposited $15.0 million into the escrow account and paid directly to us the remaining $0.3 million in available insurance coverage.

Interest Income, net. Interest income consists of interest earned on our cash equivalents, marketable debt securities and long-term investments. Interest expense in fiscal 2007 relates to capital lease obligations. Interest expense in fiscal 2006 consists of interest incurred on a convertible subordinated note, which we repaid in May 2006, and capital lease obligations. Interest income, net of interest expense, was $18.2 million in fiscal 2007, an increase of $2.8 million, from $15.4 million in fiscal 2006. The increase reflects higher average cash and investment balances, coupled with a higher average portfolio yield.

Income Taxes. Our benefit for income taxes was $8.8 million for the year ended December 31, 2007, compared to a benefit of $65.0 million for the year ended December 31, 2006. The effective tax benefit rate of 27.2% for the year ended December 31, 2007 is below the statutory U.S. federal rate of 35% primarily due to increases in the tax rate for state income, foreign dividends, and stock-based compensation, offset by research and development tax credits earned for both U.S. federal and state purposes.

During 2006, in connection with the release of our deferred tax asset valuation allowance of $82.6 million, we recorded an overall deferred income tax benefit of $73.1 million. In addition, we recorded a current provision of $8.1 million, which included a foreign provision of $1.7 million, a federal and state provision of $0.8 million and a discrete item of $5.6 million related to a reserve for probable state and federal R&D tax credit exposure.

In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including our past operating results, the existence of cumulative income in the most recent fiscal years, changes in the business in which we operate and our forecast of future taxable income. In determining future taxable income, we are responsible for assumptions utilized including the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. Based upon our cumulative operating results and an assessment of our expected future results, we concluded in the fourth quarter of fiscal 2006 that it was more likely than not that we would be able to realize a substantial portion of our U.S. net operating loss carryforward tax asset prior to its expiration and realize the benefit of other net deferred tax assets. As a result, we reduced our valuation allowance in 2006, resulting in recognition of a deferred tax asset, and an increase to net income of $73.6 million.

At December 31, 2007, we had a remaining valuation allowance of $28.9 million, consisting of $28.7 million relating to excess tax benefits associated with stock-based compensation and $0.2 million related to foreign net operating loss carryforwards that we expect to expire unused. At December 31, 2006 we had a remaining valuation allowance of $31.7 million, consisting of $28.7 million relating to excess tax benefits associated with stock-based compensation and $3.0 million relating to certain state net operating losses which we expect to expire unused. These excess tax benefits will be recorded as a credit to additional paid-in capital in the period realized.

Because of the availability of the U.S. net operating loss tax carryforwards ("NOLs"), a significant portion of our future provision for income taxes is expected to be a non-cash expense; consequently, the amount of cash paid with respect to income taxes is expected to be a relatively small portion of the total annualized tax expense during periods in which the NOLs are utilized.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Three Months Ended March 31, 2008 and 2007

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.

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.

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 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 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 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.

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.

CONF CALL

Jocelyn Philbrook

Good afternoon, everyone, and thank you for joining us today as we discuss our first quarter fiscal 2008 financial results. With me today are Sonus’ Chairman and CEO, Hassan Ahmed, and CFO, Rich Gaynor.

The press release announcing our first quarter 2008 financials was issued this afternoon at 4:05 PM Eastern time on PR Newswire and on First Call. The text of this release also appears on our website at www.sonusnet.com.

Before Hassan offers his opening remarks, I would like to remind you that we’ll make projections or forward-looking statements regarding items such as future market opportunities and the company’s financial performance. The productions or statements are just predictions and involve risks and uncertainties such that actual events or financial results may differ materially from those we have forecasted. As a result, we can make no assurances that any projections of future events or financial performance will be achieved. For a discussion of important risk factors that could cause actual events or financial results to vary from these forward-looking statements, please refer to the Risk Factors section of our quarterly report on Form 10-Q through the period ended March 31, 2008. Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point, we specifically disclaim any obligations to do so.

I’d now like to turn the call over to Hassan.

Hassan Ahmed

Good afternoon, everyone, and thank you for joining us. As many of you know, last year marks Sonus’ 10-year anniversary as a company and we closed it out with record high revenues, high profile customer whims, and a growing cash balance. That momentum has continued as we enter our second decade. Today, I’ll share with your our progress from the first quarter and discuss our outlook for the year ahead. Then I’ll hand it over to Rick for a more detailed overview of our quarterly financial performance.

