Welcome to the Sonus Networks second quarter fiscal 2008 financial results conference call. (Operator Instructions) I’d now like to turn the conference over to Karen Cellupica from Investor Relations.

With me on the call this afternoon are Richard Nottenburg, President and Chief Executive Officer, and Rick Gaynor, Chief Financial Officer. After the market closed, we issued a press release announcing our results for the second quarter 2008. The text of this release, along with the accompanying income statement, balance sheet and operating statistics, as well as the reconciliation of the most directly comparable GAAP financial measures to any non-GAAP financial measures used during this call and for certain prior periods, are available on the Investor Relations section of our website. Before Richard offers his opening remarks, I would like to remind you that during this call we will make projections or forward-looking statements regarding items such as future market opportunities and the company’s financial performance. These projections or statements are just predictions and involve risks and uncertainties such that actual events or financial results may differ materially from those we have forecasted. As a result, we can make no assurances that any projections of future events or financial performance will be achieved. For a discussion of important risk factors that could cause actual events or financial results to vary from these forward-looking statements, please refer to the risk factors section of our quarterly report on Form 10-Q for the period ended June 30, 2008. Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point, we specifically disclaim any obligation to do so unless required by law. During this call, we will be referring to non-GAAP financial metrics. These non-GAAP metrics are not prepared in accordance with the generally accepted accounting principles. For important commentary on why the management team considers non-GAAP information a useful view of the company’s financial results, please consult our filings with the SEC. I would now like to turn the call over to Richard Nottenburg.

. It is a pleasure being with you today. With me here is Rick Gaynor, our Chief Financial Officer, and also Vikram Saksena, our Chief Technology Officer. We are here to review results for the second quarter, the first half of 2008, and to provide some perspectives on the business. We emphasize the change of format of this call from prior earnings conference calls. I will first give you an overview of the second quarter and some of my initial impressions from my first seven weeks as CEO before handing the call to Rick for an in-depth financial look at the quarter. I will then continue the call with additional color for our outlook for the back end of this year and a few thoughts on my approach to leading this company. One small item - I have decided to dispense with the slide deck. Let me begin saying that I am excited to be here and I am proud of the Sonus team for delivering revenue in the high end of our original Q2 outlook and earnings that exceeded expectations. Key takeaways from the second quarter include revenue was $87.9 million for the quarter, up 16% compared with the same period a year ago; non-GAAP operating income was $12.9 million for the quarter, up just over 300% year-on-year. Our book-to-bill ratio was greater than 1 for the first half of 2008, compared to a ratio that was less than 1 for the first half of 2007. Design wins announced include COLT, Tata Communications, Bahamas Telecom, Convergia and PTV Telecom. I know that many of you are interested in my initial impressions of the company, the markets we serve, the competitive landscape, and the customer environment. Many of you are also interested in my approach to leading the business and…

I am pleased to report that we delivered solid Q2 financial results. Revenue was in line with outlook, and we significantly outperformed expectations on gross margin and operating income. Before I continue, I’d like to extend my appreciation to the Sonus team whose steadfast focus enabled us to achieve these strong results. Please note that throughout my discussion, I will reference both GAAP and non-GAAP financial information. There is a reconciliation of GAAP and non-GAAP information in the Investor Relations section of our website. As I do each quarter, I’d like to remind investors that, for a variety of reasons, our business is inherently uneven and we suggest that you consider our performance over a longer time horizon, as our sales will fluctuate from quarter to quarter. Let me now recap our results. Revenue for the second quarter was $87.9 million, up 18.7% from $74 million in Q1 2008, and up 16.4% from $75.5 million in Q2 2007. Product revenue was $62.4 million or 71% of total revenue, up from $51 million in Q1 and up from $52.2 million in Q2 2007. Service revenue was $25.5 million or 29% of total revenue, up from $23 million in Q1 and up from $23.3 million in Q2 of last year. Now looking at our revenue geographically, domestic revenue accounted for 80% of [inaudible] revenue versus 83% in Q1 and 75% in Q2 2007. AT&T and KDDI both contributed greater than 10% of total revenue in the second quarter. Our top five customers represented approximately 69% of revenue in Q2 versus 58% in Q1 and 65% in Q2 of last year. We reported revenue from 82 customers in the second quarter compared to 85 in the first quarter and 70 in Q2 2007. Please note that the timing of deployment schedules will cause…

