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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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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)

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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.

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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.
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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.]
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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
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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."]
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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
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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

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