Q1 marked a solid start to 2008. The Sonus team executed against the plan we outlined at the beginning of the year and delivered performance in line with our expectations. The first quarter followed the traditional Q1 seasonal pattern, with order activity starting later in the period as operators budgets were finalized. This is typically our slowest quarter during the year which is reflected in our book-to-build being below one for the quarter.

Revenues increased annually to $74 million while non-GAAP gross margins remain strong at approximately 64% and non-GAAP quarterly operating expenses decreased slightly year over year. This resulted in non-GAAP operating incomes at an increase 64% from the fourth quarter of 2007. Added to this, our deferred revenue grew to over $179 million and our cash balance also increased 11% from Q1 of last year, resulting in an ending cash/cash equivalent and marketable securities balance of over $407 million.

Our solid performance in the first quarter, following a tremendous Q4, demonstrates the benefits of our diversified market and geographic approach. Overall, our business performance was driven by three factors.

First, in North America, there has been a notable increase in the number of minutes supported by our customers’ networks. Second, our Access business has continued to accelerate, especially in Europe, where Access is now our fastest growing product line. And lastly, our decision to broaden our geographic presence in [inaudible] economies was starting to deliver results.

Okay, first with our geographic order performance in Q1, all regions achieved order growth compared to a year ago. Demand was healthy and balanced for this period of the year. While we continue to be mindful of current trends in the macroeconomic environment, we still have not seen evidence of softness in the service provider IP voice market. A key component of our strength is our broad stand across geography product categories and customer segments, which is a critical asset in any economic environment.

Starting first with North America, this region continues to be our largest revenue contributor, with Q1 order performance growing significantly from this period last year. The increase levels and operator’s IP traffic throughout this region are a primary factor in our growth. Our customer’s IP voice traffic is increasing due to a few factors including an increase in wholesale IP traffic driven in part by the ability to connect at an IP level, the addition of new IP services that require more bandwidth and the newly promoted flat rate pricing programs that are driving consumer minutes on the network.

AT&T remains our largest customer in North America but they’re just one example of our ability to reduce network costs and reliably deliver real-time services. As one of the world’s largest operators, AT&T’s network footprint is significant, both in geographic reach and the volume of minutes it carries. We’re proud that over the last five years, AT&T has leveraged our solutions and then migrate their network to an advanced IP architecture. There is still much more to be done with this enormous operator and we continue to expand their Sonus-based IP voice network, both in scale and in scope.

While AT&T is our largest North American customer, they are certainly not our only major customer in this region. Neutral Tandem was an important contributor to our business performance in Q1, along with Qwest Communications, Time Warner Telecom and Level 3, to name a few.

Turning now to Europe, I’m really pleased with our progress in Europe as reflected again in the second largest theatre from an order perspective. We announced our deployment in BT’s 21st Century Network last November and are working diligently to meet their aggressive deployment timeline. We’re honored to be part of this historic network evolution project but this isn’t the only monumental network build that Sonus was executing on in Europe.

In Interoute Cable and Wireless and The Carphone Warehouse all have deployments underway with Sonus. Broadening beyond the UK, we have a significant deployment underway at Deutsche Telekom T-Systems. Further, France Telecom is leveraging our number of border switch capabilities in their unique network environment. All of this activity resulted in order growth for Europe that was up sharply versus Q1 last year.

For the first time in our history, Sonus took the top spot in the European market in 2007, according to Synergy Research. And you can be sure that we have no intention of letting anyone displace us from the top in 2008. We see a vital and energized European market for IP voice solutions and we intend to capitalize on that market with an asserted effort. In Q1 we expanded our sales coverage in Spain, Scandinavia, the UK and Africa, which is already beginning to yield new sales opportunities.

Finally on to Asia Pacific and Japan, in Japan you may recall that during 2007, we were disappointed that some operators took longer than expected to digest new technology being delivered for their next generation networks. As a result, our growth in Japan stalled in the later part of last year. We’re pleased that these same operators are now moving on to the next phase of growth in their network plans.

While we continue to focus on partnering with leading Japanese operators to advance their IP initiatives, we are also extending our footprint in Asia. For the first time in Sonus’ history, order activity in Asia excluding Japan exceeded our order performance within this next gen hub. To add a little more color on the growth drivers within this region, one of our customers, Telecom Malaysia, expanded the scope of its mobile number portability project with us to meet the growing consumer demands from this region. I look forward to sharing more with you on our progress in Asia in the coming months.

From a market share perspective, many of the industry analysts have released their year-end findings. I’m proud Sonus was on top in all the right places. The latest market research results show Sonus with the leadership position in each of the segments we target. Industry researcher, iLocus, recognized Sonus as the 2007 Global Leader in IP Voice Minutes, with a 38% market share, nearly four times the next closest competitor. And Synergy Research also placed us at the top of the global market, ranking Sonus number one in all three major regions: The United States, India and Japan.