During the second quarter we continued to see solid order activity in North America, with an uptick year-on-year. AT&T, our largest customer, continues to expand their network and the order activity in part reflected the IP voice traffic and the deployment of new IP services. In addition, we were pleased that Sonus deployments in the quarter continued to drive network efficiency and lower the total cost of network ownership for our largest customer. We are making good progress in EMEA. Investments made in the region drove a substantial increase in first half bookings year-on-year. Work with BT on the [inaudible] contract win in the fourth quarter of 2007 continues and I am pleased that we are meeting milestones and excited to be working with BT on their 21CM program. During the quarter we announced COLT, one of the largest Pan-European operators as a customer. COLT is deploying an end-to-end Sonus Network solution for IP telephony to enterprise customers across 13 countries and Europe. We were successful in winning this business because of our underlying technology and the flexibility, scalability and robustness of our platform, which allows COLT to develop new services faster. The solution uses our core trunking and access technology as well as our Network Border Switch, which COLT confirmed as the best session border control technology. In the second quarter we saw the first cable customer for Sonus in Spain. PTV Telecom is an integrated voice, data and local television programming provider, and it selected Sonus to upgrade its next generation network with a full suite of Sonus solutions. During the first half of 2008 we continued to grow our market share in the session border controller space with our Network Border Switch. Our holistic approach to network design and the decision to build our Network Border Switch…

We will no open for Q&A.

(Operator Instructions) Your first question comes from Paul Silverstein - Credit Suisse.

Richard, can you tell us how broad, when you all talk about weakness in the second half of the year relative to the global CapEx outlook, how broad is this? Is this focused, as one would expect, on your - where the revenues are coming, your top five or so? Is this much broader than that? Any insight you could give us would be appreciated.

Yes, first of all I think that clearly the softness in the second half of the year is external rather than any internal execution issue. I think though that the bookings strength is also noteworthy. We did quite well in the first half of the year compared with the first half of last year. But I think that, if you look at the landscape, I think that if you look at some of the customers across the landscape, I think there's some softness. I think they potentially give you some pushouts and we don’t have the visibility that I think we'd like to have with regard to that.

Well, Rich, that being said, is there anything specific from AT&T or any of your other major customers at this time that leads to the concern that's reflected in the numbers or is this just you being prudent and cautious given the overall environment or is it a combination?

Well, first of all, it's not due to anything specific from any specific customers, number one. I think it's just basically looking at the landscape, looking at the backdrop of the year and just basically saying to yourself looking the at the things that I see among some of my colleagues in the industry.

Your next question comes from Edward Jackson - Cantor Fitzgerald.

When you, again, look at the back half, did you just make a comment you see the back half having revenue growth on a year-over-year basis - this is the back six months - of 10.5%?

Yes, I think that's exactly what we said. We said not to exceed the growth rate you saw in the first half of the year, so just for clarity we were into approximately 10.5% growth in the first half of this year over the first half of last year, and what we're really saying is we expect the second half of this year to grow - not to exceed that rate from the second half of last year.

When you look at the growth prospects for the back half of the year and look in some of the prior commentary that you've made I'm just speaking to the last call and you had talked about a pickup in business within Europe. You talk about how the Japanese spending was coming back in line. Has there been a fair amount of slowdown just on a global perspective or are there any particular geographic regions where you're seeing things a little [inaudible] than others? Is this mainly a North American phenomena? Just any color you can provide on that front.

I don't really have a lot of, what I call specific color on that, just to say that. I don't think that the business environment is as robust as it was earlier in the year.

And did you say that CapEx and operating cash flow, CapEx was $2.7 million and operating cash flow was negative 27?

Correct.

Your next question comes from George C. Notter - Jefferies & Co. George C. Notter - Jefferies & Co.: Richard, you've been here for seven weeks, as you said. any thoughts about the balance sheet here? There's obviously a lot of cash. You did grow cash a little bit here this quarter in total. What do you think about the capital structure of the company in this low interest rate environment? Is there a way to pursue a buyback program or maybe you could optimize the balance sheet a little bit? Conversely, would you look at M&A to try to grow the company through inorganic means? What's the thought there?

