SONUS NETWORKS INC - 10-K Annual Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE YEAR ENDED DECEMBER 31, 2001

COMMISSION FILE NUMBER 000-30229

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

DELAWARE 04-3387074
(State or other jurisdiction of incorporation (I.R.S. employer identification no.)
or organization)

5 CARLISLE ROAD, WESTFORD, MASSACHUSETTS 01886
(Address of principal executive offices, including zip code)

(978) 692-8999
(Registrant's telephone number, including area code)
------------------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common stock, $0.001 par value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy statement or information
proxy statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

As of January 31, 2002, there were 204,220,958 shares of $0.001 par value
per share, common stock, outstanding. As of that date, the aggregate market
value of the voting stock held by non-affiliates of the Registrant was
approximately $740,000,000.

DOCUMENTS INCORPORATED BY REFERENCE

The information required in Items 10-13 are incorporated by reference to
specified portions of the Registrant's definitive Proxy Statement to be issued
in conjunction with the Registrant's 2002 Annual Meeting of Shareholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended December 31, 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

ITEM 1. BUSINESS.

OVERVIEW

We are a leading provider of voice infrastructure products for the new
public network. Our products are a new generation of carrier-class switching
equipment and software that enable voice services to be delivered over
packet-based networks. Our target customers include new and established
communications service providers, including long distance carriers, local
exchange carriers, Internet service providers, cable operators, international
telephone companies and carriers that provide services to other carriers. Many
of these carriers have been building packet-based networks to support the
dramatic growth in data traffic resulting from Internet use. 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
for telephone calls. By enabling voice traffic to be carried over these
packet-based networks, our products will accelerate the convergence of voice and
data into the new public network.

Our suite of voice infrastructure products includes the GSX9000-TM- Open
Services Switch, the Insignus-TM- Softswitch and the Sonus Insight-TM-
Management System. Our products, designed for deployment at the core of a
service provider's network, significantly reduce the cost to build and operate
voice services compared to traditional alternatives. Moreover, our products
offer a powerful and open platform for service providers to increase their
revenues through the creation and delivery of new and innovative voice and data
services. Our switching equipment and software can be rapidly and easily
deployed, and readily expanded to accommodate growth in traffic volumes. Our
products also interoperate with service providers' existing telephone
infrastructure, allowing them to preserve the investment in their current
networks. Designed for the largest telephone networks in the world, our products
offer the reliability and voice quality that have been hallmarks of the public
telephone network for decades.

We have been recognized as the 2001 worldwide market share leader for
carrier-class packet voice infrastructure products by three market research
firms. Our announced customers include many of the world's major service
providers: Alestra (Mexico), BellSouth Corporation, China Netcom, Fusion
Communications (Japan), Global Crossing, Level 3 Communications, Qwest
Communications, Time Warner Telecom, Williams Communications and XO
Communications. We sell our products principally through a direct sales force
and, in some markets, through distributors and resellers. We also collaborate
with our customers to identify and develop new advanced services and
applications that they can offer to their customers.

As a result of the current challenging business environment in the
telecommunications industry, many service providers, including some of Sonus'
customers, are experiencing financial difficulties, and some are in the process
of restructuring their businesses or have filed for bankruptcy. While this has
resulted in recent reductions in spending by service providers for products such
as those we offer, we believe that over time the market opportunity for packet
voice solutions is one of the largest in networking and communications. Synergy
Research Group projects that the market for service provider voice over Internet
protocol equipment will grow dramatically to more than $6 billion in 2006. Our
objective is to capitalize on our early technology and market lead and build the
premier franchise in voice infrastructure solutions for the new public network.
The following are key elements of our strategy:

- leverage our technology leadership to achieve key service provider design
wins;

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

- expand and broaden our customer base by targeting specific market
segments;

- 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.

3

INDUSTRY BACKGROUND

The public telephone network is an integral part of our everyday lives. For
most of its 100-year history, the telephone industry has been heavily regulated,
which has slowed the evolution of its underlying circuit-switching technologies
and limited innovation in service offerings and the pricing of telephone
services. We expect two global forces--deregulation and the expansion of the
Internet--to revolutionize 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, are disappearing. The opportunity created by opening up the
$750 billion telephone services market has encouraged new participants to enter
the market and incumbent service providers to expand into new markets, both
domestically as well as internationally.

Competition between new players 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 are
eroding. In response, service providers are seeking new, creative and
differentiated service offerings as the means to introduce new revenue
opportunities and to reduce costs.

Simultaneously, the rapid adoption of the Internet is driving dramatic
growth of data traffic. Today, a significant portion of this data traffic is
carried over the traditional circuit-switched telephone network. However, the
circuit-switched network, designed for voice traffic and built long before the
advent of the Internet, is not suited to efficiently transport data traffic. In
a circuit-switched network, a dedicated path, or circuit, is established for
each call, reserving a fixed amount of capacity or bandwidth in each direction.
The dedicated circuit is maintained for the duration of the call across all of
the circuit switches spanning the path from origination to the destination of
the call, even when no traffic is being sent. As a result, a circuit-switched
architecture is highly inefficient for Internet applications, which tend to
create large bursts of data traffic followed by long periods of silence.

In contrast, a packet network divides traffic into distinct units called
packets and routes each packet independently. By combining traffic from users
with differing capacity demands at different times, packet networks more
efficiently fill available network bandwidth with packets of data from many
users, thereby reducing the bandwidth wasted due to silence from any single
user. The volume of data traffic continues to increase as use of the Internet
and the number of connected users grow, driving service providers to build
large-scale, more efficient packet networks.

With voice traffic carried over the vast installed base of traditional
circuit-switched networks and data traffic carried over rapidly expanding packet
networks, service providers are faced with the expense and complexity of
building and maintaining parallel networks.

The following diagrams depict these parallel voice and data networks.

[Two diagrams appear: the first diagram is symmetric and depicts a
circuit-switched network. A large, rectangular box labeled "Circuit Switched
Network" is in the center. The box contains a series of small shapes aligned
linearly and connected by a straight bold line. From left to right, the shapes
are a small circle labeled "End Office," two small hexagons labeled "Tandem" and
a small circle labeled "End Office." Outside of the rectangular box on each side
is an icon representing a telephone connected to the outer circle labeled "End
Office" by a bold line. Also on each side and connected to the outer "End
Office" circle by dotted lines are icons representing a fax machine and second
telephone. Above the rectangular box and connected by dotted lines to each of
the small shapes inside of the large rectangle is a shaded oval labeled "SS7."
Lower diagram is symmetric and depicts a generic packet-switched network. Shaded
cloud labeled "Packet Network" is aligned directly below the rectangular box of
the upper diagram. On the left and right side of the cloud, aligned linearly,
are icons representing a computer, connected to the cloud by dotted lines.
Connected to the bottom of the cloud by dotted lines are three additional
computers.]

4

THE NEED FOR, AND BENEFITS OF, COMBINING VOICE AND DATA NETWORKS

We believe significant opportunities exist in uniting these separate,
parallel networks into a new integrated public network capable of transporting
both voice and data traffic. Enormous potential savings can be realized by
eliminating redundant or overlapping equipment purchases and reducing network
operating costs. 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 one-number/follow-me
services, unified messaging, Internet click-to-talk, sophisticated call centers
and other services.

The packet network is the platform for the new public network. The volume of
data traffic has already eclipsed voice traffic and is growing much faster than
voice. Packet architectures are more efficient at moving data, more flexible and
reduce equipment and operating costs. The key to realizing the full potential of
a converged, packet-based network is to enable the world's voice traffic to run
over those networks.

Early attempts to develop new technologies to carry voice traffic over
packet networks have included voice over Internet protocol, or VoIP, systems
using a personal computer platform and devices that added VoIP capability to
existing data devices such as remote access servers. While demonstrating the
viability of transmitting voice over packet technology, these approaches have
fallen far short of the quality, reliability and scalability required by the
public telephone network.

The early VoIP systems also lack the ability to interoperate with the
signaling infrastructure of the circuit-switched network. Without this signaling
capability, VoIP applications cannot provide the consistent "look, sound and
feel" of traditional telephone calls and are not well-suited to more complex
applications such as voicemail, unified messaging and other value-added
services.

The public telephone network is large, highly complex and generates
significant revenues, a substantial majority of which are derived from voice
services. Given service providers' substantial investment in, and dependence
upon, traditional circuit-switched technology, their transition to the new
public network will be gradual. During this transition, immediate opportunities
exist to reduce the burden on overloaded and expensive circuit-switched
resources, such as Internet call diversion. Internet call diversion allows
modem-connected Internet calls to be identified and diverted from the circuit-
switched network to the packet network, thus optimizing use of valuable network
bandwidth.

REQUIREMENTS FOR VOICE INFRASTRUCTURE PRODUCTS FOR THE NEW PUBLIC NETWORK

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, voice infrastructure
products for the new public network must satisfy the following requirements:

CARRIER-CLASS PERFORMANCE. Because they operate complex, mission-critical
networks, service providers have clear infrastructure requirements. These
include 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 various
physical interfaces such as T1 and E1. It must also support data networking
protocols such as Internet protocol, or IP, and asynchronous transfer mode, or
ATM, as well as newer protocols such as SIP, MGCP, Megaco (H.248) and H.323.
Infrastructure solutions must also seamlessly integrate with service providers'
existing operations support systems.

SCALABILITY AND DENSITY. Infrastructure solutions for the new public
network 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

5

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 for
the new public network decouples the capabilities of traditional
circuit-switching equipment into robust hardware elements and highly intelligent
software platforms that provide control, signaling and service creation
capabilities. This approach will transform the closed, proprietary
circuit-switched public telephone network into a flexible, open environment
accessible to a wide range of software developers. Service providers and
third-party vendors will be able 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 what we believe to be the first comprehensive
suite of voice infrastructure products purpose-built for the deployment and
management of voice and data services over the new public network. The Sonus
solution consists of the following carrier-class products:

- GSX9000-TM- Open Services Switch;

- Insignus-TM- Softswitch; and

- Sonus Insight-TM- Management System.

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. Our
solution has been specifically designed to meet the requirements of the new
public network. As shown in the following diagram, our products unite the voice
and data networks, unleashing the potential of the new public network.

[Symmetric diagram with shaded cloud labeled "Packet Network" at the center.
Extending from left side of the "Packet Network" cloud is a box with caption
reading "Sonus GSX9000(TM) Open Services Switch" and extending from that,
connected by a bold line, a small cloud labeled "PSTN", or Public Switched
Telephone Network Extending from right side of the "Packet Network" cloud is a
box with caption reading "3 rd Party Media Gateways" and extending from that,
connected by a bold line, a small cloud labeled "PSTN", or Public Switched
Telephone Network. Below the "Packet Network" cloud is a box labeled "IADs" and
connected by bold lines are three icons representing telephones. Above the
"Packet Network" cloud on the left side are three small boxes labeled "OSPA
Enhanced Services." Directly above the "Packet Network" cloud are three icons
representing servers labeled "Sonus Insignus(TM) Softswitch." Above the "Packet
Network" cloud on the right side is a small icon representing a computer
terminal labeled "Sonus Insight(TM) Management."]

6

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 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 all applicable voice and data
networking standards and interfaces, including:

- SS7 and other telephone network signaling protocols, including advanced
services as well as simple call management and routing;

- IP, ATM, Ethernet and optical data networking standards;

- call management standards including SIP, MGCP, 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 the new public network, 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 half that of
traditional circuit-switched equipment. At the same time, our GSX9000-TM- Open
Services Switch offers unparalleled density, requires less than one-tenth of the
space needed by circuit-switching implementations and requires significantly
less power and cooling. This enables a significant reduction in expensive
central office facilities cost and allows service providers to deploy our
equipment in locations where traditional circuit switches are not even an option
given the limited space and environmental services.

The GSX9000-TM- Open Services Switch can create central office space savings
as shown below.

[Three dimensional diagram with a set of four rectangular bars parallel to one
another and lined up evenly with caption reading "Traditional Circuit Switch
(50,000 calls)." Depicted in front of the rectangular bars is a single, small,
upright rectangular box labeled "Sonus GSX9000(TM) Open Services Switch (50,000
calls)." Extending from each of the left and right sides of the small
rectangular box back to the sides of the first of the four larger bars is a thin
line.]

OPEN SOFTWARE ARCHITECTURE AND FLEXIBLE PLATFORM. Our Open Services
Architecture, or OSA, is based on a software-centric design and a flexible
platform, allowing rapid development of new products and services. New services
may be developed by us, by service providers or by any number of third parties
including software developers and systems integrators. The OSA also facilitates
the creation of services that were previously not possible on the
circuit-switched network. In addition, we have partnered with a

7

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 much more quickly than
circuit-switching 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 of time from product arrival to
final testing, thereby reducing the cost of deployment and speeding the time to
market for new services.

THE SONUS STRATEGY

Our objective is to capitalize on our early technology and market lead and
build the premier franchise in voice infrastructure solutions for the new public
network. The following are key elements of our strategy:

LEVERAGE OUR TECHNOLOGY LEADERSHIP TO ACHIEVE KEY SERVICE PROVIDER DESIGN
WINS. As the first company to provide voice infrastructure products for the new
public network, we have achieved key design wins with market-leading service
providers as they develop the architecture for their new voice networks. We
expect service providers to select vendors that provide leading technology and
the ability to maintain that technology leadership. Our equipment is an integral
part of the network architecture and achieving design wins will enable us to
expand our business as these networks are deployed. We have been awarded
contracts by major service providers including Alestra, BellSouth Corporation,
China Netcom, Fusion Communications, Global Crossing, Level 3 Communications,
Qwest Communications, Time Warner Telecom, Williams Communications and XO
Communications. Furthermore, by working closely with our customers as they
deploy these networks, we gain valuable knowledge regarding their requirements,
positioning us to develop product enhancements and extensions that address
evolving service provider needs.

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 at the heart of the largest networks in the world. From this fundamental
position in the trunking infrastructure, we are extending our reach by moving
outward to the access segments of the network. Sonus supports multiple carrier
applications in a single platform. These applications include long
distance/international calling, tandem switching, Internet call diversion,
business PBX access, residential access/Centrex, H.323 termination, direct voice
over broadband and enhanced services. This approach will allow our customers to
design and execute a co-ordinated migration and expansion strategy as they build
entirely new networks or transition from their legacy circuit-switched
infrastructure.

EXPAND AND BROADEN OUR CUSTOMER BASE BY TARGETING SPECIFIC MARKET
SEGMENTS. We plan to leverage our early success to penetrate new customer
segments. We believe new and incumbent service providers will build the new
public network 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, cable operators,
and Internet service providers, or ISPs, are also likely to be early adopters of
our products. Incumbents, including interexchange service providers, or IXCs,
Regional Bell Operating Companies, or RBOCs, and international PTTs are also
expected to adopt packet voice technologies over time.

8

EXPAND OUR GLOBAL SALES, MARKETING, SUPPORT AND DISTRIBUTION
CAPABILITIES. Becoming the primary supplier of voice infrastructure for the new
public network 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, in China, Japan,
Singapore, Germany and France, and in the United Kingdom. In addition, we plan
to augment our global direct sales effort with international distribution
partners. 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 OSPA, that 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 include companies such as Agilent Technologies, Ericsson, Juniper
Networks, Priority Call Management, Redback Networks, Riverstone Networks and
Ulticom.