In total, it is clear that the world’s moved to IP voice is underway. Today, we address nearly 70% of the global opportunity for IP voice with our direct sales efforts. We’ve proven that in the regions we target, we lead. As the worldwide market for IP voice expands, we are opening new regions to grow with it and capture even more of this growing market.

According to Synergy Research, the global IP voice market will grow to $5.6 billion by 2011. Our challenge and our opportunity is to continue to grow ahead of the market. We are executing against the plan to permeate the world’s top operators, which we believe will deliver growth for a long-term sustained period.

Now, let’s shift gears and spend a few minutes on the products and solutions that give us an edge in the market. The interest level in our Network Border Switch continues to increase. We’ve signed new customers for this solution and are embarking on a number of projects to connect the world’s communications network. Not only has global interest levels in our solutions increased but order activity has also grown. Perhaps even more importantly, several operators have capped their installations of first generation session border controllers and are moving forward with Sonus. Sonus has a proven product that can scale to meet the demands of larger operators and enterprises with security and full functionality.

Shifting to the edge of the network, this is where things are really starting to heat up. In 2007, we shipped more licenses for our ASX classified Feature Server than in the previous two years combined. I’m pleased that The Carphone Warehouse, Cable and Wireless, Deustche Telekom, J-Com, Qwest Communications, ONI, NTT, Alestra, and most recently, BT and Comverge, all have deployments that leverage Sonus’ Access solutions. With over a billion landlines and nearly three billion mobile phones around the globe, you could see why we’re enthusiastic about this market segment.

We see a world of opportunities in the growing voice applications market as well. The convergence of voice and multimedia is the future of global communication and the Sonus IMS application platform is an important part of that future. In March of this year, the IMS 2.0 product was given the Prestigious Innovative Award from Von Magazine. More importantly, the IMS is helping to drive sales of our core IP voice solutions by demonstrating that Sonus can help carriers create and sell real IP voice services now.

The applications market is a bit different than our traditional voice infrastructure business. This is a segment of the market that will unfold at a speed largely determined by consumers. For Sonus, we are investing now to enable operators to not only bring together services from Sonus’ ecosystem of partners, but also others in the industry. To further that end, Sonus recently acquired our long-term partner, Atreus Systems. As we continue to help the industry move to an all IP platform, bridging between traditional networks and the future of communications is critical. Atreus enables us to do that with a proven provisioning solution that consolidates an operator’s IP and TDM-based voice services into a unified seamless platform.

One of the most important goals for Sonus in 2008 is to penetrate the wireless market with innovative IP voice solutions. We announced our presence in a big way this year with significant showings at the industry’s two largest events, the Mobil World Conference in Barcelona and more recently, CTIA.

Barcelona was the stage for the unveiling of our advanced network solution to bring femtocell technology to life under the new Sonus mobilEdge brand. Also this quarter, we announced our new Centralized Call Router solution, which enables wireless operators to deploy Transcoder-Free Operation gateways in their networks for improved voice quality and lower bandwidth use. This is critical for mobile operators as they offer flat rate pricing programs to drive more traffic onto their networks.

These are dynamic times in our industry, from the FCC’s recent wireless spectrum option to the global push to build the single worldwide multimedia network. If the future we envisioned more than ten years ago and we continue to look forward as we build solutions that will address the needs of the next ten years, from seamless mobility to global number of portability. In an effort to accelerate that future and in our own growth, we committed more resources to research and development than ever before.

What’s on the horizons for Sonus and the months ahead is a world of opportunities. We’ve identified a clear strategy for growth that includes tapping into emerging economies and penetrating new markets like wireless and Access solutions. We’ve encountered success everywhere that we go. Our goal in 2008 is to extend that success with a broader portfolio of offerings and a truly global presence that unites today’s voice networks and protect the technology of tomorrow.

As we advise coming into 2008, we see no sign of the evolution to IP voice slowing. Operators recognized that their networks are strategic assets that allow them to differentiate themselves in the market. And at certain economic times, new purchasing decisions tend to be evaluated with even more rigor. At Sonus, we’re mindful of this and believe that our strategic advantages and the value we bring to our operators will continue to be recognized.

As a result, we are reaffirming our outlook for 2008 and expect solid sequential growth for the second quarter of 2008. We’re committed to delivering annual 2008 revenue growth but at least matches the market’s performance, which is expected to be approximately 20%.