I've been here seven weeks, and certainly I don't have any, I'm not going to basically give you any, I'm not going to make some big statement here about the balance sheet. But let's just think about a couple of things I think that are important in terms of the questions that I'd be asking. I think first of all we have to think about how much cash we need to have so that our customers feel comfortable. We do business with some very, very big customers, and I think that's the first thing you have to assess. How much cash do we need to have on hand so that large customers feel comfortable? I think a couple of the other things you have to consider are what is the replacement cost of that cash? How much would it cost to go back and get cash? I think another thing is, and I haven't seen and I have to get a feeling for. what are the cash generating capabilities of the business? What are the cash from operations going to be here over the next 24 months? And I don't have that visibility right now. But that being said, I think obviously the Board every quarter, obviously the Board's going to look at the capital structure and ask the right questions. But I think I'm not in a position right now to say much more than that. George C. Notter - Jefferies & Co.: Any thoughts on M&A?

On M&A? Well, I'm really focused right now operationally and I'm focused on execution. Any M&A activity would obvious, for me would tend to be, right now, be very opportunistic. And my real focus is on the business, on execution, strengthening the team, and doing the right things that getting the company ready for 2009.

Your next question comes from Steven O'Brien - JPMorgan.

Regarding, going back, just a point of clarification on the 2H revenue guidance. You're using the word growth, so does that imply a band of zero to up to 10.5% growth you know, versus 2H 'O7? And then a second question, really my question is on the margin side of the business, the full year margin guidance implies a pretty substantial drop in the gross margin in the back half of the year, below normalized 58% to 62% percent level. Can you give us any more color on what are the puts and takes within that and if we should be reading through that that the gross margin does fall below the historic range?

Let me answer the growth question first. I think what we are indicating is that the growth rate in the second half over the second half of last year will be in line with the growth we say in the first half of the year versus the first half of last year. And the way we positioned it is we don't really expect it to exceed that rate, which was approximately the 10.5% rate, so I think that's your goalpost there. We have intentionally not given a lower end to that range because of the limited visibility we have. In terms of the gross margin question, I'm not giving the 58% to 62% on an annual basis, so you don't have to think about taking the first half and weighing it against the second half. We're looking at the 58% to 62% as our target range for the second half of the year.

Richard, you've come aboard and looked at the operating margin structure. Is it a function of reducing the cost for adding a new customer or cost for pursuing a new network opportunity that is an area for finding operating leverage going forward or what other factors have you identified as a way to target that mid-teens operating margin?

First of all, I haven't had that much time here to really get into that level of thought process. What I can say is that as far as we did say that we would do a deep dive on OpEx and we're certainly looking at that. We looking at that putting [inaudible] and there's some things obviously in our expense structure that I think that we can improve on. I think being said, I think you raise some important questions about what is the cost to acquire a new customer and what does it cost for a very large customer? I certainly don't have any data right now to share with you on that, but that's something I'll be looking at as we go forward.

Your next question comes from Brian Coyne - Friedman, Billings, Ramsey.

First of all, I don't seem to have great historic numbers for your deferred product revenues, but I was wondering if you might be able to shed a little bit more light on how that's changing. That's first. And then second, again, I know probably not a deep area for discussion but what kind of an update on perhaps some of the sticking points might you have for in your discussions with your largest shareholder?

In terms of deferred revenue for product, the number we have here I can share with you now is $38.1 million for Q2. That number is down from $47.3 million in Q1 '08 and down modestly from the $44.1 million in Q4 '07.

I think with regard to Legatum, I think I was pretty clear in the script. I think that what we said was that we have dialogue and I believe we have constructive discussion. And that's about the extent of my comment right now. When we have more things to add, we'll give you more information as we have something more to say.

Your next question comes from Tim Savageaux - Merriman Curhan Ford & Co. Tim Savageaux - Merriman Curhan Ford & Co.: Did you specifically say your second half outlook is not driven by changes at AT&T or how did you respond to that question?

The way we responded to that question was we said that the second half outlook is driven by external factors and not by internal company execution. Tim Savageaux - Merriman Curhan Ford & Co.: On to that, looking at your guidance range, though, it looks like you continue to expect some sequential growth, just not the hockey stick that was implied in the previous forecasted guidance. Is that fair to say?

That’s fair to say. If you do the math, the second half of the year is typically stronger for us over the last several years, and if growth rate in the second half of this year over second half of last year is in line with global retail enterprise in the first half, that would mean that it is stronger in the second half than the first half if one uses the upper limit of the 10.5% expectation, given that we're not saying - and we have a lower limit on that number; I'm just giving you an upper goalpost, if you will. Tim Savageaux - Merriman Curhan Ford & Co.: You did see a bit of a bounce back in Japan with KDDI back on the 10% customer list, I believe for the first time in awhile. Do you expect that to continue to strengthen? Can you give us some sense of developments in Japan from an orders standpoint or whatever color you might be able to provide?

