Welcome to the Sonus Networks third quarter fiscal 2008 financial results conference call. (Operator Instructions) This call is being recorded Thursday, November 6, 2008. I would now like to turn the conference over to Karen Cellupica from Investor Relations.

Thank you and good morning everyone. With me on the call this afternoon are Richard Nottenburg, President and Chief Executive Officer; Rick Gaynor, Chief Financial Officer; and Vikram Saksena, Chief Technology Officer. Earlier this morning we issued a press release announcing our results for the third quarter 2008. The text of this release, along with the accompanying income statement, balance sheet, and operating statistics, as well as a 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 are making projections or forward-looking statements regarding items such as future market opportunities and the company’s financial performance. These remarks about the company’s future expectations, plans, and prospects constitute forward-looking for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. 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 most recent quarterly report on Form 10-Q which is on file with the SEC. 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 measures. These non-GAAP measures are not prepared in accordance with the generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available on the Investor Relations section of our website, www.sonusnet.com. I would now like to turn the call over to Richard Nottenburg.

Thank you for joining us on the call today. We are here to review financial results for the third quarter 2008 and to provide insight into our business performance and the operating environment. We will also share with you our plan to manage Sonus through the current economic environment. Key take-aways from the third quarter include: revenue was $62.2 million for the quarter, down 18% compared with the same period a year ago; non-GAAP operating loss was $10.9 million for the quarter compared with an operating income of $4.0 million in Q3 2007; our book-to-bill ratio was less than 1; and we maintain a strong cash position of $404.7 million at quarter end with no debt. Like many companies who provide infrastructure to wire line and mobile operators, we have not been immune to the challenging environment in which we operate. As I indicated during our Q2 earnings call in August, we anticipated some of the impact from the slowing economy and the potential for reduced spending by our customers. Accordingly, we initiated several actions in Q3 to reduce operating expenses by flattening internal organizations and improving line of sight into some of the key performing strivers within the company. These changes reflected my initial observation that Sonus needs to be operated more efficiently at a lower expense level irrespective of the economic environment. Furthermore, we have instituted increased rigor around customer engagements in an effort to create a win-win environment for our customers and shareholders. However, like many of you, we were unable to predict just how fast the market would decelerate during September and today we find ourselves in a macroeconomic environment that the telecomm industry has not seen for quite some time. On our call in August I said that Sonus had a good foundation and there…

While we are disappointed with our results this quarter we are confident in our ability to respond appropriately to this challenging environment. Our fundamentals are strong. We are a market leader with a strong balance sheet, world-class engineering, and tier-1 customers. As Rich will discuss in more detail, we took a number of steps during the quarter to improve our cost structure, streamline our operations, and improve our responsiveness to future market opportunities. More work remains and we look forward to sharing those actions in our view for 2009 on our next earnings call. In April 2007 we acquired Zynetix to avail ourselves of certain wireless technologies which we incorporated into our product set, in particular, Sonus mobilEdge. In Q3, to improve our focus and reduce the opex drag associated with the residual Zynetix niche business we committed to a plan to sell the subsidiary and are currently negotiating the sale. Before we review our results I would like to point out that the Zynetix results of operations have been reclassified and are reported as discontinued operations for all periods presented. For the purpose of my remarks this morning I will refer to continuing operations unless otherwise stated. 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 would 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 results will fluctuate from quarter-to-quarter. Let me now recap our results. Revenue for the third quarter was $62.2 million, down 29.2% from $87.8 million in Q2 2008, and down 17.9% from $75.8 million…

A key consequence of the current economic environment is that network operators are reducing capital investments in response to a slowing economy and their higher cost of capital. While our value proposition to network operators remains unchanged, we expect the transition from carrier circuit voice to carrier IP voice to slow in the current economic environment for some of our customers and prospects. This is not a uniform trend across the customer landscape as each operator is at a different stage in the transition from legacy to next-generation all IP networks. Even in the current environment we remain competitive and we continue to see quality opportunities to expand our base of tier-1 and tier-2 customers and to increase the footprint of our solutions sold within our existing customers. This is due to our broad product offering, our core competence, and excellent reputation in delivering scalable carrier-grade IP-based voice solutions and in the investments we continue to make in our technology. In addition, the key part of our value proposition enables network operators to reduce operating expenses while allowing them to offer new services. During 2009 Sonus will focus on investing in technology and solutions to strengthen our product offering in three areas that have the best potential for growth and market share gains. We will build on our success in the network border session control space to extend our offering in the emerging wireless IP peering market where we have an opportunity to establish a leadership position. We will invest in delivering differentiated solutions in the access market that will allow operators to offer the enhanced and sticky services required to retain and grow their subscriber base. And we will continue to drive the transformation from legacy TDM to all IP core networks through innovations in number portability, ENUM, and…