ACTIVELY CONTRIBUTE TO THE STANDARDS DEFINITION AND ADOPTION PROCESS. To
advance our technology and market leadership, we will continue to actively lead
and contribute to standards bodies such as the International Softswitch
Consortium, the Internet Engineering Task Force and the International
Telecommunications Union. The definition of standards for the new public network
is in an early stage and we intend to drive these standards to meet the
requirements for an open, accessible, scalable and powerful new public network
infrastructure.

PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We intend to expand our
products and services through selected 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 for the
new public network will enable us to bring greater value to our customers and
extend our lead over potential competitors.

SONUS PRODUCTS

GSX9000-TM- OPEN SERVICES SWITCH

The Sonus GSX9000-TM- Open Services Switch enables voice traffic to be
transported over packet networks. Its carrier-class hardware, which is NEBS
Level 3 compliant and designed to provide 99.999% availability with no single
point of failure, offers optional full redundancy and full hot-swap capability.
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-TM- 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. The first 2 slots are reserved
for management modules, while the other 14 slots may be used for any mix of
other module types. It supports the following interfaces:

- - T1; [Diagram depicting a large box. Detail on
- - T3; the face includes the Sonus logo in the
- - E1; upper left corner and a set of vertical
- - OC3; slots.]
- - 100BaseT;
- - 1000BaseT; and
- - OC12c/STM-4.

9

The GSX9000-TM- is designed to deliver voice quality equal, or superior, to
that of the legacy circuit-switched public network. It is designed to support
the multiple encoding schemes used in circuit switches such as G.711 and
delivers a number of other voice compression algorithms. It also is designed to
provide world-class echo cancellation, conforming to the latest G.168 standard,
on every circuit port. It automatically disables echo cancellation when it
detects a modem signal. The GSX9000-TM- is also designed to minimize delay,
further enhancing perceived voice quality. The GSX9000-TM- scales to the very
large configurations required by major service providers. With density
improvements introduced in March 2002, a single GSX9000-TM- shelf will be able
to support up to 22,176 simultaneous calls. A single GSX9000-TM-, consisting of
multiple shelves, can support 100,000 or more simultaneous calls. The
GSX9000-TM- is designed to operate with our Insignus-TM- Softswitch and with
softswitches and network products offered by other vendors.

INSIGNUS-TM- SOFTSWITCH

Softswitches provide the network intelligence in next-generation networks,
including call control, signaling, core network routing and a management
foundation. Our Insignus-TM- Softswitch is based on a modular architecture that
is designed for high performance and scalability, as well as interoperability
with third-party gateways, devices and services. The Insignus-TM- Softswitch
includes the following functionality:

- call control and signaling;

- service selection and routing;

- line-side endpoint control and services for both residential and
enterprise markets;

- local calling features and regulatory requirements such as emergency
services routing; and

- a gateway between existing SS7/C7 signaling networks and the packet
network.

The Insignus-TM- Softswitch functions can be deployed on the same or
separate platforms, and can be configured in either a centralized or distributed
manner, based on a service providers' network requirements. This high level of
flexibility allows service providers to precisely allocate functionality and
processing performance, avoiding the cost of unused resources. Service providers
can also deploy additional Insignus-TM- modules as their requirements change.
For instance, a service provider deploying the functions for a long distance
application might require only service selection routing and SS7 connectivity.
As the service provider moves into the local market, it can add line-side
endpoint control to deliver access services on the same platform. The
Insignus-TM- Softswitch can scale from the smallest single point of presence to
the largest global networks.

The Insignus-TM- Softswitch supports industry-standard protocols such as
SIP, H.323 and MGCP, using them for both interaction with third-party products
and for communication among components of the Open Services Architecture. The
Insignus-TM- Softswitch supports a large number of international SS7/C7
variants, for both call signaling and interaction with legacy intelligent
network, or IN, and advanced intelligent network, or AIN, services.

The Insignus-TM- Softswitch is deployed on industry-standard, NEBS-compliant
computing platforms. The Insignus-TM- Softswitch supports redundancy, providing
carrier-class reliability. In fully redundant configurations, there is no loss
of active calls during switchover for any hardware and software component.

We believe that in addition to traditional voice services, our Insignus-TM-
Softswitch will enable service providers to offer differentiated, value-added
features and services developed by us, by application software developers,
system integrators or service providers themselves, including:

- one-number/follow-me services, which route a subscriber's email, phone and
Web services to any location;

10

- unified messaging that integrates telephone services, email and Web
applications, and allows subscribers to have a unified mailbox for email,
voicemail and message filtering;

- conference calling across the Internet;

- multimedia conferencing;

- Internet-enabled call centers; and

- Internet content delivered with voice.

SONUS INSIGHT-TM- MANAGEMENT SYSTEM

Sonus Insight-TM- is a complete, web-based management system designed to
simplify the operation of carrier-class packet voice networks. Sonus Insight-TM-
includes the Element Management System, or EMS, and the DataStream Integrator,
or DSI, that together provide comprehensive configuration, provisioning,
security, alarm reporting, performance data and billing mediation capabilities.
Sonus Insight-TM- seamlessly integrates with service providers' existing
back-office systems, and offers many tools that enhance and consolidate key
management functions, allowing service providers to streamline many of today's
labor-intensive processes. Sonus Insight-TM- scales to support hundreds of
switches and concurrent users, and is based on industry standards and protocols
to facilitate management from any location worldwide.

CUSTOMER SUPPORT AND PROFESSIONAL SERVICES

We believe our comprehensive technical customer support and professional
services capabilities are an important element of our solution for customers.
These services cover the full network lifecycle: planning; design; installation;
and operations. We help our customers create or revise their business plans and
design their networks and also provide the following:

- turnkey network installation services;

- system integration and testing;

- 24-hour technical support; and

- educational services to customer personnel on the installation, operation
and maintenance of our equipment.

We have established technical assistance centers in Westford, Massachusetts,
Richardson, Texas and in the United Kingdom. The technical assistance centers
provide customers with around-the-clock technical support, as well as periodic
updates to our software and product documentation. We offer our customers a
variety of service plans.

A key differentiator of our support activities is our professional services
group, many members of which hold advanced technical degrees in electrical
engineering or related disciplines. We offer a broad range of professional
services, including sophisticated network deployment, assistance with logistics
and project management support. We also maintain a customer support laboratory
in which customers can test the utility of our products for their specific
applications and in which they can gain an understanding of the applications
enabled by the converged network. Our approach to professional services is
designed to ensure that our products are integrated into our customers' networks
to meet their specific needs and that these customers realize the maximum value
from their networking technology investments. As of December 31, 2001, our
customer support and professional services organization consisted of 111
employees.

CUSTOMERS

Our target customer base includes long distance carriers, local exchange
carriers, ISPs, cable operators, international telephone companies and carriers
that provide services to other carriers. We

11

have shipped products to customers including: Alestra, BellSouth Corporation,
China Netcom, Fusion Communications, Global Crossing, Level 3 Communications,
Qwest Communications, Time Warner Telecom, Williams Communications and XO
Communications. As a result of the current challenging business environment in
the telecommunications industry, many service providers, including some of
Sonus' customers, are experiencing financial difficulties, and some are in the
process of restructuring their businesses or have filed for bankruptcy. For the
year ended December 31, 2001, Fusion Communications, Global Crossing, Qwest
Communications and XO Communications each contributed more than 10% of our
revenues and collectively represented an aggregate of 67% of our total revenues.
Currently, some of our customers have deployed our products in their commercial
networks while others are using our products in laboratory testing and internal
trials.

SALES AND MARKETING

We sell our products principally through a direct sales force and, in some
markets, through distributors and resellers, including Nissho Electronics
Corporation (Japan), Samsung Corporation (Korea) and Sumitomo Corporation
(Japan). In addition, we intend to establish relationships with selected
original equipment manufacturers and other marketing partners in order to serve
particular markets or geographies and provide our customers with opportunities
to purchase our products in combination with related services and products.

Through our Open Services Partner Alliance, or OSPA, vendors achieve
interoperability with our products quickly and efficiently, allowing those
vendors, as well as service providers, to reduce the time to deploy new
services. This partner program also allows service providers to select from a
list of vendors that are Sonus "Powered," which signifies proven
interoperability with Sonus products. We believe that this flexibility offers
those service providers a choice of solutions and value-added services, and
enables them to achieve differentiation through an integrated suite of
"best-of-breed" solutions.

As of December 31, 2001, our sales and marketing organization consisted of
101 employees, of which 20 were located in Westford, Massachusetts and 81 were
located in sales and support offices in the United States and around the world.

RESEARCH AND DEVELOPMENT

We believe that strong product development capabilities are essential to our
strategy of enhancing our core technology, developing additional applications,
incorporating that technology into new products and maintaining comprehensive
product and service offerings. Our research and development process is driven by
the availability of new technology, market data and customer feedback. We have
invested significant time and resources in creating a structured process for
undertaking all product development projects.

We have assembled a team of highly skilled engineers with significant
telecommunications and networking industry experience. Our engineers have
experience in, and have been drawn from, leading computer data networking,
telecommunications and multimedia companies. As of December 31, 2001, we had 306
employees responsible for research and development, of which 268 were software
and quality assurance engineers and 38 were hardware engineers. Our engineering
effort is focused on new applications and network access features, new network
interfaces, improved scalability, interoperability, quality, reliability and
next generation technologies. We currently maintain United States research and
development offices in Massachusetts, New Jersey, Virginia and Texas and have an
office in the United Kingdom. In addition, we have a joint development effort in
Japan with Nissho Electronics Corp. and NTT Communicationware Corp., a wholly
owned subsidiary of NTT, the world's largest carrier.

We have made, and intend to continue to make, a substantial investment in
research and development. Research and development expenses were $65.0 million
for the year ended December 31, 2001, $26.4 million for the year ended
December 31, 2000 and $10.8 million for the year ended December 31, 1999.

12

COMPETITION

The market for voice infrastructure products for the new public network is
intensely competitive, subject to rapid technological change and significantly
affected by new product introductions and other market activities of industry
participants. We expect competition to persist and intensify in the future. Our
primary sources of competition include vendors of networking and
telecommunications equipment, such as Cisco Systems, Lucent Technologies and
Nortel Networks. Some of our competitors have significantly greater financial
resources than we do and are able to devote greater resources to the
development, promotion, sale and support of their products. In addition, these
competitors have more extensive customer bases and broader customer
relationships than we do, including relationships with our potential customers.
Numerous smaller and mostly private companies are also focusing on similar
market opportunities.

In order to compete effectively, we must deliver innovative products that:

- provide extremely high network reliability and voice quality;

- scale easily and efficiently;

- interoperate with existing network designs and other vendors' equipment;

- provide effective network management;

- are accompanied by comprehensive customer support and professional
services; and

- provide a cost-effective and space-efficient solution for service
providers.

In addition, we believe that the ability to provide vendor-sponsored
financing, which some of our competitors currently offer, is an important
competitive factor in our market.

INTELLECTUAL PROPERTY

Our success and ability to compete are dependent on our ability to develop
and maintain our technology and operate without infringing on the proprietary
rights of others. We rely on a combination of patent, trademark, trade secret
and copyright law and contractual restrictions to protect the proprietary
aspects of our technology. These legal protections afford only limited
protection for our technology. We presently hold three patents, and have seven
patent applications pending in the United States. In addition, we have fifteen
patent applications pending abroad. We can't be certain that patents will be
granted based on these pending applications. We seek to protect our intellectual
property by:

- protecting our source code for our software, documentation and other
written materials under trade secret and copyright laws;

- licensing our software pursuant to signed license agreements, which impose
restrictions on others' ability to use our software; and

- seeking to limit disclosure of our intellectual property by requiring
employees and consultants with access to our proprietary information to
execute confidentiality agreements.

Due to rapid technological change, we believe that factors such as the
technological and creative skills of our personnel, new product developments and
enhancements to existing products are more important than the various legal
protections of our technology to establishing and maintaining technology
leadership.

13

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

MANUFACTURING

Currently, we outsource the manufacturing of our products. Our contract
manufacturers provide comprehensive manufacturing services, including assembly
of our products and procurement of materials on our behalf. We perform final
test and assembly at our facility to ensure that we meet our internal and
external quality standards. We believe that outsourcing our manufacturing will
enable us to conserve working capital, better adjust manufacturing volumes to
meet changes in demand and more quickly deliver products. At present, we
purchase products from our outside contract manufacturers on a purchase order
basis. We may not be able to enter into long-term contracts with outside
manufacturers on terms acceptable to us, if at all. As of December 31, 2001, we
had 40 employees responsible for manufacturing, purchasing, final testing and
assembly.

EMPLOYEES

As of December 31, 2001, we had a total of 593 employees, including 306 in
research and development, 101 in sales and marketing, 111 in customer support
and professional services, 40 in manufacturing and 35 in finance and
administration. Our employees are not represented by any collective bargaining
unit. We believe our relations with our employees are good.

ITEM 2. PROPERTIES.

Our headquarters are located in a leased facility in Westford,
Massachusetts, consisting of 90,000 square feet under leases that expire in
March 2004. We have additional facilities in Westford and Littleton,
Massachusetts, consisting of an aggregate of 51,000 square feet under subleases
that expire through December 2008, and in Richardson, Texas, consisting of
25,000 square feet under a lease expiring in April 2003. We also lease
short-term office space in Colorado, Oklahoma, New Jersey, Virginia, China,
Japan, Singapore and the United Kingdom. We believe our existing facilities are
adequate for our current needs and that suitable additional space will be
available as needed.

ITEM 3. LEGAL PROCEEDINGS.

On November 8, 2001, a purchaser of Sonus' common stock filed a complaint in
the federal district court for the Southern District of New York against Sonus,
two of its officers and the lead underwriters alleging violations of the federal
securities laws in connection with our initial public offering (IPO) and seeking
unspecified monetary damages. The purchaser seeks to represent a class of
persons who purchased Sonus' common stock between the IPO on May 24, 2000 and
December 6, 2000. The complaint alleges that Sonus' registration statement
contained false or misleading information or omitted to state material facts
concerning the alleged receipt of undisclosed compensation by the underwriters
and the existence of undisclosed arrangements between underwriters and certain
purchasers to make additional purchases in the after market. The claims against
Sonus are asserted under Section 11 of the Securities Act of 1933 and against
the individual defendants under Sections 11 and 15 of that Act. Sonus intends to
vigorously defend this action.

14

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

Our common stock has been quoted on the Nasdaq National Market under the
symbol "SONS" since May 25, 2000. Prior to that time, there was no public market
for the common stock.

On October 6, 2000, Sonus effected a three-for-one stock split in the form
of a stock dividend to each stockholder of record. All stock information has
been retroactively adjusted to reflect the stock split.

In May 2000, Sonus completed its IPO of 17,250,000 shares of common stock,
which includes the exercise of the underwriters' over-allotment option of
2,250,000 shares, at $7.67 per share. The IPO generated net proceeds of
$121,705,000, after deducting the underwriting discount and commissions and
offering expenses of $10,545,000.

The following table sets forth, for the time periods indicated, the high and
low sales prices of the common stock as reported on the Nasdaq National Market.

We have never declared or paid cash dividends and have no present intention
to pay cash dividends in the foreseeable future. Further, our bank agreement
prohibits us from declaring any cash dividends. At January 9, 2002, there were
approximately 960 holders of record of our common stock.

15

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

The following selected consolidated financial data of Sonus should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
to those statements included elsewhere in this report.

