SONUS NETWORKS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

Three months ended

March 31,

December 31,

March 31,

2011

2010

2010

Revenue:

Product

$             35,953

$             54,118

$             36,278

Service

31,346

28,861

26,130

Total revenue

67,299

82,979

62,408

Cost of revenue:

Product

23,161

17,805

12,301

Service

17,513

12,491

11,929

Total cost of revenue

40,674

30,296

24,230

Gross profit

26,625

52,683

38,178

Gross profit %

Product

35.6%

67.1%

66.1%

Service

44.1%

56.7%

54.3%

Total gross profit %

39.6%

63.5%

61.2%

Operating expenses:

Research and development

15,608

16,514

14,940

Sales and marketing

14,297

13,211

13,594

General and administrative

8,196

11,119

10,144

Restructuring

-

387

-

Total operating expenses

38,101

41,231

38,678

Income (loss) from operations

(11,476)

11,452

(500)

Interest income, net

435

182

502

Other income, net

-

-

10

Income (loss) before income taxes

(11,041)

11,634

12

income tax provision

(1,367)

(224)

(146)

Net income (loss)

$           (12,408)

$             11,410

$                (134)

Earnings (loss) per share:

Basic

$               (0.04)

$                 0.04

$                    -

Diluted

$               (0.04)

$                 0.04

$                    -

Shares used to compute earnings (loss) per share:

Basic

277,712

276,659

274,701

Diluted

277,712

278,096

274,701

SONUS NETWORKS, INC.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

March 31,

December 31,

2011

2010

Assets

Current assets:

Cash and cash equivalents

$             87,152

$             62,501

Marketable securities

245,302

258,831

Accounts receivable, net

28,521

52,813

Inventory

29,114

22,499

Deferred income taxes

401

408

Other current assets

18,740

16,474

Total current assets

409,230

413,526

Property and equipment, net

21,117

21,284

Intangible assets, net

1,500

1,600

Goodwill

5,062

5,062

Investments

69,874

87,087

Deferred income taxes

1,413

1,271

Other assets

4,663

26,124

$           512,859

$           555,954

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$             17,869

$             16,936

Accrued expenses

18,272

29,999

Current portion of deferred revenue

50,493

42,776

Current portion of long-term liabilities

290

338

Total current liabilities

86,924

90,049

Deferred revenue

12,320

42,811

Long-term liabilities

4,437

4,138

Total liabilities

103,681

136,998

Commitments and contingencies

Stockholders equity:

Common stock

278

277

Additional paid-in capital

1,303,932

1,301,285

Accumulated deficit

(901,909)

(889,501)

Accumulated other comprehensive income

6,877

6,895

Total stockholders' equity

409,178

418,956

$           512,859

$           555,954

SONUS NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Three months ended

March 31,

March 31,

2011

2010

Cash flows from operating activities:

Net loss

$           (12,408)

$                (134)

Adjustments to reconcile net loss to cash flows provided by (used in) operating activities:

Depreciation and amortization of property and equipment

2,850

2,458

Amortization of intangible assets

100

138

Stock-based compensation

2,026

2,486

(Gain) loss on disposal of property and equipment

(12)

57

Changes in operating assets and liabilities:

Accounts receivable

24,390

15,477

Inventory

10,425

2,852

Other operating assets

2,981

(2,098)

Accounts payable

900

3,547

Accrued expenses

(11,281)

(5,039)

Deferred revenue

(22,624)

(16,445)

Net cash provided by (used in) operating activities

(2,653)

3,299

Cash flows from investing activities:

Purchases of property and equipment

(3,165)

(1,763)

Purchase of intangible assets

-

(2,000)

Purchases of marketable securities

(42,773)

(121,856)

Sale/maturities of marketable securities

72,487

61,493

Net cash provided by (used in) investing activities

26,549

(64,126)

Cash flows from financing activities:

Proceeds from sale of common stock in connection with employee stock purchase plan

754

609

Proceeds from exercise of stock options

665

35

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

(877)

(180)

Principal payments of capital lease obligations

(26)

(55)

Net cash provided by financing activities

516

409

Effect of exchange rate changes on cash and cash equivalents

239

(44)

Net increase (decrease) in cash and cash equivalents

24,651

(60,462)

Cash and cash equivalents, beginning of year

62,501

125,323

Cash and cash equivalents, end of period

$             87,152

$             64,861

SONUS NETWORKS, INC.

Supplemental Information

(In thousands)

(unaudited)

The following tables provide the details of stock-based compensation and amortization of intangible assets included in the Company's Condensed Consolidated Statements of Operations and the line items in which these amounts are reported.  Additional information regarding these items is available in the Investor Relations section of our website at http://www.sonusnet.com.  The information contained on our website or that can be accessed through our website should not be considered to be part of, or incorporated into, this press release.

Three months ended

March 31,

December 31,

March 31,

2011

2010

2010

Stock-based compensation

Cost of revenue - product

$                  108

$                  104

$                    71

Cost of revenue - service

385

401

419

Cost of revenue

493

505

490

Research and development expense

533

626

606

Sales and marketing expense

497

597

729

General and administrative expense

503

1,147

661

Operating expense

1,533

2,370

1,996

Total stock-based compensation

$               2,026

$               2,875

$               2,486

Amortization of intangible assets

Cost of revenue - product

$                      -

$                  228

$                    38

Research and development

100

100

100

Total amortization of intangible assets

$                  100

$                  328

$                  138

SONUS NETWORKS, INC.