Nick, could you please provide our callers with the instructions on how to ask a question.

(Operator Instructions) Your first question comes from George Notter - Jefferies & Co. George Notter - Jefferies & Co.: Clarification on Zynetix, what is the top line and net income impact there? I guess if I look at your financials I can see the business lost $4.3 million on a net income basis, although I think that’s GAAP. What would be the non-GAAP net income impact and then how about on revenue?

I would say it’s relatively immaterial for the company overall. Zynetix, as you know, the object when we acquired Zynetix was to actually import over the intellectual property that we acquired, which we did into the mobilEdge product set primarily. And what was left in Zynetix was really a niche business that serviced things like cruise ship operators. And the revenue and cost implications are relatively immaterial to the company. So I would say you should just consider it immaterial. George Notter - Jefferies & Co.: And I wanted to ask about the long-term operating margin for Sonus. Historically the business has been fairly operating-expense-intensive, custom software development, lots of network inoperability work for customers. You talked a little about pushing that cost out on to the customers. How do you think that transition would work and where do you think the long-term operating margin structure of the company should go? Can this still be a 17% operating margin business longer term? What’s the thought now?

I’m not going to really answer your question on long-term operating margins right now but what I can say, as far as pushing work onto customers, actually one of the things we are trying to do here is we are trying to transition to really being much more aligned with the market than just with specific customers. So if there are things that are really very, very customer specific, I just want to ensure that we get paid to do that work and that we want to maintain a very solid process for our product road map in bringing out products ahead of market demand. Really, it’s a balance. It’s a transition and I think we started that transition with Shaylan coming to my table with product marketing. I feel really comfortable with that. I think Rick wanted to comment on margins.

I would point out that Rich has made several executive management changes here and reorganized several business units and those new managers’ new responsibilities have been cast to go out and put operational efficiencies into their businesses and they’re working through that process right now. We do present our FY 2009 plan to our Board in the December time frame so we’re hoping that on the next earnings call we can give you much better clarity about our operating model on a go-forward basis. We’re just not in a position to do that as we continue to work through some of these cost initiatives we are currently pursuing.

Your next question comes from Paul Silverstein - Credit Suisse.

Can you just remind us, the litigation settlement piece of the cash burn, how much is that expected to be this quarter? Both Q3 and Q4.

We had two broad elements to the litigation. We had one actually impacted us in Q3 to the tune of $9.6 million. We currently anticipate, the second has not been finalized, the terms are being finalized right now. We feel relatively confident the number is going to be $9.5 million. We are currently expecting that to happen in Q4 although there is the possibility that could roll out into Q1.

So your guidance of the $25.0 million to $35.0 million burn, roughly $10.0 million of that you expect to come from the litigation settlement, so the non-litigation piece is $15.0 million to $25.0 million?

That is correct.

And I know you’re only giving guidance for one quarter forward, but as you look beyond, any thoughts in terms of the cash burn going out into next year?

I don’t think we can give you a number on that yet. The next earnings call, hopefully we will be in a position to do that, but as I said earlier we’re working through the cost initiatives right now and we’re taking very seriously the need to pursue cost efficiency in the business and that will impact our operating cash position next year. So I would like to defer that until our Q4 call.

So I trust it would also be premature to talk about a cash flow break-even point at this particular juncture?

Yes, it would.

It is premature to talk about a cash flow break-even point but I did say on my call that we would be reducing the break-even point. I wanted to be very clear.

Where was the break-even point?

We didn’t give guidance on the break-even point but what I’m saying is that we will be reducing the break-even point.