KDDI is a 10% customer in the second quarter. We did recognize that that was likely to happen because we scored a piece of that out of deferred revenue. So our relationship with KDDI is an ongoing relationship. Unfortunately, due to the vagaries of rev rec under 97-2, you sometimes get a scoring of revenue even though you have activity in every quarter. So we did see a spike in revenue for KDDI in the second quarter related to scoring some revenue out of deferred, however our relationship is ongoing, but I would not expect it to be a 10% customer every quarter.

First of all, I haven't been over to Japan yet nor have I been over to Asia-Pac, at least for Sonus. And I think there's a lot of exciting activity going on in the region, and I plan on getting over there as quickly as possible. We've got a couple of good customers over there, including KDDI and J:COM and Softbank, and I think that there's a lot we can do in the market. And I think that one of the things that's a good bellwether in that market is that when you look at the strength of the market with respect to some of the layer 3 equipment and infrastructure that's being bought right now, that usually bodes well in terms of where we would be potentially in the future. But until I get over there, it's really hard for me to give an assessment since I like to go out and touch the customers and basically find out really what their deployments are going to look like.

Your next question comes from Edward Jackson - Cantor Fitzgerald.

Did you say in the third quarter that you expect operating expenses to be relatively flat with the second quarter?

No, we didn't say that. We actually said we expect them to be moderately higher in the second half of the year.

Your last question comes from Paul Silverstein - Credit Suisse.

Rick, I don't mean to pin you down, but I know from historical experience one person's moderately is another's modest is another's extreme, so can you give us a little bit more insight when you [say] moderate if we're talking about just some type of bound.

Paul, what I'd like to be is precise but I'm afraid I can't. And let me give you some reasons why we can't. Rich is still relatively new to the company. His plans are still in development and as we indicated earlier, we've taken certain actions right now to position ourselves for 2009. Not all of those actions have been completely worked out. In addition, a wild card we seem to have here is litigation fees, and those have been relatively volatile and somewhat hard for us to predict over the last couple of quarters, and we expect that to continue in Q3 as well. So with that, we're saying moderately up, so I'll have to allow you to make your own estimate on what moderately means, but it's not going to be, let's say, less than a million, in our expectation.

It will be more than a million?

I would expect it to be more than a million.

The G&A was up $1.8 million sequentially, $1.7 million sequentially. You mentioned the litigation expense aspect. I understand it's hard to predict. Should we expect that to hit again in Q3 or should we expect G&A to come back down?

No, in terms of general OpEx G&A is an area where we still expect to see litigation fees in the third quarter.

With respect to BT in terms of the impact on your balance sheet, you mentioned it was in deferred revenue. I assume if it's in deferred revenue we're also seeing it in cash. Would that be correct?

That would be correct.

You had KDDI come out of deferred revenue and hit the income statement. You had BT go in. I also assume that it's still early days, and the impact of BT was clearly not that great in the grand scheme of things. As you go forward this coming quarter and each quarter thereafter we should expect that impact to become larger and larger. Is that a fair assumption?

Yes, it's fair to say that we'll expect to see it increase in deferred revenue. It won't be a linear growth. It will be following the project plan to some degree. But yeah, it's not a huge number in the first quarter, in which we start moving deferred revenue, but it is starting to become more material as we go forward.

You mentioned in the prepared remarks you had your best quarter of bookings in the history of the company. I understand Rich is also being prudent or conservative in terms of the outlook with respect to CapEx. But there seems to be a little bit of a disconnect in terms of the growth you're talking about, great order book, great book to bill, growth not so good in terms of the actual income statement. Is this just a timing issue? Where's the disconnect?

I appreciate the question and, I understand why you're asking it. Look, we had very good bookings the first half of this year versus the first half of last year, and we built some backlog. Frankly right now I don't know what the bookings are going to look like in the second half of this year, and I'll be honest with you, I feel on the outside right now that we have less visibility. So I understand the disconnect, but at the same time it's really - it's driven by external visibility.

Paul, I want to come back with a clarification. While we did start invoicing earlier in the year, we didn't receive our first cash inflow from BT until Q3.

This completes this afternoon's financial results conference call. We would like to thank you again for joining us, and we appreciate your interest in Sonus Networks.