- --------------------------

(FOOTNOTES ON FOLLOWING PAGE)

16

(1) Excludes non-cash, stock-based compensation expense as follows:

(2) See Note 1 (o) to our consolidated financial statements for an explanation
of the method of calculation. Pro forma per share calculation reflects the
conversion of all outstanding shares of redeemable convertible preferred
stock into shares of common stock which occurred upon the closing of our IPO
in May 2000, as if the conversion occurred at the date of original issuance.

17

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL
INFORMATION APPEARING ELSEWHERE IN THIS REPORT. THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING THE
RISKS DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS REPORT.

OVERVIEW

Sonus is a leading provider of voice infrastructure products for the new
public network. We offer a new generation of carrier-class switching equipment
and software that enables voice services to be delivered over packet-based
networks.

Since our inception, we have incurred significant losses and, as of
December 31, 2001, had an accumulated deficit of $729.4 million. We have not
achieved profitability on a quarterly or an annual basis, and anticipate that we
will continue to incur net losses. We have a lengthy sales cycle for our
products and, accordingly, we expect to incur sales and other expenses before we
realize the related revenues. We expect to continue to incur significant sales
and marketing, research and development and general and administrative expenses
and, as a result, we will need to generate significant revenues to achieve and
maintain profitability.

We sell our products primarily through a direct sales force and, in some
markets, through resellers and distributors. In the future, we anticipate
expanding our sales efforts to include additional overseas distribution
partners. 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. We believe these long sales cycles,
as well as our expectation that customers will tend to sporadically place large
orders with short lead times, will cause our revenues and results of operations
to vary significantly and unexpectedly from quarter to quarter. We expect to
recognize revenues from a limited number of customers for the foreseeable
future.

Sonus began shipping product to customers during the fourth quarter of
fiscal 1999 and recorded its first revenues of $51.8 million in fiscal 2000. For
the year ended December 31, 2001, Sonus recognized $173.2 million in revenue.
For the six consecutive quarters ending June 30, 2001, our revenue increased
each quarter sequentially compared to the previous quarter. However, our revenue
declined sequentially in the third and fourth quarters of fiscal 2001 to
$40.3 million and $38.9 million, due to unfavorable business conditions
primarily caused by declines in capital spending by telecommunications service
providers. As a result of the current challenging business environment in the
telecommunications industry, many service providers, including some of Sonus'
customers are experiencing financial difficulties, and some are in the process
of restructuring their businesses or have filed for bankruptcy. Due to these
factors, our revenues could be further reduced.

In response to these unfavorable economic conditions, in September 2001,
Sonus announced a restructuring plan designed to reduce expenses and align its
cost structure with its revised business outlook. Accordingly, Sonus recorded a
restructuring charge in fiscal 2001 of $25.8 million for a worldwide workforce
reduction, consolidation of excess facilities and other charges, a non-cash
impairment charge of $374.7 million for the write-off of goodwill and certain
purchased intangibles related to the acquisition of telecom technologies, inc.
(TTI) and a $25.4 million write-off of deferred compensation for shares and
options held by terminated employees. See Note 2 to our consolidated financial
statements.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from these estimates. The following critical

18

accounting policies are impacted significantly by judgments, assumptions and
estimates used in the preparation of our consolidated financial statements.

Our revenue recognition policy complies with SEC Staff Accounting Bulletin
No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. See Note 1(h) to our
consolidated financial statements.

The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts. If there is a deterioration of a
major customer's credit worthiness or actual defaults are higher than our
historical experience, the actual results could differ from these estimates.

Inventory purchases and commitments are based upon estimated future demand
for our products. If there is a sudden and significant decrease in demand for
our products or there is a higher risk of inventory obsolescence because of
rapidly changing technology and customer requirements, we may be required to
increase our inventory allowances and our gross profit could be adversely
affected.

We accrue for warranty costs based on the historical rate of claims and
costs to provide warranty services. If we experience an increase in warranty
claims which are higher than our historical experience or our costs to provide
warranty services increase, our gross profit could be adversely affected.

We are subject to the possibility of various loss contingencies arising in
the ordinary course of business. We consider the likelihood of the loss or
impairment of an asset or the incurrence of a liability as well as our ability
to reasonably estimate the amount of loss in determining loss contingencies. An
estimated loss contingency is accrued when it is probable that a liability has
been incurred or an asset has been impaired and the amount of loss can be
reasonably estimated. We regularly evaluate current information available to us
to determine whether such accruals should be adjusted.

ACQUISITION OF TELECOM TECHNOLOGIES, INC.

In January 2001, we acquired TTI. Upon the closing of this acquisition, we
issued an aggregate of 10,800,000 shares of common stock in exchange for all
outstanding capital stock of TTI. Of the 10,800,000 shares issued to the TTI
shareholders, 1,200,000 shares were placed into escrow as security for indemnity
obligations which were released to TTI shareholders on January 18, 2002. Also
during 2001, TTI shareholders received an additional 4,200,000 shares of common
stock upon the achievement of certain specified business expansion and product
development milestones. In connection with our acquisition of TTI, we adopted
our 2000 Retention Plan and issued 3,000,000 shares of common stock under this
plan to certain employees of TTI who became employees of Sonus. These shares
vest subject to continued employment and the attainment of the business
expansion and product development milestones. Due to the termination of certain
former TTI employees in connection with the restructuring plan in
September 2001, restrictions associated with approximately 860,000 shares of
common stock awarded under the 2000 Retention Plan have been removed.

We accounted for the acquisition as a purchase for financial reporting
purposes. Accordingly, Sonus' financial statements for the year ended
December 31, 2001 reflect the results of operations of TTI since the date of
acquisition. The purchase price was allocated to TTI's assets and liabilities
based on the fair value of the assets acquired and the liabilities assumed. The
excess of the purchase price over the fair value of the net tangible assets and
identifiable intangible assets acquired has been classified as goodwill. In
addition, a portion of the purchase price was allocated to in-process research
and development. Additionally, since the closing date, the purchase price has
been increased as escrowed shares subject to milestone conditions were earned.
Goodwill and other intangibles have been amortized by charges to operations over
their estimated useful lives of three years and purchased in-process research
and development was charged to operations at the time of closing. Sonus has
recorded deferred stock-based compensation relating to the issuance of awards
under our 2000 Retention Plan. For the year ended December 31, 2001, Sonus
recorded a non-cash impairment charge of $374.7 million for the write-off of
goodwill and certain purchased intangibles related to the acquisition of TTI.
See Notes 2 and 3 to our consolidated financial statements.

19

RESULTS OF OPERATIONS

REVENUES. Revenue is recognized from product sales to end users, resellers
and distributors upon shipment, provided there are no uncertainties regarding
acceptance, persuasive evidence of an arrangement exists, the sales price is
fixed or determinable and collection of the related receivable is probable. If
uncertainties exist, we recognize revenue when those uncertainties are resolved.
In multiple element arrangements, in accordance with Statement of Position 97-2
and 98-9, we use the residual method to recognize revenue when vendor-specific
objective evidence does not exist for one of the delivered elements in the
arrangement. Service revenue is recognized as the services are provided. Revenue
from maintenance and support arrangements is recognized ratably over the term of
the contract. Amounts collected prior to satisfying the revenue recognition
criteria are reflected as deferred revenue. We estimate and record warranty
costs at the time of product revenue recognition.

COST OF REVENUES. Our cost of revenues consists primarily of amounts paid
to third-party manufacturers for purchased materials and services, and
manufacturing and professional services personnel and related costs.
Manufacturing engineering, documentation control, final testing and assembly are
performed at our facility.

GROSS PROFIT. We believe that our gross profit margins will be affected
primarily by the following factors:

- demand for our products and services;

- new product introductions and enhancements both by us and by our
competitors;

- product service and support costs associated with initial deployment of
our products in customers' networks;

- changes in our pricing policies and those of our competitors;

- write off of any obsolete inventory;

- the mix of product configurations sold;

- the mix of sales channels through which our products and services are
sold; and

- the volume of manufacturing and costs of manufacturing and components.

We expect gross profit as a percentage of revenues to increase modestly from
their current levels in the future due to continuing product mix changes and
increases in support and maintenance revenues.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of salaries and related personnel costs, recruiting expenses
and prototype costs related to the design, development, testing and enhancement
of our products. We expense our research and development costs as incurred. Some
aspects of our research and development effort require significant short-term
expenditures, the timing of which can cause significant quarterly variability in
our expenses. We believe that our recent restructuring actions will reduce
research and development expenses in fiscal 2002 from the fiscal 2001 level.
However, rapid technological innovation is critical to our long-term success and
we intend to continue to make substantial investments to enhance our products
and technologies.

SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of salaries and related personnel expenses, commissions, travel and
entertainment expenses, promotions, customer evaluations and other marketing
expenses. We believe that our recent restructuring actions will reduce sales and
marketing expenses in fiscal 2002 from the fiscal 2001 level.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries and related expenses for executive and
administrative personnel, recruiting expenses, provision for bad debts and
professional fees. We believe that our recent restructuring actions will reduce
general and administrative expenses in fiscal 2002 from the fiscal 2001 level.

20

STOCK-BASED COMPENSATION EXPENSES. Stock-based compensation expenses
include the amortization of stock compensation charges resulting from the
granting of stock options, including those TTI stock options assumed by Sonus,
stock awards to TTI employees under the 2000 Retention Plan, the sales of
restricted common stock to employees and compensation expense associated with
the grant of stock options and issuance of restricted stock to non-employees.
See Note 13 (i) to our consolidated financial statements. Deferred compensation
related to the granting of stock options and sales of restricted common stock to
employees, including those TTI stock options assumed by Sonus, are being
amortized over the vesting periods of four to five years. The deferred
compensation associated with the 2000 Retention Plan awarded to TTI employees
will be expensed over the approximate two-year vesting period of the retention
shares. These amounts have been adjusted for changes in the fair value of Sonus
common stock on the date the related milestone release conditions were earned.
Upon the termination of an employee, the remaining value of shares held under
the 2000 Retention Plan, to which such employee is entitled, if any, will be
expensed. The compensation expense associated with non-employees is recorded at
the time services are provided. As of December 31, 2001, we expect to record up
to approximately $21.0 million, $6.5 million and $1.2 million in employee
stock-based compensation expense in the years ending December 31, 2002, 2003 and
2004.

BENEFICIAL CONVERSION OF PREFERRED STOCK. In fiscal 1999, we recorded a
charge to accumulated deficit of $2.5 million, representing the beneficial
conversion feature of our Series C redeemable convertible preferred stock that
was sold in the fourth quarter of 1999. This charge was accounted for as a
dividend to preferred stockholders and, as a result, increased the net loss
available to common stockholders and the related net loss per share.

YEARS ENDED DECEMBER 31, 2001 AND 2000

REVENUES. Revenues were $173.2 million for fiscal 2001, an increase of
$121.4 million, or 235% from $51.8 million in fiscal 2000. The increase in
revenues was the result of a significant increase in the sale of voice
infrastructure products. For the years ended December 31, 2001 and 2000, four
and three customers each contributed more than 10% of our revenues, representing
an aggregate of 67% and 70% of total revenues. International revenues, primarily
to Asia and Europe, were 18% and 11% of revenues for the years ended
December 31, 2001 and 2000.

GROSS PROFIT. Gross profit was $97.5 million, or 56% of revenues, for
fiscal 2001, compared with $23.9 million, or 46% of revenues, in fiscal 2000.
The increase in gross profit as a percentage of revenues is primarily the result
of improved manufacturing efficiencies due to increased volume, a favorable
product mix and a reduction in material costs.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$65.0 million for fiscal 2001, an increase of $38.6 million, or 146%, from
$26.4 million in fiscal 2000. The increase reflects costs primarily associated
with a significant increase in personnel and personnel-related expenses
including those in connection with our acquisition of TTI, and, to a lesser
extent, prototype and software expenses for the development of our products.

SALES AND MARKETING EXPENSES. Sales and marketing expenses were
$42.3 million for fiscal 2001, an increase of $20.7 million, or 96%, from
$21.6 million in fiscal 2000. The increase reflects costs primarily associated
with the hiring of additional U.S. and international sales and marketing
personnel including those in connection with our acquisition of TTI,
commissions, the opening of international sales offices and, to a lesser extent,
travel-related expenses, marketing program costs and trade shows.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $13.1 million for fiscal 2001, an increase of $7.6 million, or 139%, from
$5.5 million in fiscal 2000. The increase reflects the hiring of additional
personnel including those in connection with our acquisition of TTI, and, to a
lesser extent, an increase in professional fees, bad debt expense and costs
associated with being a public company.

21

STOCK-BASED COMPENSATION EXPENSES. Stock-based compensation expenses were
$75.5 million for fiscal 2001, an increase of $48.8 million, or 182% from
$26.7 million in fiscal 2000. The increase is primarily due to the amortization
of deferred stock-based compensation resulting from the unvested TTI stock
options assumed by Sonus, retention stock awards issued to TTI employees and the
write-off of $25.4 million of deferred compensation of shares and options held
by terminated employees impacted by the restructuring plan.

GOODWILL, PURCHASED INTANGIBLES AND IN-PROCESS RESEARCH AND DEVELOPMENT
EXPENSES. In January 2001, Sonus acquired certain intellectual property,
in-process research and development and intangible assets in connection with our
acquisition of TTI, which resulted in the recording of $523.7 million of
goodwill and other intangibles. Results of operations for fiscal 2001 include
$107.6 million in amortization of TTI goodwill and purchased intangibles, a
$40.0 million write-off of TTI purchased in-process research and development and
the write-off of $374.7 million in TTI goodwill and certain purchased
intangibles. Due to the implementation of Statement of Financial Accounting
Standards (SFAS) No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, amortization
expense for fiscal 2002 will be substantially reduced from the fiscal 2001
level. See Notes 2 and 3 to our consolidated financial statements.

In July 2001, Sonus completed the acquisition of certain intellectual
property and other assets of privately-held Linguateq Incorporated, a provider
of data distribution and billing application software, which resulted in the
recording of $5.4 million of goodwill and other intangibles. Results of
operations for fiscal 2001 include the amortization of purchased intangibles of
$167,000 and a non-cash charge of $3.8 million for purchased in-process research
and development. See Note 4 to our consolidated financial statements.

RESTRUCTURING CHARGES. On September 26, 2001, in response to unfavorable
business conditions largely caused by a rapid further decrease in capital
spending by telecommunications service providers, Sonus announced a
restructuring plan designed to reduce expenses and align its cost structure with
its revised business outlook. Accordingly, during the third quarter of fiscal
2001, Sonus recorded a restructuring charge of $25.8 million for a worldwide
workforce reduction, consolidation of excess facilities and other charges.

WORKFORCE REDUCTION. Restructuring actions in September 2001 resulted
in the reduction of Sonus' workforce by approximately 150 employees, or 21%.
The affected employees were entitled to severance and other benefits for
which Sonus recorded a charge of $4.5 million in fiscal 2001. Remaining cash
expenditures of $871,000 at December 31, 2001 relating to workforce
reductions are expected to be substantially paid in the first quarter of
fiscal 2002.