I’m not asking you for where it’s going, I’m asking you to the extent you’re going to be reducing it, it begs the question where has it been.

As you know, we are a very lumpy business. Revenues come in very unevenly for us. Deferred revenue and cash flow is quite different from revenue, but if you look at our cash balance over the last six quarters or so, we’ve been tracking in that 390’s, low 400 range, which would suggest if you average it out, we’ve been pretty much close to our cash break-even sort of run rate over the last year to two. But what we recognize is that if we do have revenue slowdown, our goal is to take our cost infrastructure down in such a way that we’re bringing down that cash break-even point on a revenue basis.

I appreciate the commentary about the slowdown but I’m trying to understand, for a long time now it seems like one of the problems for the company has been great customer base and unfortunately not enough of them buy enough. So I’m trying to understand what part of it is a slowdown as opposed to what piece of it is just the same old not enough of the DTs and soft banks and NTTs of the world stepping up and buying more. And we all know we’re in a global slowdown but any insight you can give in terms of just how much is due to slowdown and how much is people not stepping up.

I think it’s a good question and I think there are a couple of components I want to address. One component is it’s pretty clear that we don’t address all of the top 20 operators in the world. That’s one thing for sure. At least the top-20 meaningful operators, many of whom have consolidated over the last couple of years. I think the other issue is, of course, is that carrier VoIP to some extent is a replacement business. And if you look at DSL traffic, for example, I could show you statistics where Internet traffic for data has grown 40% in the access network. If you’re a service provider, you don’t have a choice but to add more routers and switches to handle that traffic. Carrier VoIP is another situation. And basically in a slowdown the legacy will live longer and the next gen is something you can defer. Depending on which customers you have and where you are in the replacement cycle, you will have somewhat of a different outcome. I think that having a larger customer base of the top 20 would be more advantageous and that is what we are building towards.

Your next question comes from Troy Jensen - Piper Jaffray.

Could you talk about capacity utilization within your install base? I would be interest in class 5 versus class 4 and are these systems built with a lot of excess capacity or are they more success-based?

Let me let Vikram answer that question.

We continue to see traffic increases in our class 4 networks and month-over-month so clearly I think the capacity utilization on class 4 continues to drive up. The class 5 is still in very early stages. What we are seeing there is some of the larger customers focus on the enterprise market and enterprise-listed services and that is where we are focusing more on differentiated applications and services. But I would say class 5 is still in its early growth stages and it’s very hard to predict capacity utilization on those networks in this early stage of transition.

The question was, are the networks built with excess capacity in them to begin with or is there just excess space to begin with?

No, to begin with they always put in capacity that is a little ahead of demand and so they don’t over-stretch the network. But when it comes to an environment like this, the less the capacity stays and drives the utilization, which is basically what’s happening in these networks.

I think the other comment here is really on class 5. Obviously you have the attackers, people who are challenging the incumbent legacy service providers. They were out of the gate relatively quickly. Look at the MSOs around basically voice. If you look at legacy PSTN replacement I think that’s in a very early stage right now and that’s a market which will extend well into the future as legacy providers figure out how they’re going to replace their existing PSTN infrastructure.

Rick, you talked about using your balance sheet for a situation with an attractive ROI or NPVs. Are you talking about extended terms or vendor financing? Could you just give a little more color about what you’re thinking there?

We are really talking about investments into the engineering organization here. If we think that as we pursue some of the market opportunities where we think there are higher growth profiles, we would not hesitate to invest in delivering differentiated solutions in those spaces. So really what we’re saying is we do plan to defend our flanks and maintain our market leadership where we have it, and we’re also prepared to use the balance sheet to make selective investments where we think we can establish new market leaderships.

Would you turn to vendor financing?

It’s not something we have considered.

Let me just tell you from my experience here around vendor financing. Rick and I take a very conservative approach to business. This is not a place where we feel comfortable going.

Your next question comes from Steven O'Brien - J.P. Morgan.

What are your customers telling you regarding longer-term projects? Are they saying they will be pushing them out or have you seen actually any cancellation of orders or parts of projects that impact you going forward? And then on the global RFP activity or lack thereof, is there anything going on terms of new potential projects that maybe are in the longer term, couple of quarters out time frame, that give you some optimism toward the long-term outlook?