Reconciliation of GAAP to Non-GAAP 2011 Guidance

(In millions, except percentages)

(unaudited)

The following tables include non-GAAP measures provided as guidance for 2011 derived from our GAAP (generally accepted accounting principles in the United States) 2011 expected results.  This non-GAAP guidance for gross margin and operating expenses is not presented in accordance with, nor is it intended to be a substitute for, GAAP.  In addition, our presentations of these measures may not be comparable to similarly titled measures used by other companies.  The non-GAAP measures provided as guidance should not be considered alternatives for, or in isolation from, the financial information prepared and presented in accordance with GAAP.

Range

Low

to

High

Revenue

$                  265

$                  285

Reconciliation of GAAP to Non-GAAP 2011 Guidance - Gross Margin

GAAP expected results

58%

62%

Stock-based compensation

1%

1%

Non-GAAP guidance

59%

63%

Reconciliation of GAAP to Non-GAAP 2011 Guidance - Operating Expenses

GAAP expected results

$                  151

$                  155

Stock-based compensation

(8)

(8)

Amortization of intangible assets (A)

-

-

Non-GAAP guidance

$                  143

$                  147

(A) The impact of expense for amortization of intangible assets on non-GAAP operating expenses is expected to approximate $100,000 per quarter.

SONUS NETWORKS, INC.

Reconciliation of Non-GAAP and GAAP Financial Information

(In thousands, except per share data)

(unaudited)

The tables below include non-GAAP financial measures derived from our Condensed Consolidated Statements of Operations.  These non-GAAP financial measures of Gross profit, Gross margin and Operating expenses are not presented in accordance with, nor are they intended to be a substitute for, accounting principles generally accepted in the United States of America ("GAAP").  In addition, our presentations of these measures may not be comparable to similarly titled measures used by other companies.  The non-GAAP financial measures described below, should not be considered alternatives for, or in isolation from, the financial information prepared and presented in accordance with GAAP.

We use a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of our business, in making operating decisions, planning and forecasting future periods, and determining payments under compensation programs.  We consider the use of these non-GAAP financial measures helpful in assessing the core performance of our continuing operations and liquidity, and when planning and forecasting future periods.  These items for the periods presented are Stock-based compensation expense, Amortization of intangible assets and Restructuring.

Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool.  In particular, many of the adjustments to the Company's GAAP financial measures reflect the exclusion of items that are recurring and will be reflected in the Company's financial results for the foreseeable future.

Three months ended

March 31,

December 31,

March 31,

Notes

2011

2010

2010

GAAP Total gross profit

$             26,625

$             52,683

$             38,178

Stock-based compensation expense

A

493

505

490

Amortization of intangible assets

B

-

228

38

Non-GAAP Total gross profit

$             27,118

$             53,416

$             38,706

GAAP Total gross margin

39.6%

63.5%

61.2%

Stock-based compensation expense

A

0.7%

0.6%

0.8%

Amortization of intangible assets

B

0.0%

0.3%

0.0%

Non-GAAP Total gross margin

40.3%

64.4%

62.0%

GAAP Operating expenses

$             38,101

$             41,231

$             38,678

Stock-based compensation expense

A

(1,533)

(2,370)

(1,996)

Amortization of intangible assets

B

(100)

(100)

(100)

Restructuring

C

-

(387)

-

Non-GAAP Operating expenses

$             36,468

$             38,374

$             36,582

A  Stock-based compensation is different from other forms of compensation, as it is a non-cash expense.  A cash salary or bonus has a fixed and unvarying cash cost.  In contrast, the expense associated with the award of an option is generally unrelated to the amount of cash ultimately received by the employee, and the cost to us is based on a stock-based compensation valuation methodology and underlying assumptions that may vary over time.  We believe that excluding non-cash stock-based compensation expense from our operating results enables the readers of our financial statements to more accurately compare our operating results to our historical results and to other companies in our industry.

B  On January 15, 2010, we entered into an intellectual property asset purchase and license agreement with Winphoria, Inc. ("Winphoria") and Motorola, Inc. ("Motorola") to purchase certain of Winphoria's software code and related patents and licensed certain other intellectual property from Winphoria and Motorola.  The purchase price included an initial payment of $2.0 million and future potential royalty payments dependent upon future sales of certain of our products  that include the Winphoria technology that was purchased or licensed.  In connection with this transaction we recorded identifiable intangible assets which we have classified as developed technology and that will be amortized on a straight-line basis over five years, the expected useful life of the technology.  The amortization expense for these identifiable intangible assets is included in Amortization of intangible assets.  

On April 13, 2007, we completed our acquisition of Zynetix Limited ("Zynetix"), a privately-held designer of innovative Global System for Mobile Communications infrastructure solutions located in the United Kingdom.  In connection with this acquisition we recorded intangible assets consisting of customer relationships, intellectual property and a trade name.  A portion of the Intellectual property was allocated to the Sonus reporting unit.  During the third quarter of fiscal 2008, we committed to a plan to sell Zynetix, and completed the sale transaction on November 26, 2008.  The amortization expense for the intellectual property allocated to the Sonus reporting unit is included in Amortization of intangible assets.

We believe that excluding the non-cash amortization of intangible assets facilitates the comparison of our financial results to our historical operating results and to other companies in our industry and provides meaningful information regarding our liquidity.

C  We recorded restructuring expense in the three months ended December 31, 2010 related to closing our office in Ottawa, Canada.  We believe that excluding this restructuring expense facilitates the comparison of our financial results to our historical operating results and to other companies in our industry and provides meaningful information regarding our liquidity.

Wayne Pastore
978-614-8291
wpastore@sonusnet.com

Fran Murphy
978-614-8148
fmurphy@sonusnet.com