CONSOLIDATION OF EXCESS FACILITIES AND OTHER CHARGES. Sonus recorded a
restructuring charge in fiscal 2001 of $21.3 million for the consolidation
of excess facilities and other miscellaneous charges, which are included on
the balance sheet as accrued restructuring expenses and long-term
obligations. In March 2002, we completed a lease renegotiation for certain
excess space and expect to record a restructuring benefit in the first
quarter of fiscal 2002. The remaining cash expenditures relating to the
consolidation of excess facilities and other miscellaneous charges are
expected to be paid through May 2004.

WRITE-OFF OF GOODWILL AND PURCHASED INTANGIBLES. In light of negative
industry and economic conditions, a general decline in technology valuations and
our decision to discontinue the development and use of certain acquired
technology, we performed an assessment of the carrying value of the goodwill and
purchased intangibles recorded in connection with our acquisition of TTI. In
accordance with SFAS No. 121, Sonus recorded a non-cash impairment charge of
$374.7 million in fiscal 2001 for the write-off of goodwill and certain
purchased intangibles because the estimated undiscounted future cash flows of
these assets was less than the carrying value.

22

INTEREST INCOME (EXPENSE), NET. Interest income consists of interest earned
on our cash balances and marketable securities. Interest expense consists of
interest incurred on convertible subordinated notes, equipment financing and
capital lease arrangements. Interest income, net of interest expense, was
$5.0 million for fiscal 2001, a decrease of $1.2 million from $6.2 million in
fiscal 2000. The decrease reflects a reduction in interest rates and invested
balances and increasing interest expense incurred on capital lease arrangements
assumed in the TTI acquisition and convertible subordinated notes.

NET OPERATING LOSS CARRYFORWARDS. As of December 31, 2001, we had
approximately $92.8 million of federal net operating loss carryforwards for tax
purposes available to offset future taxable income. These net operating loss
carryforwards expire at various dates through 2021, to the extent that they are
not used. We have not recognized any benefit from the future use of net
operating loss carryforwards for fiscal 2001 and 2000, or for any other periods
since inception. Use of the net operating loss carryforwards may be limited in
future years if there is a significant change in our ownership. Management has
recorded a full valuation allowance for the related net deferred tax asset due
to the uncertainty of realizing the benefit of this asset.

INCOME TAXES. No provision for income taxes has been recorded for fiscal
2001 and 2000, due to accumulated net losses.

YEARS ENDED DECEMBER 31, 2000 AND 1999

REVENUES. Revenues were $51.8 million for fiscal 2000, as a result of the
introduction of our voice infrastructure products. No revenues were reported for
fiscal 1999. For the year ended December 31, 2000, three customers each
contributed more than 10% of our revenues and represented an aggregate of 70% of
total revenues. International revenues, primarily to Europe, were 11% of
revenues for the year ended December 31, 2000.

COST OF REVENUES. Cost of revenues was $27.8 million, or 54% of revenues,
for fiscal 2000, an increase of $25.9 million from $1.9 million in fiscal 1999.
The increase is primarily the result of an increase in product manufacturing and
personnel costs associated with revenues recorded in fiscal 2000.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$26.4 million in fiscal 2000, an increase of $15.6 million, or 145%, from
$10.8 million in fiscal 1999. The increase reflects costs primarily associated
with a significant increase in personnel and personnel-related expenses and, to
a lesser extent, prototype and software expenses for the development of our
products.

SALES AND MARKETING EXPENSES. Sales and marketing expenses were
$21.6 million in fiscal 2000, an increase of $16.0 million, or 285%, from
$5.6 million in fiscal 1999. The increase reflects costs primarily associated
with the hiring of additional U.S. and international sales and marketing
personnel and the opening of international sales offices and, to a lesser
extent, sales commissions, travel-related expenses, marketing program costs,
trade shows and product launch activities.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $5.5 million in fiscal 2000, an increase of $3.8 million, or 218%, from
$1.7 million in fiscal 1999. The increase reflects the hiring of additional
general and administrative personnel and, to a lesser extent, costs associated
with being a public company.

STOCK-BASED COMPENSATION EXPENSES. Stock-based compensation expenses were
$26.7 million in fiscal 2000, an increase of $22.3 million from $4.4 million in
fiscal 1999. This increase is due to the amortization of deferred stock-based
compensation resulting from the granting of additional stock options and sale of
restricted common stock to employees and non-employees.

INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense,
was $6.2 million in fiscal 2000, an increase of $5.7 million from $487,000 in
fiscal 1999. This increase reflects higher invested cash and marketable
securities balances as a result of our May 2000 IPO and private financings and
is partially offset by interest expense from increased borrowings, which were
repaid in June 2000.

23

INCOME TAXES. No provision for income taxes has been recorded for fiscal
2000 and 1999, due to accumulated net losses. We did not record any tax benefits
relating to these losses or other tax benefits due to the uncertainty
surrounding the realization of these future tax benefits.

LIQUIDITY AND CAPITAL RESOURCES

Prior to our IPO, we financed our operations primarily through private sales
of redeemable convertible preferred stock totaling $70.7 million in net
proceeds. Upon the closing of our IPO on May 31, 2000, Sonus received cash
proceeds, net of underwriters' discount and offering expenses, totaling
$121.7 million, and all of our redeemable convertible preferred stock converted
into 96,957,222 shares of common stock. At December 31, 2001, cash, cash
equivalents and marketable securities totaled $125.1 million.

Net cash used in operating activities was $1.2 million for fiscal 2001, as
compared to $14.4 million for fiscal 2000. The net cash used in operating
activities for fiscal 2001 compared to the prior year primarily reflects a
significantly higher net loss and reductions in accounts payable and deferred
revenues offset by significantly higher non-cash charges, decreases in accounts
receivable and inventories and an increase in accrued expenses.

Net cash used in investing activities was $50.4 million for fiscal 2001, as
compared to $55.8 million for fiscal 2000. Net cash used in investing activities
for fiscal 2001 primarily reflects net purchases of marketable securities of
$21.0 million, purchases of property and equipment of $23.1 million and cash
expenditures associated with our acquisitions of $6.1 million. Sonus has no
current material commitments for capital expenditures but does expect
approximately $8.0 million in purchases during fiscal 2002.

In January 2002, we established a $10.0 million equipment line of credit and
a $20.0 million working capital line of credit with a bank available through
March 24, 2003. The lines of credit are collateralized by all of our assets,
except intellectual property and bear interest at the banks prime rate. We are
required to comply with various financial and restrictive covenants.

Net cash provided by financing activities was $13.6 million for fiscal 2001,
as compared to $148.4 million for fiscal 2000. The net cash provided by
financing activities for fiscal 2001 resulted from the sale of common stock, the
exercise of stock options and the issuance of $10.0 million in convertible
subordinated notes offset by the repayment of $8.0 million in a bank note
payable assumed as part of the acquisition of TTI. The net cash provided by
financing activities in fiscal 2000, was primarily a result of net proceeds
received from Sonus' IPO and to a lesser extent, from the sale of Series D
redeemable convertible preferred stock, partially offset by repayment of
long-term obligations.

The following summarizes our future contractual cash obligations as of
December 31, 2001, after reflecting the lease renegotiation in March 2002, in
thousands:

We believe our current cash, cash equivalents, marketable securities and
available bank financing, will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for at least 12 months. The rate at
which we will consume cash will be dependent on the cash needs of future
operations that in turn will be directly effected by the levels of demand for
our products. If our existing resources and cash generated from operations are
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity or debt securities. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders, and we cannot be certain that additional financing will be
available in amounts or on terms acceptable to us, if at all. If we are unable
to obtain this additional financing, we may be required to reduce the scope of
our planned product development and sales and marketing efforts, which could
harm our business, financial condition and operating results.

24

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETs. SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method of accounting and
prohibits the use of the pooling of interest method. SFAS No. 142 eliminates the
amortization of goodwill and certain other intangibles and instead subjects
these assets to periodic impairment assessments. SFAS No. 142 is effective
immediately for all goodwill and certain other intangible assets acquired after
June 30, 2001 and shall commence on January 1, 2002 for all goodwill and certain
other intangibles existing on June 30, 2001. Sonus has adopted SFAS No. 141 and
is currently assessing the potential impact that SFAS No. 142 will have on its
consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETs, which supersedes SFAS No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
and the accounting and reporting provisions of APB No. 30, REPORTING THE RESULTS
OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONs. SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and is effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. Sonus is
currently reviewing this statement to determine the effect on its consolidated
financial statements.

25

RISK FACTORS

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE BUYING OUR COMMON STOCK. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.

OUR BUSINESS HAS BEEN ADVERSELY AFFECTED BY RECENT DEVELOPMENTS IN THE
TELECOMMUNICATIONS INDUSTRY AND THESE DEVELOPMENTS WILL CONTINUE TO IMPACT OUR
REVENUES AND OPERATING RESULTS.

From our inception through the end of 2000, the telecommunications market
was experiencing rapid growth spurred by a number of factors including
deregulation in the industry, entry of a large number of new emerging service
providers, growth in data traffic and the availability of significant capital
from the financial markets. In 2001, the telecommunications industry experienced
a reversal of some of these trends, marked by a dramatic reduction in current
and projected future capital expenditures by service providers, financial
difficulties and in some cases bankruptcies experienced by emerging service
providers and a sharp contraction in the availability of capital. These
conditions caused a substantial reduction in demand for telecommunications
equipment, including our products.

We expect the developments described above to affect our business for the
next several quarters in the following manner:

- our ability to accurately forecast revenue will be diminished;

- our revenues could be reduced; and

- our losses may increase because operating expenses are largely based on
anticipated revenue trends and a high percentage of our expenses are and
will continue to be fixed in the short-term.

Our business, operating results and financial condition could be materially
and adversely impacted by any one or a combination of the above.

THE WEAKENED FINANCIAL POSITION OF MANY EMERGING SERVICE PROVIDERS WILL INCREASE
THE UNPREDICTABILITY OF OUR RESULTS.

A substantial portion of our revenues to date are from emerging service
providers who have been the primary early adopters of our voice infrastructure
products. Several of our emerging service provider customers, including XO
Communications and Global Crossing, who contributed 17% and 13% of our total
2001 revenues, are experiencing financial difficulties and are in the process of
restructuring their operations or have filed for bankruptcy. Our operating
results could be materially and adversely affected if any present or future
emerging service provider chooses to reduce its level of orders, delays or fails
to pay our receivables, or fails to successfully and timely reorganize its
operations including emerging from bankruptcy.

WE EXPECT THAT A MAJORITY OF OUR REVENUES WILL BE GENERATED FROM A LIMITED
NUMBER OF CUSTOMERS AND WE WILL NOT BE SUCCESSFUL IF WE DO NOT GROW OUR CUSTOMER
BASE.

To date, we have shipped our products to a limited number of customers. We
expect that in the foreseeable future, substantially all of our revenues will
depend on sales of our products to a limited number of customers. Four and three
customers each contributed more than 10% of our revenues for the years ended
December 31, 2001 and 2000, which represented an aggregate of 67% and 70% of
total revenues. Our future success will depend on our ability to attract
additional customers beyond our current limited number. The growth of our
customer base could be adversely affected by:

- customer unwillingness to implement our new voice infrastructure products;

- any delays or difficulties that we may incur in completing the development
and introduction of our planned products or product enhancements;

- our customers' inability to raise capital to finance their business plans
and capital expenditures;

- new product introductions by our competitors;

26

- any failure of our products to perform as expected; or

- any difficulty we may incur in meeting customers' delivery requirements.

The loss of any of our significant customers or any substantial reduction in
orders from these customers could materially adversely affect our financial
condition and results of operations. If we do not expand our customer base to
include additional customers that deploy our products in operational commercial
networks, our revenues will not grow significantly, or at all.

THE MARKET FOR VOICE INFRASTRUCTURE PRODUCTS FOR THE NEW PUBLIC NETWORK IS NEW
AND EVOLVING AND OUR BUSINESS WILL SUFFER IF IT DOES NOT DEVELOP AS WE EXPECT.

The market for our products is rapidly evolving. Packet-based technology may
not be widely accepted as a platform for voice and a viable market for our
products may not develop or be sustainable. If this market does not develop, or
develops more slowly than we expect, we may not be able to sell our products in
significant volumes, or at all.

WE WILL NOT RETAIN CUSTOMERS OR ATTRACT NEW CUSTOMERS IF WE DO NOT ANTICIPATE
AND MEET SPECIFIC CUSTOMER REQUIREMENTS OR IF OUR PRODUCTS DO NOT INTEROPERATE
WITH OUR CUSTOMERS' EXISTING NETWORKS.

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

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

WE MAY NOT BECOME PROFITABLE.

We have incurred significant losses since inception and expect to continue
to incur losses in the future. As of December 31, 2001 we had an accumulated
deficit of $729.4 million and had only recognized cumulative revenues since
inception of $225.0 million through December 31, 2001. We have not achieved
profitability on a quarterly or annual basis. Our revenues may not grow and we
may never generate sufficient revenues to achieve or sustain profitability.

WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE AVAILABLE TO US,
AND IF IT IS AVAILABLE, MAY DILUTE THE OWNERSHIP OF OUR COMMON STOCK.

We may need to raise additional funds through public or private debt or
equity financings in order to:

- fund ongoing operations and capital requirements;

- take advantage of opportunities, including more rapid expansion or
acquisition of complementary products, technologies or businesses;

- develop new products; or

- respond to competitive pressures.

27

Any additional capital raised through the sale of equity may dilute an
investor's percentage ownership of our common stock. Furthermore, additional
financings may not be available on terms favorable to us, or at all. A failure
to obtain additional funding could prevent us from making expenditures that may
be required to grow or maintain our operations.

THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE TRADING
PRICE OF OUR COMMON STOCK.

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

- fluctuation in demand for our voice infrastructure products and the timing
and size of customer orders;

- the cancellation or deferral of existing customer orders;

- the failure of certain of our customers to successfully and timely
reorganize their operations, including emerging from bankruptcy;

- the length and variability of the sales cycle for our products and the
corresponding timing of recognizing or deferring revenues;

- new product introductions and enhancements by our competitors and us;

- changes in our pricing policies, the pricing policies of our competitors
and the prices of the components of our products;

- our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;

- the mix of product configurations sold;

- our ability to obtain sufficient supplies of sole or limited source
components;

- our ability to attain and maintain production volumes and quality levels
for our products;

- costs related to acquisitions of complementary products, technologies or
businesses; and

- general economic conditions, as well as those specific to the
telecommunications, networking and related industries.

As with other telecommunications product suppliers, we may recognize a
substantial portion of our revenue in a given quarter from sales booked and
shipped in the last weeks of that quarter. As a result, a delay in customer
orders is likely to result in a delay in shipments and recognition of revenue
beyond the end of a given quarter, which would have a significant impact on our
operating results for that quarter.

Our operating expenses are largely based on anticipated organizational
growth and revenue trends. As a result, a delay in generating or recognizing
revenues for the reasons set forth above, or for any other reason, could cause
significant variations in our operating results. We believe that
quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. It is likely that in some future quarters,
our operating results may be below the expectations of public market analysts
and investors. In this event, the price of our common stock will probably
substantially decrease.

IF WE FAIL TO HIRE AND RETAIN NEEDED PERSONNEL, THE IMPLEMENTATION OF OUR
BUSINESS PLAN COULD SLOW OR OUR FUTURE GROWTH COULD HALT.