I am going to answer the first part of it but I think Vikram and Rich will probably have some comments as well. Just in terms of did we see any delays, we didn’t see any significant project cancellations in the third quarter nor did we see any major orders that we had already received pushed out or delivery schedules pushed out. The phenomenon we seemed to have experienced is that anything that got through the approval cycle at our customer base in July and August had no issues. But when September ran around, we just could not get P.O.s approved by our customer base and things just seemed to slow down very dramatically and that really impacted us on the book/ship opportunities. Stuff that we could have received an order, shipped out and scored revenue on straight away, those are the types of orders that slowed down dramatically and impacted the quarter. In terms of RFP activity I will hand it over.

I think on your long-term question, I think the long-term prognosis still holds true. We are not seeing any customers that their long-term plans have changed. Based on the activity we are seeing, both from wire line and wireless carriers, I think the session border control space continues to create RFPs and projects and we are responding to them and winning those deals as they are coming our way. We are seeing continued activity on the enterprise side as well as some of the fixed mobile convergence activities that are driving integrated operators to convert services. So there are areas in our space which are continuing to create RFP activities and customer projects and we do believe that the long-term prognosis for our projects is very healthy and good.

There are two things. First of all, a significant part of our value proposition, as I mentioned, is that we really enable operators to reduce their opex. So to a large extent, when operators have to maintain three different silos, a voice silo, a data silo, and a video silo, that’s a very expensive proposition for an operator. I think that as time moves forward a lot of operators obviously have to homogenize that base and they have to basically share a common transport network and they want to have common sessions between the various silos. So clearly opex reductions are going to continue to require innovations to space. And the second thing that I think will drive growth really is, in terms of regulatory local bundling. That’s an activity which is still going on outside North America. And I think those are the kinds of forces here that are still in play. My earlier comment was if you look at legacy, for example, you look at the transition from 2G to 3G, or 3G to 4G, mobile voice, legacy tends to live longer. But in the end operators are going to be looking for ways to reduce their opex and I think the Sonus product platform basically is an enablement in doing that. And that’s where we are making our investments.

On the gross margin discussion, I have one clarification question. The large project that is coming through which will have a negative impact on gross margin, is that going to push the blended gross margin below the company’s 58% to 62% guidance or is it just that project in particular falls below the long-term range?

The answer is yes to both. This is a particularly low margin profile project for us. It is very heavily third-party pass through, which brought the margins down. We knew that when we initiated the project. But the project itself is fairly material in terms of its revenue and it does come from deferred into the P&L and will bring down below the 58% our blended rate.

Your next question comes from Greg Mesniaeff - Needham & Co. Greg Mesniaeff - Needham & Co.: Question on the macro level. When you look at your customers are you seeing any divergence of order activity between your tier-1 one customers, particularly AT&T, and your smaller tier-2 customers?

If you look at the slowdown in the quarter, you look at the last week or two of the quarter, basically it’s a pervasive across-the-board, uniform type of phenomenon. And I don’t think that that’s very different from what some of the other even larger providers of network infrastructure have found. So the answer is no. It’s very difficult to look at an inflection point in one quarter and make any kind of broad generalization about how tier-1’s and tier-2’s are going to behave. I really couldn’t draw any conclusion there.

The bulk of our orders come in month three of each quarter and obviously September was an extremely turbulent time in the capital markets and it seemed to have slowed down the release of any purchase orders in September. And it was broad-based. We see it in tier-1’s and tier-2’s and we see it domestically and we see it internationally. The fact is we don’t typically see that many orders in month one of a quarter so we see no recovery on that yet, so hence we’re moving forward with an assumption that this macroeconomic environment will continue for the foreseeable future. Greg Mesniaeff - Needham & Co.: And as you talk to your customers, realizing that there is clearly an overall slowdown across the board, are any of them telling you of any remaining pockets of strength or areas of resilience where spending continues to be, in relative terms at least, stronger than other areas?