Before I turn the call over to Rick, I’d like to thank our customers, partners, long time shareholders and, of course, our employees for their continued commitment to Sonus and to our vision for IP communications. We’ve got a great team behind.

Richard Gaynor

I’m pleased that Sonus achieved the plan we outlined with you for the first quarter. Our increasing growth and execution and operational excellence in every level is underscored by the solid financial performance we reported today. We exited the year with good visibility in our business metrics which remains unchanged. Let me now recap our results.

Please note that throughout my discussions, I will reference both GAAP and non-GAAP financial information. There is a reconciliation of GAAP and non-GAAP financial information in the Investor Relations section of our website. I would like to remind investors that, for a variety of reasons, our business is inherently uneven and we suggest that you consider high performance over a longer time horizon, as our results will fluctuate from quarter to quarter.

Revenue for the first quarter was $74 million, down 23.8% from $97.l million in Q4 2007 and up 4% from $71.1 million in Q1 2007. Product revenue was $51 million, or 68.9% of total revenue, down from $67.3 million in Q4 and $51.6 million in Q1 2007. Service revenue was $23 million or 31.1% of the total, down from $29.8 million in Q4 and up from $19.5 million in Q1 2007. The strength in our Q4 service revenue was driven by completion of professional services in Q4 including the MXP project within our network with Deutsche Telekom T-Systems.

AT&T contributed greater than 10% of our total revenue in the first quarter. Our top five customers represent for the approximately 58% of revenue in Q1 versus 53% in Q4 and 71% in Q1 2007. We reported revenue from 85 customers in the first quarter compared to 82 in the fourth quarter and 63 in Q1 2007. [Inaudible] ratio in the first quarter was below one as expected, reflecting the inherent seasonality in the telecom business.

Before I begin discussing our gross margins in operating expenses, I would like to point out that these are non-GAAP numbers that exclude stock-based compensation and related expenses, stock option review costs, and adjustments to a loss contingency related to an employment tax audit in connection with the stock option review. Amortization of intangible assets related to the April 2007 purchase of Zynetix and in insurance recovery related to the 2004 restatement litigation settlement. Again, I would like to remind you that additional information regarding our non-GAAP financial measures, including GAAP to non-GAAP reconciliations, it available in the Investor Relations section of our corporate website, and I would encourage you to visit the site.

Non-GAAP gross margins for the first quarter was up 64.2% of revenue compared to 60.3% in Q4 and 64.9% in Q1 2007. Product gross margin for the first quarter was 67.5% compared to 56.5% in Q4 and 67.1% in Q1 2007. Our product gross margins were higher this quarter on a sequential basis due primarily to favorable product mix associated with the expansion of our existing customer networks.

Service gross margins were 56.9% compared to 68.9% in Q4 and 59% in Q1 2007. The sequential decrease in our service margins in Q1 primarily reflects the decrease in our services revenue in operating leverage attained at these revenue levels.

As for non-GAAP operating expenses, Q1 R&D expense was $16.9 million compared $14.8 million in Q4 and $15.5 million for Q1 2007. The sequential increase in R&D expenses in Q1 was associated with an increase in headcount and other people-related costs, some of which like our support ramp for the BT 21 CM project.

Sales & Marketing expenses increased to $17.1 million in Q1 compared to $16.6 million in Q4 and down from $19.5 million in Q1 2007. The sequential increase in Sales & Marketing expenses was associated with an increase in headcount and other people-related costs in support of our global expansion efforts, partially offset by lower commission expenses.

G&A expense was $9.1 million in Q1 2008 compared to $11.3 million in Q4 and $8.4 million in Q1 2007. The sequential decrease in G&A expenses in Q1 was due to reductions in professional fees, including legal and audit costs.

Total non-GAAP operating expenses for the first quarter was $43 million, up from $42.7 million in Q4 and down from $43.4 million in Q1 2007. Q1 non-GAAP operating income was $4.5 million or 6.1% of revenue compared to $15.8 million or 16.3% of revenue in Q4 and $2.7 million or 3.9% or revenue in Q1 2007. We believe our focus in controlling operation expenses will play an essential task in improving operating profit performance in 2008. We believe we continue to track to our operating income target of 14-16% for the year.

Our non-GAAP effective income tax rate was 38.7% for Q1. Please note that we have a significant and a well position of $110 million at year-end and our actual cash payments for taxes are much lower than the financial statement provisions.

In summary, Q1 non-GAAP net income was $5.2 million or $0.02 per diluted share compared to $12 million or $0.04 per diluted share in Q4 and $4.8 million or $0.02 per diluted share in Q1 2007.