Competition for highly skilled engineering, sales, marketing and support
personnel is intense because there are a limited number of people available with
the necessary technical skills and

28

understanding of our market. Any failure to attract, assimilate or retain
qualified personnel to fulfill our current or future needs could impair our
growth. The support of our products requires highly trained customer support and
professional services personnel. Once we hire them, they may require extensive
training in our voice infrastructure products. If we are unable to hire, train
and retain our customer support and professional services personnel, we may not
be able to increase sales of our products. Our future success depends upon the
continued services of our executive officers who have critical industry
experience and relationships that we rely on to implement our business plan.
Most of our officers or key employees are not bound by employment agreements for
any specific term. The loss of the services of any of our officers or key
employees could delay the development and introduction of, and negatively impact
our ability to sell, our products.

OUR FAILURE TO MANAGE OUR EXPANSION EFFECTIVELY IN A RAPIDLY CHANGING MARKET
COULD INCREASE OUR COSTS, HARM OUR ABILITY TO SELL FUTURE PRODUCTS AND IMPAIR
OUR FUTURE GROWTH.

We have expanded our operations rapidly and have hired a significant number
of employees during fiscal 2001. Our growth has placed, and our anticipated
growth will continue to place, a significant strain on our management systems
and resources. Our ability to successfully offer our products and implement our
business plan in a rapidly evolving market requires effective planning and
management processes. We expect that we will need to continue to improve our
financial, managerial and manufacturing controls and reporting systems, and will
need to continue to train and manage our worldwide workforce. If we fail to
implement adequate control systems in an efficient and timely manner, our costs
may be increased and our growth could be impaired and we may not be able to
accurately anticipate and fulfill market demand, the result of which will be a
loss of revenues and customers.

WE MAY FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL EXPANSION THAT COULD IMPAIR
OUR ABILITY TO GROW OUR REVENUES ABROAD.

International revenues, primarily to Asia and Europe, were 18% of our
revenues for fiscal 2001 and we intend to continue to expand our sales into
international markets. This expansion will require significant management
attention and financial resources to successfully develop direct and indirect
international sales and support channels. In addition, we may not be able to
develop international market demand for our products, which could impair our
ability to grow our revenues. We have limited experience marketing, distributing
and supporting our products internationally and, to do so, we expect that we
will need to develop versions of our products that comply with local standards.
Furthermore, international operations are subject to other inherent risks,
including:

- greater difficulty collecting accounts receivable and longer collection
periods;

- difficulties and costs of staffing and managing international operations;

- the impact of differing technical standards outside the United States;

- the impact of recessions in economies outside the United States;

- unexpected changes in regulatory requirements and currency exchange rates;

- certification requirements;

- reduced protection for intellectual property rights in some countries;

- potentially adverse tax consequences; and

- political and economic instability.

WE ARE ENTIRELY DEPENDENT UPON OUR VOICE INFRASTRUCTURE PRODUCTS AND OUR FUTURE
REVENUES DEPEND UPON THEIR COMMERCIAL SUCCESS.

Our future growth depends upon the commercial success of our voice
infrastructure products. We intend to develop and introduce new products and
enhancements to existing products in the future. We

29

may not successfully complete the development or introduction of these products.
If our target customers do not adopt, purchase and successfully deploy our
current or planned products, our revenues will not grow.

BECAUSE OUR PRODUCTS ARE SOPHISTICATED AND DESIGNED TO BE DEPLOYED IN COMPLEX
ENVIRONMENTS, THEY MAY HAVE ERRORS OR DEFECTS THAT WE FIND ONLY AFTER FULL
DEPLOYMENT, WHICH COULD SERIOUSLY HARM OUR BUSINESS.

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

- loss of, or delay in, revenues;

- loss of customers and market share;

- a failure to attract new customers or achieve market acceptance for our
products;

- increased service, support and warranty costs and a diversion of
development resources; and

- costly and time-consuming legal actions by our customers.

IF WE DO NOT RESPOND RAPIDLY TO TECHNOLOGICAL CHANGES OR TO CHANGES IN INDUSTRY
STANDARDS, OUR PRODUCTS COULD BECOME OBSOLETE.

The market for voice infrastructure products for the new public network is
likely to be characterized by rapid technological change and frequent new
product introductions. We may be unable to respond quickly or effectively to
these developments. We may experience difficulties with software development,
hardware design, manufacturing or marketing that could delay or prevent our
development, introduction or marketing of new products and enhancements. The
introduction of new products by our competitors, the market acceptance of
products based on new or alternative technologies or the emergence of new
industry standards could render our existing or future products obsolete. If the
standards adopted are different from those that we have chosen to support,
market acceptance of our products may be significantly reduced or delayed. If
our products become technologically obsolete, we may be unable to sell our
products in the marketplace and generate revenues.

IF WE FAIL TO COMPETE SUCCESSFULLY, OUR ABILITY TO INCREASE OUR REVENUES OR
ACHIEVE PROFITABILITY WILL BE IMPAIRED.

Competition in the telecommunications market is intense. This market has
historically been dominated by large companies, such as Lucent Technologies and
Nortel Networks, both of whom are our direct competitors. We also face
competition from other large telecommunications and networking companies,
including Cisco Systems, which have entered our market by acquiring companies
that design competing products. In addition, a number of smaller and mostly
private companies have announced plans for new products that target market
opportunities similar to those we address. Because this market is rapidly
evolving, additional competitors with significant financial resources may enter
these markets and further intensify competition.

Many of our current and potential competitors have significantly greater
selling and marketing, technical, manufacturing, financial and other resources,
including the ability to offer vendor-sponsored financing programs. If we are
unable or unwilling to offer vendor-sponsored financing, prospective customers
may decide to purchase products from one of our competitors that offers this
type of financing. Furthermore, some of our competitors are currently selling
significant amounts of other products to our current and prospective customers.
Our competitors' broad product portfolios, coupled with already existing
relationships, may cause our customers to buy our competitors' products or harm
our ability to attract new customers.

30

To compete effectively, we must deliver innovative products that:

- provide extremely high reliability and voice quality;

- scale easily and efficiently;

- interoperate with existing network designs and other vendors' equipment;

- provide effective network management;

- are accompanied by comprehensive customer support and professional
services; and

- provide a cost-effective and space-efficient solution for service
providers.

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

WE DEPEND UPON CONTRACT MANUFACTURERS AND ANY DISRUPTION IN THESE RELATIONSHIPS
MAY CAUSE US TO FAIL TO MEET THE DEMANDS OF OUR CUSTOMERS AND DAMAGE OUR
CUSTOMER RELATIONSHIPS.

We rely on a small number of contract manufacturers to manufacture our
products according to our specifications and to fill orders on a timely basis.
Our contract manufacturers provide comprehensive manufacturing services,
including assembly of our products and procurement of materials. Each of our
contract manufacturers also builds products for other companies and may not
always have sufficient quantities of inventory available to fill our orders or
may not allocate their internal resources to fill these orders on a timely
basis. We do not have long-term supply contracts with our manufacturers and they
are not required to manufacture products for any specified period. We do not
have internal manufacturing capabilities to meet our customers' demands.
Qualifying a new contract manufacturer and commencing commercial-scale
production is expensive and time consuming and could result in a significant
interruption in the supply of our products. If a change in contract
manufacturers results in delays in our fulfillment of customer orders or if a
contract manufacturer fails to make timely delivery of orders, we may lose
revenues and suffer damage to our customer relationships.

WE AND OUR CONTRACT MANUFACTURERS RELY ON SINGLE OR LIMITED SOURCES FOR SUPPLY
OF SOME COMPONENTS OF OUR PRODUCTS AND IF WE FAIL TO ADEQUATELY PREDICT OUR
MANUFACTURING REQUIREMENTS OR IF OUR SUPPLY OF ANY OF THESE COMPONENTS IS
DISRUPTED, WE WILL BE UNABLE TO SHIP OUR PRODUCTS.

We and our contract manufacturers currently purchase several key components
of our products, including commercial digital signal processors, from single or
limited sources. We purchase these components on a purchase order basis. If we
overestimate our component requirements, we could have excess inventory, which
would increase our costs. If we underestimate our requirements, we may not have
an adequate supply, which could interrupt manufacturing of our products and
result in delays in shipments and revenues.

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

31

IF WE ARE NOT ABLE TO OBTAIN NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY AT
ACCEPTABLE PRICES, OR AT ALL, OUR PRODUCTS COULD BECOME OBSOLETE.

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

OUR ABILITY TO COMPETE AND OUR BUSINESS COULD BE JEOPARDIZED IF WE ARE UNABLE TO
PROTECT OUR INTELLECTUAL PROPERTY OR BECOME SUBJECT TO INTELLECTUAL PROPERTY
RIGHTS LITIGATION, WHICH COULD REQUIRE US TO INCUR SIGNIFICANT COSTS.

We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our products is difficult and we cannot be
certain that the steps we have taken will prevent unauthorized use of our
technology, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States. If competitors are able to
use our technology, our ability to compete effectively could be harmed. In
addition, we may become involved in litigation as a result of allegations that
we infringe the intellectual property rights of others. Any parties asserting
that our products infringe upon their proprietary rights would force us to
defend ourselves and possibly our customers or contract manufacturers against
the alleged infringement. These claims and any resulting lawsuit, if successful,
could subject us to significant liability for damages and invalidation of our
proprietary rights. Any potential intellectual property litigation also could
force us to do one or more of the following:

- stop selling, incorporating or using our products that use the challenged
intellectual property;

- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or

- redesign those products that use any allegedly infringing technology.

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

ANY INVESTMENTS OR ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND SERIOUSLY
HARM OUR FINANCIAL CONDITION.

Although we have no current agreements to do so, we intend to consider
investing in, or acquiring, complementary products, technologies or businesses.
In the event of future investments or acquisitions, we could:

- issue stock that would dilute our current stockholders' percentage
ownership; incur debt or assume liabilities;

- incur significant impairment charges related to the write-off of goodwill
and purchased intangible assets;

- incur significant amortization expenses related to purchased intangible
assets; or

- incur large and immediate write-offs for in-process research and
development and stock-based compensation.

32

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

- problems and unanticipated costs associated with combining the purchased
products, technologies or businesses;

- diversion of management's attention from our core business;

- adverse effects on existing business relationships with suppliers and
customers;

- risks associated with entering markets in which we have limited or no
prior experience; and

- potential loss of key employees, particularly those of the acquired
organizations.

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

IF WE ARE SUBJECT TO UNFAIR HIRING CLAIMS, WE COULD INCUR SUBSTANTIAL COSTS IN
DEFENDING OURSELVES.

Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices.
We may be subject to claims of this kind in the future as we seek to hire
qualified personnel. Those claims may result in material litigation. We could
incur substantial costs defending ourselves or our employees against those
claims, regardless of their merits. In addition, defending ourselves from those
types of claims could divert our management's attention from our operations. If
we are found to have engaged in unfair hiring practices, or our employees are
found to have violated agreements with previous employers, we may suffer a
significant disruption in our operations.

SECURITIES LITIGATION COULD RESULT IN SUBSTANTIAL COST AND DIVERT THE ATTENTION
OF KEY PERSONNEL, WHICH COULD SERIOUSLY HARM OUR BUSINESS.

On November 8, 2001, a securities class action complaint was filed against
Sonus, two of its officers and the lead underwriters in connection with our IPO.
Sonus has reviewed the complaint and intends to vigorously defend this action.
In the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their
securities. Securities litigation could result in substantial costs and divert
management's attention and resources, which could seriously harm our business.

OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.

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

- loss of any of our major customers;

- changes in the financial condition or anticipated capital expenditure
purchases of any of our major customers;

- the addition or departure of key personnel;

- variations in our quarterly operating results;

- announcements by us or our competitors of significant contracts, new
products or product enhancements, acquisitions, distribution partnerships,
joint ventures or capital commitments;

- changes in financial estimates by securities analysts;

- sales of common stock or other securities by us or by our stockholders in
the future;

- economic conditions for the telecommunications, networking and related
industries;

- worldwide economic instability; and

- any acquisitions, distribution partnerships, joint ventures or capital
commitments.

33

SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK IN THE FUTURE COULD CAUSE OUR
STOCK PRICE TO FALL.

Some stockholders who acquired shares prior to our IPO or in connection with
our acquisition of TTI hold a substantial number of shares of our common stock
that have not yet been sold in the public market. Further, additional shares may
become available for sale upon the conversion or redemption of convertible
subordinated notes. Sales of a substantial number of shares of our common stock
within a short period of time in the future could impair our ability to raise
capital through the sale of additional debt or stock and/or cause our stock
price to fall.

INSIDERS HAVE SUBSTANTIAL CONTROL OVER US AND COULD LIMIT YOUR ABILITY TO
INFLUENCE THE OUTCOME OF KEY TRANSACTIONS, INCLUDING A CHANGE OF CONTROL.

Our executive officers, directors and entities affiliated with them
beneficially own, in the aggregate, a significant portion of our outstanding
common stock. These stockholders, if acting together, would be able to influence
significantly all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions.

PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE OF CONTROL.

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that involve substantial
risks and uncertainties. In some cases you can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will," and "would" or similar words. You
should read statements that contain these words carefully because they discuss
future expectations, contain projections of future results of operations or of
financial position or state other "forward-looking" information. The important
factors listed above in the section captioned "Risk Factors," as well as any
cautionary language in this report, provide examples of risks, uncertainties and
events that may cause the actual results to differ materially from the
expectations described in these forward-looking statements. You should be aware
that the occurrence of the events described in the risk factors and elsewhere in
this report could have a material adverse effect on the business, results of
operations and financial position of Sonus.

Any forward-looking statements in this report are not guarantees of future
performances, and actual results, developments and business decisions may differ
from those envisaged by such forward-looking statements, possibly materially.
Sonus disclaims any duty to update any forward-looking statements, all of which
are expressly qualified by the statements in this section.

34

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

We do not currently use derivative financial instruments. We generally place
our marketable security investments in high-quality credit instruments,
primarily U.S. Government obligations and corporate obligations with contractual
maturities of less than one year. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material. To date, sales from our international
operations have been made in United States dollars. Accordingly, we have no
current material exposure to foreign currency rate fluctuations, though we will
continue to evaluate the impact of foreign currency exchange risk on our results
of operations as we expand internationally.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The consolidated financial statements of Sonus Networks, Inc. are filed as a
part of this Annual Report on Form 10-K beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable.

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.

The information required by this Item 10 is incorporated by reference to our
definitive Proxy Statement with respect to our 2002 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item 11 is incorporated by reference to our
definitive Proxy Statement with respect to our 2002 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this Item 12 is incorporated by reference to our
definitive Proxy Statement with respect to our 2002 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item 13 is incorporated by reference to our
definitive Proxy Statement with respect to our 2002 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(A) DOCUMENTS FILED AS PART OF FORM 10-K:

1) FINANCIAL STATEMENTS.

The following consolidated financial statements and notes thereto are
included in Part II, Item 8 filed as part of this report:

- Report of Independent Public Accountants

- Consolidated Balance Sheets

- Consolidated Statements of Operations

35

- Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)

- Consolidated Statements of Cash Flows

- Notes to Consolidated Financial Statements

2) FINANCIAL STATEMENT SCHEDULES.

None. All schedules are omitted because they are inapplicable, not required
under the instructions or because the information is reflected in the
consolidated financial statements or notes thereto.

3) LIST OF EXHIBITS.

The following is a list of exhibits filed as a part of this Form 10-K:

- ------------------------

* Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (file No. 333-52682).

** Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (file No. 333-32206).

*** Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed June 21, 2001 with the Securities and Exchange Commission.

****Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed November 17, 2000 with the Securities and Exchange Commission.

(B) REPORTS ON FORM 8-K FILED DURING THE FOURTH QUARTER OF FISCAL 2001.

Sonus filed on October 11, 2001 a Current Report on Form 8-K dated
September 26, 2001 with the SEC in connection with its revised business and
financial outlook for the third and fourth quarters of fiscal 2001.

37

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
Town of Westford, Commonwealth of Massachusetts, on this 27th day of March,
2002.

SONUS NETWORKS, INC.

By: /s/ HASSAN M. AHMED
-----------------------------------------
Hassan M. Ahmed
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

38

SONUS NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Sonus Networks, Inc.:

We have audited the accompanying consolidated balance sheets of Sonus
Networks, Inc. (a Delaware corporation) as of December 31, 2001 and 2000 and the
related consolidated statements of operations, redeemable convertible preferred
stock and stockholders' equity (deficit) and cash flows for the years ended
December 31, 2001, 2000 and 1999. These consolidated financial statements are
the responsibility of the Sonus Networks, Inc. management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sonus
Networks, Inc. as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for the years ended December 31, 2001, 2000 and
1999 in conformity with accounting principles generally accepted in the United
States.

Arthur Andersen LLP

Boston, Massachusetts
January 14, 2002 (except with respect
to the matters discussed in Note 17,
as to which the date is March 5, 2002)

F-2

SONUS NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-3

SONUS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-4

SONUS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS, EXCEPT SHARE DATA)

REDEEMABLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK CAPITAL IN
------------------------ ---------------------- EXCESS OF
REDEMPTION PAR PAR
SHARES VALUE SHARES VALUE VALUE
----------- ---------- ----------- -------- -----------

BALANCE, DECEMBER 31, 1998................................ 10,334,287 $22,951 49,570,059 $ 50 $ 556
Issuance of Series B preferred stock and issuance costs
of $9.................................................. 50,000 250 -- -- --
Issuance of Series C preferred stock and issuance costs
of $40................................................. 1,939,681 22,908 -- -- --
Beneficial conversion feature of Series C preferred
stock.................................................. -- -- -- -- 2,500
Payments on subscriptions receivable.................... -- -- -- -- --
Issuance of common stock to employees, officers and a
director............................................... -- -- 15,230,612 15 1,488
Exercise of stock options............................... -- -- 710,250 1 15
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees.......... -- -- -- -- 149
Deferred compensation related to stock option grants and
sale of restricted common stock........................ -- -- -- -- 20,859
Amortization of deferred compensation................... -- -- -- -- --
Net loss................................................ -- -- -- -- --
----------- ------- ----------- ---- --------
BALANCE, DECEMBER 31, 1999................................ 12,323,968 46,109 65,510,921 66 25,567
Issuance of Series D preferred stock and issuance costs
of $46................................................. 1,509,154 24,750 -- -- --
Issuance of common stock to public, net of issuance
costs of $10,545....................................... -- -- 17,250,000 17 121,688
Payments on subscriptions receivable.................... -- -- -- -- --
Issuance of common stock to employees................... -- -- 3,870,676 4 6,421
Conversion of preferred stock to common stock........... (13,833,122) (70,859) 96,957,222 97 70,762
Exercise of stock options............................... -- -- 655,655 -- 228
Repurchase of common stock.............................. -- -- -- -- --
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees.......... -- -- -- -- 2,389
Deferred compensation related to stock option grants and
sale of restricted common stock........................ -- -- -- -- 39,433
Amortization of deferred compensation................... -- -- -- -- --
Net loss................................................ -- -- -- -- --
----------- ------- ----------- ---- --------
BALANCE, DECEMBER 31, 2000................................ -- -- 184,244,474 184 266,488
Issuance of common stock in connection with employee
stock purchase program................................. -- -- 1,021,333 1 7,865
Issuance of common stock in connection with acquisition
of TELECOM TECHNOLOGIES, INC. (TTI) (Note 3)........... -- -- 15,000,000 15 504,998
Issuance of common stock in connection with acquisition
of certain assets of LINGUATEQ, INC. (Note 4).......... -- -- 221,753 -- 4,995
Issuance of restricted stock awards in connection with
acquisition of TTI (Note 3)............................ -- -- 3,000,000 3 55,193
Deferred compensation related to unvested stock options
assumed in connection with acquisition of TTI (Note
3)..................................................... -- -- -- -- 22,600
Exercise of stock options............................... -- -- 1,693,525 2 4,016
Amortization of deferred compensation................... -- -- -- -- --
Deferred compensation for terminated employees (Note
2)..................................................... -- -- -- -- (5,272)
Payment on subscriptions receivable..................... -- -- -- -- --
Repurchase of common stock.............................. -- -- -- -- --
Net loss................................................ -- -- -- -- --
----------- ------- ----------- ---- --------
BALANCE, DECEMBER 31, 2001................................ -- $ -- 205,181,085 $205 $860,883
=========== ======= =========== ==== ========

STOCK TREASURY STOCK
ACCUMULATED SUBSCRIPTIONS DEFERRED --------------------
DEFICIT RECEIVABLE COMPENSATION SHARES COST
----------- ------------ ------------ --------- --------
BALANCE, DECEMBER 31, 1998................................ $ (7,446) $ (257) $ -- -- $ --
Issuance of Series B preferred stock and issuance costs
of $9.................................................. (9) -- -- -- --
Issuance of Series C preferred stock and issuance costs
of $40................................................. (40) -- -- -- --
Beneficial conversion feature of Series C preferred
stock.................................................. (2,500) -- -- -- --
Payments on subscriptions receivable.................... -- 21 -- -- --
Issuance of common stock to employees, officers and a
director............................................... -- (110) -- -- --
Exercise of stock options............................... -- -- -- -- --
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees.......... -- -- -- -- --
Deferred compensation related to stock option grants and
sale of restricted common stock........................ -- -- (20,859) -- --
Amortization of deferred compensation................... -- -- 4,255 -- --
Net loss................................................ (23,887) -- -- -- --
--------- ------- -------- --------- -----
BALANCE, DECEMBER 31, 1999................................ (33,882) (346) (16,604) -- --
Issuance of Series D preferred stock and issuance costs
of $46................................................. (46) -- -- -- --
Issuance of common stock to public, net of issuance
costs of $10,545....................................... -- -- -- -- --
Payments on subscriptions receivable.................... -- 108 -- -- --
Issuance of common stock to employees................... -- -- -- -- --
Conversion of preferred stock to common stock........... -- -- -- -- --
Exercise of stock options............................... -- -- -- -- --
Repurchase of common stock.............................. -- -- -- 772,500 (65)
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees.......... -- -- -- -- --
Deferred compensation related to stock option grants and
sale of restricted common stock........................ -- -- (39,433) -- --
Amortization of deferred compensation................... -- -- 24,340 -- --
Net loss................................................ (50,038) -- -- -- --
--------- ------- -------- --------- -----
BALANCE, DECEMBER 31, 2000................................ (83,966) (238) (31,697) 772,500 (65)
Issuance of common stock in connection with employee
stock purchase program................................. -- -- -- -- --
Issuance of common stock in connection with acquisition
of TELECOM TECHNOLOGIES, INC. (TTI) (Note 3)........... -- -- -- -- --
Issuance of common stock in connection with acquisition
of certain assets of LINGUATEQ, INC. (Note 4).......... -- -- -- -- --
Issuance of restricted stock awards in connection with
acquisition of TTI (Note 3)............................ -- -- (55,196) -- --
Deferred compensation related to unvested stock options
assumed in connection with acquisition of TTI (Note
3)..................................................... -- -- (22,600) -- --
Exercise of stock options............................... -- -- -- -- --
Amortization of deferred compensation................... -- -- 50,071 -- --
Deferred compensation for terminated employees (Note
2)..................................................... -- -- 30,701 -- --
Payment on subscriptions receivable..................... -- 238 -- -- --
Repurchase of common stock.............................. -- -- -- 241,250 (19)
Net loss................................................ (645,432) -- -- -- --
--------- ------- -------- --------- -----
BALANCE, DECEMBER 31, 2001................................ $(729,398) $ -- $(28,721) 1,013,750 $ (84)
========= ======= ======== ========= =====

TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-----------
BALANCE, DECEMBER 31, 1998................................ $ (7,097)
Issuance of Series B preferred stock and issuance costs
of $9.................................................. (9)
Issuance of Series C preferred stock and issuance costs
of $40................................................. (40)
Beneficial conversion feature of Series C preferred
stock.................................................. --
Payments on subscriptions receivable.................... 21
Issuance of common stock to employees, officers and a
director............................................... 1,393
Exercise of stock options............................... 16
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees.......... 149
Deferred compensation related to stock option grants and
sale of restricted common stock........................ --
Amortization of deferred compensation................... 4,255
Net loss................................................ (23,887)
--------
BALANCE, DECEMBER 31, 1999................................ (25,199)
Issuance of Series D preferred stock and issuance costs
of $46................................................. (46)
Issuance of common stock to public, net of issuance
costs of $10,545....................................... 121,705
Payments on subscriptions receivable.................... 108
Issuance of common stock to employees................... 6,425
Conversion of preferred stock to common stock........... 70,859
Exercise of stock options............................... 228
Repurchase of common stock.............................. (65)
Compensation associated with the grant of stock options
and sale of restricted stock to non-employees.......... 2,389
Deferred compensation related to stock option grants and
sale of restricted common stock........................ --
Amortization of deferred compensation................... 24,340
Net loss................................................ (50,038)
--------
BALANCE, DECEMBER 31, 2000................................ 150,706
Issuance of common stock in connection with employee
stock purchase program................................. 7,866
Issuance of common stock in connection with acquisition
of TELECOM TECHNOLOGIES, INC. (TTI) (Note 3)........... 505,013
Issuance of common stock in connection with acquisition
of certain assets of LINGUATEQ, INC. (Note 4).......... 4,995
Issuance of restricted stock awards in connection with
acquisition of TTI (Note 3)............................ --
Deferred compensation related to unvested stock options
assumed in connection with acquisition of TTI (Note
3)..................................................... --
Exercise of stock options............................... 4,018
Amortization of deferred compensation................... 50,071
Deferred compensation for terminated employees (Note
2)..................................................... 25,429
Payment on subscriptions receivable..................... 238
Repurchase of common stock.............................. (19)
Net loss................................................ (645,432)
--------
BALANCE, DECEMBER 31, 2001................................ $102,885
========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-5

SONUS NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-6

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Sonus Networks, Inc. (Sonus) was incorporated on August 7, 1997 and is a
leading provider of voice infrastructure products for the new public network.
Sonus offers a new generation of carrier-class switching equipment and software
that enable voice services to be delivered over packet-based networks.

Sonus is subject to risks common to technology-based companies including,
but not limited to, the development of new technology, development of markets
and distribution channels, dependence on key personnel and the ability to obtain
additional capital as needed to meet its business plan. Sonus has a limited
operating history and has incurred significant operating losses since inception.

The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying consolidated financial statements and notes.

(A) PRINCIPLES OF CONSOLIDATION

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

(B) CASH EQUIVALENTS AND MARKETABLE SECURITIES

Cash equivalents are stated at cost plus accrued interest, which
approximates market value, and have maturities of three months or less at the
date of purchase.

Marketable securities are classified as held-to-maturity, as Sonus has the
intent and ability to hold to maturity. Marketable securities are reported at
amortized cost. Cash equivalents and marketable securities are invested in high
quality credit instruments, primarily U.S. Government obligations and corporate
obligations with contractual maturities of less than one year. There have been
no gains or losses to date.

(C) CONCENTRATIONS OF CREDIT AND OFF-BALANCE SHEET RISK, SIGNIFICANT
CUSTOMERS AND LIMITED SUPPLIERS

The financial instruments that potentially subject Sonus to concentrations
of credit risk are cash, cash equivalents, marketable securities and
receivables. Sonus has no off-balance-sheet concentrations such as foreign
exchange contracts, options contracts or other foreign hedging arrangements.
Sonus' cash and cash equivalent holdings are diversified between four financial
institutions.

For the years ended December 31, 2001 and 2000, four and three customers,
each of whom contributed more than 10% of revenues, accounted for an aggregate
of 67% and 70% of revenues. As of December 31, 2001 and 2000, four and two
customers each accounted for an aggregate of 69% and 80% of Sonus' accounts
receivable balance. International revenues, primarily to Asia and Europe, were
18% and 11% of revenues for the year ended December 31, 2001 and 2000. Certain
components and software licenses from third-parties used in Sonus' products are
procured from a single source. The failure of a supplier, including a
subcontractor, to deliver on schedule could delay or interrupt Sonus' delivery
of products and thereby adversely affect Sonus' revenues and operating results.

(D) INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Sonus provides inventory allowances based on excess and obsolete
inventories.

F-7

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(E) PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Expenditures for maintenance and repairs are charged to
expense as incurred, whereas major betterments are capitalized as additions to
property and equipment. Sonus provides for depreciation and amortization using
the straight-line method and charges to operations amounts estimated to allocate
the cost of the assets over their estimated useful lives.

(F) GOODWILL AND PURCHASED INTANGIBLES

Goodwill and purchased intangibles are being amortized over two and three
year periods (Notes 1(p), 3 and 4). Statement of Financial Accounting Standards
(SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, requires that long-lived assets, goodwill
and other intangibles be reviewed for impairment whenever circumstances indicate
that the carrying value of an asset may not be recoverable. The carrying value
of long-lived assets, goodwill and other intangibles are considered impaired
when the estimated undiscounted future cash flow from such assets is less than
the carrying value (Note 2).

(G) OTHER ASSETS

Other assets include licenses for certain technology embedded in Sonus'
products. These licenses are amortized over the lesser of their useful lives or
the term of the license.

(H) REVENUE RECOGNITION

Sonus recognizes revenue from product sales to end users, resellers and
distributors upon shipment, provided there are no uncertainties regarding
acceptance, persuasive evidence of an arrangement exists, the sales price is
fixed or determinable and collection of the related receivable is probable. If
uncertainties exist, Sonus recognizes revenue when those uncertainties are
resolved. In multiple element arrangements, in accordance with Statement of
Position 97-2 and 98-9, Sonus uses the residual method when vendor-specific
objective evidence does not exist for one of the delivered elements in the
arrangement. Service revenue is recognized as the services are provided. Revenue
from maintenance and support arrangements is recognized ratably over the term of
the contract. Amounts collected prior to satisfying the revenue recognition
criteria are reflected as deferred revenue. Warranty costs are estimated and
recorded by Sonus at the time of product revenue recognition.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. This
bulletin established guidelines for revenue recognition. Sonus' revenue
recognition policy complies with this pronouncement.

(I) SOFTWARE DEVELOPMENT COSTS

Sonus accounts for its software development costs in accordance with SFAS
No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR
OTHERWISE MARKETED. Accordingly, the costs for the development of new software
and substantial enhancements to existing software are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized. Sonus has determined that technological feasibility
is established at the time a working model of the software is completed. Because
Sonus believes its current process for developing software is essentially
completed concurrently with the establishment of technological feasibility, no
costs have been capitalized to date.

F-8

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(J) STOCK-BASED COMPENSATION

Sonus uses the intrinsic value-based method of Accounting Principles Board
(APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, to account for
all of its employee stock-based compensation plans and uses the fair value
method to account for all non-employee stock-based compensation.