I think the business level, the whole area of interconnectivity between wire line and mobile networks, I think is something that carriers will have to address in the coming year. Because, again, I think there are certain opex and business efficiencies that they could afford. But there may be some opportunities in some of the emerging markets where there is some particular [inaudible] that needs to get built out. I think that we are going to know a lot more probably as when we see the budgets finalized by our customers for 2009. I know that they are all in that process right now and we will know a lot more once that process is really completed and they set their budgets and their priorities for the coming year.

Your next question comes from Analyst for Kenneth Muth - Robert W. Baird & Co. Analyst for Kenneth Muth - Robert W. Baird & Co.: Can you provide a little more discussion on the nature of the partnerships that you mentioned you are looking at? Just Intel kind of strengthening the existing Motorola relationship, are you looking at similar types of OEM-type relationships or is it different types of relationships entirely that you are pursuing?

We have got a very nice portfolio of products, technology solutions and frankly we’ve got a great sales force. But they can’t reach everywhere on the globe. And certainly in an opex constrained environment. We want to look at ways we can reward our shareholders and grow the top line without incurring costs that are not commensurate with those opportunities. And therefore, I think we’re looking to partner with large, global infrastructure providers who have significant system integration service organizations. And you can imagine who those players are and you can image there are lots of discussions going on. I think Motorola, we continue to work with them on WiMax. Obviously if there are other opportunities we will certainly talk to them. But I mean, clearly, this is a strategy we are going to use on a go-forward basis. And I think this is an important part of the strategy irrespective of the downturn. I think that companies with great technology have got to find ways to get to market with a smaller SG&A foot print. Greg Mesniaeff - Needham & Co.: Just to clarify, you think this is more appropriate for the emerging markets or do you think is viable for penetrating the developed markets, also?

I think in the developed markets, I think we will look at it on a one-off basis. I have traveled extensively in my former role in the emerging markets and I think those are the kinds of places which are remote, which are hard to get to sometimes and we don’t have a service organization on the ground and that’s where we’re really looking to place those partnerships that work.

Your last question comes from Natarajan Subrahmanyan - Smh Capital.

On opex, you talked about some plans to reduce opex and I wanted to clarify that is over and above the elimination of the legal fees and if you could talk about broad time frames in which we should see a meaningful impact on opex. Also I know you are not providing specific guidance for the fourth quarter, given the environment, but the year-over-year declines you’re planning in the business, are they from a magnitude perspective similar to what we saw in the September quarter?

Let me give you the broad principles. The basic principles, we are going to right-size and realign the business to match the market opportunity. That’s the guiding principle. I think with respect to engineering, clearly we live in a universe where engineering is done globally and what we have to do is we have to make sure that we leverage all of our assets in the most appropriate way. So I think as we roll out our plan, as we go to our Board, and as we come onto the next conference call, we will be much more articulate in terms of giving you the specificity about the plan for 2009 and beyond.

I would say two parts to that. You asked how big a define we see going forward. We really aren’t in a position to give guidance for Q4 because the range of outcomes has been so wide on the top line. But what we said it would meaningfully less than it was in Q4 of last year, which was around $97.0 million. So we don’t see any kind of strength like that in the quarter. And on opex, I would say that legal fees we hope are a pretty much resolved issue at this stage. But we’re focused right across the business. We’re focused across all the functions and we’re not going to hesitate to do the things that we need to do to respond to the economy.

On a sequential basis do you think there is any kind of seasonality factor at all which would, given that Septembers results were impacted by similar factors, that you would be up sequentially or is it just at this point it’s really hard to call?

It’s too hard for us to call at this stage and then you also have the normal factor of when do certain items in deferred revenue come out of deferred revenue and hit the P&L. And when you combine those factors, we’re just not in a position to give you guidance. We would like to think that the market would stabilize in the fourth quarter and as we go into our Q4 earnings call we’re in a better position to give you outlook for 2009 and maybe more precise guidance, like we used to do on some of the opex lines, but we’re not in a position to do that right now.

That G&A legal fee expense of $5.0 million, since some of these are settled does it drop off sharply?

It will drop off fairly significantly from that level.

That does complete this morning’s financial results conference call. We would like to thank you again for joining us and we appreciate your interest in Sonus Networks.

This concludes today’s conference call. For a replay of today’s conference call please dial in 1-800-633-8284. For international callers, please dial 1-402-977-9140. The playback reservation number is 21397294.