Now turning to the GAAP results. Our Q1 gross profits included $1.3 million of stock-based compensation and related expenses and $65,000 of intangible amortization. We have operating expenses of $49.4 million in Q1 which included stock-based compensation and related expenses of $6.9 million and intangible amortization of $75,000, offset by a gain for an adjustment to a loss contingency related to the supplement of an employment tax audit in connection with the stock option review of $534,000 totaling $6.4 million.

Q1 GAAP operating loss was $3.3 million compared to operating income of $23.3 million in Q4 and an operating loss of $10.3 million in Q1 2007.

Q1 interest income, net of interest expense, was $3.9 million compared to $4.7 million in Q4 and $4.6 million in Q1 2007. The interest income decline was primarily due to the lower interest rate environment.

Our GAAP effective income tax rate was 44.5% in Q1. The high rate was due to the high tax jurisdiction in which we operate and the non-deductibility of several lines, in particular, certain stock compensation charges. Again, I remind you that our actual cash payments of taxes are much lower than the financial statement provisions.

Q1 GAAP net income was $566,000 or $0.00 per diluted share compared to $14.1 million or $0.05 per diluted share in Q4 and a net loss of $4 million or $0.02 per share in Q1 2007. In Q1, our diluted share count was approximately 271 million shares.

Now turning to the balance sheet. Overall, Sonus ended the quarter with total cash/cash equivalent/marketable securities and long-term investments of $407.6 million compared to $392.6 million in Q4. This cash balance improvement was primarily driven by very strong cash collections of over $100 million in the quarter.

On April 18, 2008, we completed a cash acquisition of Atreus Systems, a privately held company with its principal office located in Ottawa, Canada. As we disclosed in our Form 10-Q filed this afternoon with the SEC, we paid $4.9 million which we will be reflecting in our Q2 ending cash balance. We expect to incur some additional exit costs in 2008. We expect this acquisition to be slightly dilutive in 2008 and neutral in 2009.

Accounts Receivables were $66.9 million, down from $85 million in Q4, reflective of the strong cash collections I referred to earlier, and up from $59.7 in Q1 2007.

Our DSO and our Receivables balance was 92 days, up from 73 days for Q4 based on a 2-point average. For those of you who are more custom to a single straight point DSO calculation, our DSO’s will be 81 days in the first quarter, up from 79 in Q4.

Total deferred revenue was $107.9 million, an increase from the $99.2 million reported in Q4 and $90.6 million in Q1 2007. The current portion of deferred revenue was $90.8 million and the long-term portion was $17.1 million.

While we are continuing through see borders related to our [AGC] and BT, I would note that this deployment is not yet reflected in deferred revenue due to the invoicing terms of the contract. We do anticipate this to occur later in 2008. We ended the first quarter with $48 million of total inventory, up from the $45.6 million we reported at the end of Q4 and $46 million in Q1 2007. $32.3 million of our inventory balances unearned inventory which reflects product shipped to customers but not yet reflected in our revenue results.

Cap Ex during the quarter was $1.7 million compared to $2.7 million in Q4 and $1.7 million for Q1 2007. Appreciation was 3.3 million in the quarter consistent with Q4 2007 and up from $3 million in Q1 2007.

Looking at our head count, we ended the quarter with 955 employees compared to 926 employees at the end of 2007, with the largest increase Sales, reflective of our global expansion initiative. We expect head count in the second quarter to increase and part due to the addition of approximately 49 employees from the Atreus acquisition that we are excited to have join us on this team.

Now turning to our outlook which is inclusive of our Atreus acquisition. Our view for Sonus’ opportunity in the market remains unchanged for 2008. We continue to expect Sonus to achieve revenue growth that is at least in line with the overall market growth, which is expected to approximate 20% for 2008 versus 2007. Given the inherent seasonality in our business which typically includes a strong fourth quarter, we expect the second half of 2008 to realize strong revenue results. For the second quarter specifically, we currently expect revenues to be in the $84-88 million dollar range.

Non-GAAP gross margins are expected to be in our long-term model range of 58-62%. Non-GAAP operating expenses are expected to be in the $46-48 million dollar range. We will continue to invest in R&D and Sales and Marketing and support of our annual plan. G&A expenses should increase modestly from Q1. Non-GAAP operating income is expected to be $3.5-6.5 million. We expect interest income of approximately $3-3.5 million. Our non-GAAP tax rate for the quarter should be approximately 39%. Finally, share count is expected to increase to approximately 274 million shares.

In summary, in Q1 Sonus continued to execute to its plan and strengthen its customer position of product portfolio. In 2008, we look forward to a solid year of revenue growth, expanding our incumbency position with major tier one customers and penetrating new geographic markets.

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