(K) COMPREHENSIVE LOSS

Sonus applies Financial Accounting Standards Board (FASB) SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. The comprehensive loss for the years ended
December 31, 2001, 2000 and 1999 does not differ from the reported loss.

(L) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of Sonus' financial instruments, which include cash
equivalents, marketable securities, accounts payable, accrued expenses,
long-term obligations and the convertible subordinated note, approximate their
fair value.

(M) USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.

(N) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE

SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, established standards for reporting information regarding operating
segments and established standards for related disclosures about products and
services and geographic areas. Operating segments are identified as components
of an enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker, or decision
making group, in making decisions regarding resource allocation and assessing
performance. To date, Sonus has viewed its operations and manages its business
as principally one operating segment.

(O) NET LOSS PER SHARE

Basic net loss per share is computed by dividing the net loss for the year
by the weighted average number of shares of unrestricted common stock
outstanding during the year. Diluted net loss per share is computed by dividing
the net loss for the year by the weighted average number of shares of
unrestricted common stock and potential common stock outstanding during the
year, if dilutive. Potential common stock consists of restricted shares of
common stock, shares of common stock issuable upon the exercise of stock
options, conversion of convertible subordinated notes and shares of common stock
issued in connection with our acquisition of telecom technologies, inc. (TTI)
subject to the achievement of milestones and employee retention (Notes 3 and
13(g)). For both basic and diluted net loss per share, shares of common stock
issuable upon the conversion of Sonus' redeemable convertible preferred stock
have been excluded from the date of issuance until conversion into common stock.
There were no dilutive shares of potential common stock for the years ended
December 31, 2001, 2000 and 1999 as Sonus incurred a net loss in each year.

F-9

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Pro forma basic and diluted net loss per share for the years ended
December 31, 2000 and 1999 is computed using the weighted average number of
unrestricted common shares outstanding, including the pro forma effects of the
automatic conversion of Sonus' Series A, B, C and D redeemable convertible
preferred stock into shares of Sonus' common stock which occurred upon the
closing of Sonus' initial public offering (IPO), as if such conversion occurred
at the date of original issuance.

The following table sets forth the computation of basic and diluted net loss
per share and pro forma basic and diluted net loss per share:

Excluded from the computation of diluted net loss per share in the above
table are options to purchase shares of common stock and shares of common stock
issuable upon conversion of convertible subordinated notes representing an
aggregate of 20,615,955, 17,725,526, and 3,052,743, for the years ended
December 31, 2001, 2000 and 1999, as their effects would have been
anti-dilutive. Had Sonus recorded net income for the year ended December 31,
2001 and used the treasury stock method in accordance with SFAS No. 128,
EARNINGS PER SHARe, approximately 210,000,000 weighted average shares of common
stock would have been used in the computation of diluted earnings per share.

(P) RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETs. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method of accounting and prohibits the use of the pooling of interest
method. SFAS No. 142 eliminates the amortization of goodwill and certain other
intangibles with indefinite lives and instead subjects these assets to periodic
impairment assessments. SFAS No. 142 is effective immediately for all goodwill
and certain other intangible assets acquired after June 30, 2001 and shall
commence on January 1, 2002 for all goodwill and certain other intangibles
existing on June 30, 2001. Sonus has adopted SFAS No. 141 and is currently
assessing the potential impact SFAS No. 142 will have on its consolidated
financial statements.

F-10

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETs, which supersedes SFAS No. 121, and the
accounting and reporting provisions of APB No. 30, REPORTING THE RESULTS OF
OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONs. SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and is effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. Sonus is
currently reviewing this statement to determine the effect on its consolidated
financial statements.

(2) RESTRUCTURING CHARGES AND WRITE-OFF OF GOODWILL AND PURCHASED INTANGIBLES

In September 2001, in response to unfavorable business conditions primarily
caused by declines in capital spending by telecommunications service providers,
Sonus announced a restructuring plan designed to reduce expenses and align its
cost structure with its revised business outlook. The restructuring plan
includes a worldwide workforce reduction, consolidation of excess facilities and
other charges. Additionally, Sonus recorded a write-off of goodwill and
purchased intangibles related to the acquisition of TTI (Note 3). Sonus'
restructuring related reserves as of December 31, 2001 are summarized as
follows, in thousands:

Remaining cash expenditures relating to the workforce reductions are
expected to be substantially paid in the first quarter of fiscal 2002. In March
2002, Sonus completed a lease renegotiation for certain excess space and expects
to record a restructuring benefit in the first quarter of fiscal 2002
(Note 17(b)). The remaining amounts related to the net lease expense due to the
consolidation of excess facilities and other miscellaneous charges will be paid
through May 2004.

(A) WORKFORCE REDUCTION

The restructuring actions in September 2001 resulted in the reduction of
Sonus' workforce by approximately 150 employees, or 21%. The affected employees
were entitled to severance and other benefits for which Sonus recorded a charge
of $4,506,000 in fiscal 2001. In addition in fiscal 2001, Sonus recorded
non-cash stock-based compensation expense of $25,429,000 related to the
write-off of deferred compensation associated with shares and options held by
terminated employees.

(B) CONSOLIDATION OF EXCESS FACILITIES AND OTHER CHARGES

The Company recorded a restructuring charge in fiscal 2001 of $21,301,000
for the consolidation of excess facilities and other miscellaneous charges,
which are included on the balance sheet in accrued restructuring expenses and
long-term obligations. The accrual for the consolidation of excess facilities
was determined assuming no sub-lease income.

(C) WRITE-OFF OF GOODWILL AND PURCHASED INTANGIBLES

In light of negative industry and economic conditions, a general decline in
technology valuations and our decision to discontinue the development and use of
certain acquired technology, we performed an assessment of the carrying value of
the goodwill and purchased intangibles recorded in connection with our
acquisition of TTI. In accordance with SFAS No. 121, Sonus recorded a non-cash
impairment charge of $374,735,000 in fiscal 2001 for the write-off of goodwill
and certain purchased intangibles because the estimated undiscounted future cash
flows of these assets was less than the carrying value.

F-11

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) ACQUISITION OF TELECOM TECHNOLOGIES, INC.

In January 2001, Sonus acquired privately-held TTI. Upon the closing of this
acquisition, an aggregate of 10,800,000 shares of Sonus common stock (Merger
Shares) were exchanged for all outstanding shares of TTI common stock. Of the
10,800,000 shares issued to the TTI stockholders, 1,200,000 shares were placed
into escrow as security for indemnity obligations which were released to TTI
stockholders on January 18, 2002. In addition to the Merger Shares, the TTI
stockholders received in fiscal 2001, 4,200,000 additional shares of Sonus
common stock upon the achievement of certain specified business expansion and
product development milestones. Sonus has also issued contingent awards of
3,000,000 shares of common stock under the 2000 Retention Plan to certain former
TTI employees (Note 13 (g)).

The acquisition of TTI was accounted for using the purchase method of
accounting in accordance with APB Opinion No. 16, BUSINESS COMBINATIONs.
Accordingly, the total purchase price was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values. The purchase price
was determined by using the average market value of Sonus common stock for the
period from two days before to two days after the announcement of the TTI
acquisition ($41.61 per share) to value the 10,800,000 Sonus common shares
issued to the TTI stockholders at the closing date and adding the fair value of
liabilities assumed and expenses of the acquisition. Additionally, since the
closing date, the purchase price has been increased as the 4,200,000 shares of
common stock which were subject to milestone conditions were earned. As of
December 31, 2001, the purchase price has been computed as follows, in
thousands:

Fair market value of shares issued.......................... $527,613
Liabilities assumed......................................... 21,184
Acquisition expenses........................................ 5,833
--------
$554,630
========

In accordance with APB Opinion No. 16 and with the assistance of valuation
experts, the purchase price was allocated to the tangible and intangible assets
acquired based upon their fair values as follows, in thousands:

Tangible assets............................................. $ 8,296
Intangible assets:
Workforce, developed technology and customer list......... 32,300
In-process research and development....................... 40,000
Deferred compensation related to unvested stock options... 22,600
Goodwill.................................................. 451,434
--------
$554,630
========

Sonus engaged third-party appraisers to conduct a valuation of the tangible
and intangible assets and to assist in the determination of the useful lives for
such assets. Based on the results of the appraisal, $40,000,000 was allocated to
in-process research and development, which was expensed in fiscal 2001. The
amounts allocated to developed technology, customer list, assembled workforce
and goodwill have been amortized over their estimated useful lives of three
years. During the year ended December 31, 2001, amortization of goodwill and
purchased intangibles for the TTI acquisition was $107,592,000. In fiscal 2001,
Sonus recorded a non-cash impairment charge of $374,735,000 for the write-off of
TTI goodwill and certain purchased intangibles (Note 2). Deferred compensation
was computed based on the intrinsic value of the unvested TTI stock options
assumed by Sonus and is being expensed over the remaining vesting period of up
to four years.

F-12

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The valuation of in-process research and development was determined using
the income method. Revenue and expense projections for the in-process
development project were prepared by the management of Sonus through 2008 and
the present value was computed using a discount rate of 22.5%. In the event that
the project is not completed and technological feasibility is not achieved,
there is no alternative future use for the in-process technology. The
assumptions used for the valuation of in-process research and development are
the responsibility of management.

PRO FORMA INFORMATION

The following unaudited pro forma information presents a summary of the
consolidated results of operations of Sonus and TTI as if the acquisition had
occurred on January 1, 2001 and 2000. The pro forma adjustments exclude the
one-time write-off of TTI in-process research and development.

The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the years presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies from combining operations.

(4) ACQUISITION OF CERTAIN ASSETS OF LINGUATEQ, INC.

In July 2001, Sonus completed the acquisition of certain intellectual
property and other assets of privately-held Linguateq Incorporated. Linguateq
was a provider of data distribution and billing application software for both
next generation and legacy networks. The acquisition of certain intellectual
property and other assets was accounted for using the purchase method of
accounting in accordance with SFAS No. 141. The purchase price has been
determined by using the average market value of Sonus common stock for the
period from two days before to two days after the terms were agreed upon for the
acquisition ($22.53 per share) to value the 221,753 Sonus common shares issued
to the Linguateq stockholders at the closing date and adding payments to
employees and vendors and expenses of the acquisition. As of December 31, 2001,
the purchase price has been computed as follows, in thousands:

Fair market value of shares issued.......................... $4,995
Payments to employees and vendors........................... 241
Acquisition expenses........................................ 141
------
$5,377
======

In accordance with SFAS No. 142, and with the assistance of valuation
experts, the purchase price was allocated to the intangible assets acquired
based upon their fair values as follows, in thousands:

Intangible assets:
Developed technology and customer list.................... $ 700
In-process research and development....................... 3,800
Goodwill.................................................. 877
------
$5,377
======

F-13

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Sonus engaged third-party appraisers to conduct a valuation of the
intangible assets and to assist in the determination of useful lives for such
assets. Based on the results of the appraisal, $3,800,000 was allocated to
in-process research and development, which was expensed in fiscal 2001. The
amounts allocated to developed technology and customer list are being amortized
over their estimated useful lives of up to two years. During the year ended
December 31, 2001, amortization of purchased intangibles for Linguateq was
$167,000.

The valuation of in-process research and development was determined using
the income method. Revenue and expense projections for the in-process
development project were prepared by the management of Sonus through 2007 and
the present value was computed using a discount rate of 25.0%. In the event that
the project is not completed and technological feasibility is not achieved,
there is no alternative future use for the in-process technology. The
assumptions used for the valuation of in-process research and development are
the responsibility of management.

Pro forma information related to the consolidated results of operations of
Sonus and Linguateq were not material for 2001 and 2000.

(5) INVENTORIES

Inventories consist of the following, in thousands:

(6) PROPERTY AND EQUIPMENT

Property and equipment consist of the following, in thousands:

F-14

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) OTHER BALANCE SHEET DATA

(A) ACCRUED EXPENSES

Accrued expenses consist of the following, in thousands:

(B) ALLOWANCE FOR DOUBTFUL ACCOUNTS

The following table sets forth activity in Sonus' allowance for doubtful
accounts, in thousands:

(8) INCOME TAXES

Sonus provides for income taxes in accordance with SFAS No. 109, ACCOUNTING
FOR INCOME TAXES. Deferred tax assets and liabilities are determined based on
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. A valuation allowance has been
recorded for the net deferred tax asset due to the uncertainty of realizing the
benefit of this asset.

The following is a summary of the significant components of Sonus' deferred
tax assets and liabilities, in thousands:

As of December 31, 2001, Sonus has net operating loss carryforwards for
federal income tax purposes of approximately $92,800,000, which expire through
2021. Sonus also has available research and development credit carryforwards of
approximately $5,867,000 that expire through 2021. The Internal Revenue Code
contains provisions that limit the net operating loss and tax credit
carryforwards available to be used in any given year in the event of certain
circumstances, including significant changes in ownership interests. Sonus has
completed several financings since inception and has incurred ownership changes.
Sonus does not believe that these changes will have a material impact on its
ability to use its net operating loss and tax credit carryforwards.

F-15

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9) LONG-TERM OBLIGATIONS

Long-term obligations consist of capital leases and restructuring expenses
(Notes 2 and 17(b)). Sonus assumed certain capital leases as part of the
acquisition of TTI. The capital leases are due in monthly installments expiring
at various dates through March 2005 and accrue interest at annual rates ranging
from 4.62% to 14.39%. The future minimum annual payments under capital leases
and amounts due for long-term obligations, as of December 31, 2001, are as
follows, in thousands:

CAPITAL LEASES:
2002........................................................ $ 640
2003........................................................ 539
2004........................................................ 193
2005........................................................ 30
-------
Total minimum lease payments................................ 1,402
Less amount representing interest........................... (109)
-------
Present value of minimum payments........................... 1,293
Less current portion of capital leases...................... (1,055)
-------
Long-term portion of capital leases......................... 238
RESTRUCTURING EXPENSES:
Long-term portion of restructuring expenses................. 12,460
-------
Total long-term obligations................................. $12,698
=======

(10) CONVERTIBLE SUBORDINATED NOTES

In May 2001, Sonus completed a private placement of an aggregate principal
amount of $10,000,000 of 4.75% convertible subordinated notes, due May 1, 2006,
with a customer. Interest payments are due semi-annually on May 1 and
November 1 of each year through May 2006. The notes may be converted by the
holder into shares of Sonus' common stock at any time before their maturity or
prior to their redemption or repurchase by Sonus. The conversion rate is 33.314
shares per each $1,000 principal amount of notes, subject to adjustment in
certain circumstances. After May 1, 2004, Sonus has the option to redeem all or
a portion of the notes at 100% of the principal amount. Also, at any time if the
market price of Sonus' common stock exceeds $60.04 per share for twenty trading
days in any thirty trading-day period, Sonus may redeem these notes through the
issuance of shares of common stock or for cash. In the event of a change of
control in Sonus, the holder at its option may require Sonus to redeem the notes
through the issuance of common stock or cash. Interest expense related to our
convertible subordinated notes was $317,000 for the year ended December 31,
2001.

(11) COMMITMENTS AND CONTINGENCIES

(A) LEASES

Sonus leases its facilities under operating leases, which expire through
December 2008. Rent expense was approximately $4,146,000, $1,310,000 and
$537,000 the years ended December 31, 2001, 2000 and 1999. Sonus is responsible
for certain real estate taxes, utilities and maintenance costs under these
leases. The future minimum payments under operating lease arrangements as of
December 31, 2001, after reflecting the lease renegotiation (Note 17(b)) are as
follows: $3,493,000 in 2002; $2,956,000 in 2003; $942,000 in 2004; $186,000 in
2005; $195,000 in 2006; and $418,000 thereafter.

(B) PENDING LITIGATION

In November 2001, a purchaser of the Company's common stock filed a
complaint in the federal district court for the Southern District of New York
against Sonus, two of its officers and the lead underwriters alleging violations
of the federal securities laws in connection with our IPO and seeking

F-16

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

unspecified monetary damages. The purchaser seeks to represent a class of
persons who purchased Sonus' common stock between the IPO on May 24, 2000 and
December 6, 2000. The complaint alleges that Sonus' registration statement
contained false or misleading information or omitted to state material facts
concerning the alleged receipt of undisclosed compensation by the underwriters
and the existence of undisclosed arrangements between underwriters and certain
purchasers to make additional purchases in the after market. The claims against
Sonus are asserted under Section 11 of the Securities Act of 1933 and against
the individual defendants under Sections 11 and 15 of that Act. Sonus intends to
vigorously defend this action.

(12) REDEEMABLE CONVERTIBLE PREFERRED STOCK

In connection with our IPO in May 2000, all redeemable convertible preferred
stock was converted into an aggregate of 96,957,222 shares of common stock. A
summary of the redeemable convertible preferred stock issuances from inception
and the redemption value as of the closing of our IPO in May 2000 are as
follows:

The rights, preferences and privileges of the Series A, B, C and D
redeemable convertible preferred stock are as follows:

CONVERSION

Each share of Series A, B and C preferred stock was convertible into 7.5
shares of common stock and each share of Series D preferred stock was
convertible into three shares of common stock, each adjustable for certain
dilutive events. Conversion was at the option of the holder, but became
automatic upon the closing of an IPO for the Series A, B and C preferred stock
in which at least $10,000,000 of net proceeds shall be received by Sonus at a
price of at least $2.67 per share and for the Series D preferred stock with at
least $25,000,000 of net proceeds at a price of at least $6.56 per share.

REDEMPTION

If requested prior to specified redemption dates, by the holders of 66 2/3%
of the then outstanding Series A, B, C and D preferred stock, Sonus was required
to redeem such stock at $1.00, $5.00, $11.81 and $16.40 per share, as adjusted
in the event of future dilution, plus declared but unpaid dividends.

DIVIDENDS

Series A, B, C and D preferred stockholders were entitled to receive any
cash dividend declared on common stock equal to the amount they would be
entitled to if such preferred stock had been converted into common stock. In
1999, in connection with the sale of an aggregate of 211,688 shares of Series C
preferred stock in the fourth quarter of fiscal 1999, Sonus recorded a charge to
accumulated deficit of $2,500,000. This amount represents the beneficial
conversion feature of the Series C preferred stock. This amount has been
accounted for as a dividend to preferred stockholders and as a result, increased
Sonus' capital in excess of par value, net loss applicable to common
stockholders and the related net loss per share.

F-17

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

LIQUIDATION PREFERENCE

In the event of liquidation of Sonus and before any distribution to common
stockholders, the Series A, B, C and D preferred stockholders were entitled to
share pro rata, $1.00, $5.00, $11.81 and $16.40 per share, plus all declared but
unpaid dividends.

VOTING RIGHTS

Series A, B, C and D preferred stockholders were entitled to one vote per
common share equivalent on all matters voted on by holders of common stock.

(13) STOCKHOLDERS' EQUITY (DEFICIT)

(A) AUTHORIZED CAPITAL STOCK

In May 2001, Sonus' stockholders approved an increase in the authorized
common stock from 300,000,000 to 600,000,000 shares.

(B) STOCK SPLIT

On October 6, 2000, Sonus effected a three-for-one stock split in the form
of a stock dividend. All common shares, common stock options and per share
amounts in the accompanying financial statements and footnotes have been
retroactively adjusted to reflect the stock split.

(C) INITIAL PUBLIC OFFERING

On May 31, 2000, Sonus completed its IPO of 17,250,000 shares of common
stock, which included the exercise of the underwriters' over allotment option of
2,250,000 shares, at $7.67 per share. The proceeds from the IPO were
$121,705,000, after deducting the underwriting discount and commissions and
offering expenses of $10,545,000.

(D) RESTRICTED COMMON STOCK

Sonus issued 24,615,693 and 262,500 shares of restricted common stock
outside of the 1997 Stock Incentive Plan (the Plan) in the period ended
December 31, 1997 and in the year ended December 31, 1999, respectively. These
shares are subject to repurchase agreements which expire over a five-year
period. Sonus may repurchase any remaining restricted shares of common stock
held by these individuals upon termination of employment at their original
purchase price ranging from $0.0001 to $0.001 per share. All shares of common
stock subject to repurchase restrictions contain the same rights and privileges
as unrestricted shares of common stock and are presented as outstanding as of
the date of issuance. As of December 31, 2001, 1,259,274 of these common shares
were restricted and subject to Sonus' repurchase.

(E) 1997 STOCK INCENTIVE PLAN

The Plan, which is administered by the Board of Directors, permits Sonus to
sell or award restricted common stock or to grant incentive and non-qualified
stock options for the purchase of common stock to employees, directors and
consultants. On January 1 of each year, commencing with January 2001, the
aggregate number of shares of common stock available for purchase under the Plan
shall increase by the lesser of (i) 5% of the outstanding shares on December 31
of the preceding year or (ii) an amount determined by the Board of Directors. At
December 31, 2001, 90,173,599 shares were authorized and 24,051,950 shares were
available under the Plan for future issuance.

F-18

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Sonus issued shares of restricted common stock to employees and consultants
which are subject to repurchase agreements and generally vest over a four or
five-year period. If the employee leaves or if the services are not performed,
Sonus may repurchase any restricted shares of common stock held by these
individuals at their original purchase price ranging from $0.01 to $4.67 per
share. All shares of common stock subject to repurchase restrictions contain the
same rights and privileges as unrestricted shares of common stock and are
presented as outstanding as of the date of issuance. As of December 31, 2001,
16,275,097 shares of the outstanding common stock issued under the Plan were
restricted and subject to Sonus' repurchase.

A summary of activity under the Plan for the years ended December 31, 1999,
2000 and 2001, is as follows:

RESTRICTED COMMON STOCK ISSUANCES

As of December 31, 2000 and 1999, 17,319,885 and 7,438,965 shares of
unrestricted common stock were outstanding with a weighted average purchase
price of $0.04 and $0.02 per share.

COMMON STOCK OPTION GRANTS

F-19

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 2000 and 1999, 783,589 and 374,379 options were
exercisable at an average exercise price of $1.35 and $0.06 per share. The
weighted average fair value of each option granted under the Plan for 2001, 2000
and 1999 is $11.15, $7.05 and $0.06 per share.

The following table summarizes information relating to currently outstanding
and exercisable options as of December 31, 2001:

(F) 2000 EMPLOYEE STOCK PURCHASE PLAN

In March 2000, the stockholders approved the 2000 Employee Stock Purchase
Plan (ESPP). The ESPP consists of a series of overlapping 24-month offering
periods. Each offering period generally consists of four consecutive 6-month
purchase periods. Eligible employees may purchase common stock at a price equal
to 85% of the lower of the fair market value of the common stock at the
beginning of each offering period or end of each purchase period. Participation
is limited to 20% of an employee's eligible compensation not to exceed amounts
allowed by the Internal Revenue Code. On January 1 of each year, commencing with
January 2001, the aggregate number of shares of common stock available for
purchase under the ESPP shall increase by the lesser of (i) 2% of the
outstanding shares on December 31 of the preceding year or (ii) an amount
determined by the Board of Directors. As of December 31, 2001, 7,269,439 shares
of common stock were authorized and 1,021,333 shares have been issued under the
ESPP.

(G) 2000 RETENTION PLAN

In January 2001 in conjunction with the acquisition of TTI, Sonus
established the 2000 Retention Plan (the Retention Plan) and issued contingent
awards of 3,000,000 shares of common stock to certain employees of TTI who
became employees of Sonus. Pursuant to the Retention Plan, these awards will
vest in equal installments on each of October 31, 2002, November 30, 2002,
January 31, 2003 and February 28, 2003, if (i) the recipients do not voluntarily
terminate employment with TTI or Sonus prior to such vesting dates and (ii) the
business expansion and product development escrow release conditions are
satisfied in whole or in part. Generally, any awards forfeited by employees who
terminate employment with TTI, other than a termination by Sonus or TTI without
cause, prior to the date on which they would otherwise vest, may be reallocated
to remaining TTI employees, awarded to replacement hires or returned to Sonus as
provided by the terms of the Retention Plan. Due to the termination of certain
former TTI employees in connection with the restructuring plan announced in
September 2001, restrictions associated with approximately 860,000 shares of
common stock awarded under the Retention Plan have been removed.

F-20

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(H) 1998 EQUITY INCENTIVE PLAN

In January 2001 in connection with the completion of the TTI acquisition,
Sonus assumed TTI's 1998 Equity Incentive Plan and all grants of options under
this plan. Each outstanding option to purchase shares of Class B common stock
granted under the 1998 Equity Incentive Plan immediately prior to the effective
time of the acquisition was converted into an option to purchase Sonus common
stock based on the merger consideration, with the exercise price of the options
being proportionately adjusted.

In continuation of a 1997 agreement entered into by the TTI founders and
other then TTI shareholders, the founders agreed, in exchange for the option
exercise proceeds, to transfer to Sonus a number of shares of Sonus' common
stock received by them in the acquisition equal to the number of shares of
Sonus' common stock issued upon exercise by former TTI employees of the stock
options granted under the TTI 1998 Equity Incentive Plan. As a result of this
agreement, the aggregate number of outstanding shares of Sonus' common stock
that will be issued upon exercise of these stock options will not increase.

(I) STOCK-BASED COMPENSATION

Stock-based compensation expenses includes the amortization of deferred
employee compensation and other equity related expenses for non-employees.

In connection with certain employee stock option grants and the issuance of
employee restricted common stock during the years ended December 31, 2000 and
1999, Sonus recorded deferred stock-based compensation of $39,433,000 and
$20,859,000. This represents the aggregate difference between the exercise price
or purchase price and the fair value of the common stock on the date of grant or
sale for accounting purposes. The deferred compensation is recognized as an
expense over the vesting period of the underlying stock options and restricted
common stock.

In connection with the TTI acquisition, Sonus recorded deferred stock-based
compensation of $22,600,000 for the year ended December 31, 2001, related to the
intrinsic value of unvested TTI stock options assumed by Sonus. This deferred
compensation is recognized as an expense over the remaining vesting period of
the underlying stock options of up to four years. Additionally, Sonus recorded
$55,196,000 of deferred stock-based compensation on 3,000,000 shares awarded to
TTI employees under the Retention Plan, based on the fair value of the Sonus
common stock on the closing date of the acquisition. This deferred compensation
is being expensed ratably over the approximate two-year vesting period of the
retention shares and was adjusted for changes in the fair value of Sonus common
stock on the date the specific escrow release conditions were satisfied. Upon
termination of an employee, the remaining value of the retention shares held to
which such employee is entitled, if any, will be expensed (See Note 13 (g)).

Sonus has valued the stock options and the issuances of restricted common
stock to non-employees based upon the fair market value of the services rendered
where Sonus believes the value of these services is more readily determinable
than the value of the options or restricted stock. All other grants of options
and issuances of restricted stock to non-employees are valued based upon the
Black-Scholes option pricing model. As of December 31, 2001, Sonus has 135,000
stock options and 120,000 shares of restricted common stock outstanding to
non-employees. In accordance with Emerging Issues Task Force 96-18, Sonus will
record the value at the time the services are provided.

Sonus recorded stock-based compensation of $75,500,000, $26,729,000 and
$4,404,000 for the years ended December 31, 2001, 2000, and 1999. Stock-based
compensation expense for the year ended December 31, 2001 includes $25,429,000
related to the write-off of deferred compensation with respect to shares held by
terminated employees impacted by the restructuring plan (Note 2). Sonus expects
to

F-21

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

record up to approximately $21,000,000, $6,500,000 and $1,200,000 in employee
stock-based compensation expense in the years ending December 31, 2002, 2003 and
2004.

Sonus has computed the pro forma disclosures required under SFAS No. 123 for
stock options granted to employees and shares purchased under the ESPP using the
Black-Scholes option pricing model with an assumed 4.5% risk-free interest rate
in 2001, and 5% risk-free rate in 2000 and 1999, volatility of 150%, 80%, and
60% in 2001, 2000, and 1999 and an expected life ranging from 2-5 years for
stock options and 6 months for the ESPP, with the assumption that no dividends
will be paid. Had compensation expense for Sonus' stock option plan and ESPP
been determined consistent with SFAS No. 123, the pro forma net loss and pro
forma net loss per share would have been as follows:

The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
Sonus' employee stock options and ESPP shares have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of Sonus' options and ESPP shares.

(J) COMMON STOCK RESERVED

Common stock reserved for future issuance at December 31, 2001 consist of
the following:

Stock incentive plan........................................ 44,334,765
Employee stock purchase plan................................ 6,248,106
Conversion of convertible subordinated notes................ 333,140
----------
50,916,011
==========

(14) EMPLOYEE BENEFIT PLAN

In 1998, Sonus adopted a savings plan for its employees, which has been
qualified under Section 401(a) of the Internal Revenue Code. Eligible employees
are permitted to contribute to the 401(k) plan through payroll deductions within
statutory and plan limits. Contributions from Sonus are made at the discretion
of the Board of Directors. Sonus has made no contributions to the 401(k) plan to
date.

F-22

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(15) SUPPLEMENTAL CASH FLOW INFORMATION

(16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table presents our quarterly operating results for the years
ended December 31, 2001 and 2000. The information for each of these quarters is
unaudited and has been prepared on the same basis as the audited consolidated
financial statements. In the opinion of management, all necessary adjustments,
consisting only of normal recurring adjustments, have been included to present
fairly the unaudited consolidated quarterly results when read in conjunction
with our audited consolidated financial statements and related notes. These
operating results are not necessarily indicative of the results of any future
period.

F-23

SONUS NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(17) SUBSEQUENT EVENTS

(A) BANK FINANCING

As of January 16, 2002, Sonus established a $10,000,000 equipment line of
credit and a $20,000,0000 working capital line of credit with a bank, at the
bank's prime rate, available through March 24, 2003. Amounts borrowed under the
equipment line shall be repaid over a 36-month period. Amounts borrowed under
the working capital line will be based on a percentage of eligible accounts
receivable balances. Under the agreement, all of Sonus' assets, except
intellectual property, have been pledged as collateral. Sonus must also maintain
a certain minimum tangible stockholders' equity and quick ratio, as defined and
maintain certain minimum investment balances with the bank.

(B) LEASE RENEGOTIATION

As of March 5, 2002, TTI reduced its lease commitments for excess space in
its Texas facilities in exchange for a one-time payment of $835,000 to a
landlord and a guarantee by Sonus of TTI's rents owed through April 2003, the
remainder of the revised lease term. As a result of this transaction, Sonus
expects to record a restructuring benefit in the first quarter of fiscal 2002
(Note 2).

F-24