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Executives

Tom Stanton - Chairman and Chief Executive Officer

Jim Matthews - Chief Financial Officer

Analysts

Scott Coleman - Morgan Stanley

Ehud Gelblum – JPMorgan

Vivek Arya - Merrill Lynch

Cobb Sadler - Deutsche Bank Securities

Marcus Kupferschmidt - Lehman Brothers

Nikos Theodosopoulos – UBS

Paul Bonenfant - Morgan, Keegan & Company

Raimundo Archibold - Kaufman Brothers

Brian Coyne - Friedman, Billings, Ramsey Group

Todd Koffman - Raymond James & Associates

Eric Buck - Brean Murray Carret & Co.

Paul Silverstein - Credit Suisse

ADTRAN, Inc. (ADTN) Q3 2007 Earnings Call October 16, 2007 10:30 AM ET

Operator

Good morning.  My name is Crystal.  At this time, I would like to welcome everyone to the third quarter 2007 earning release conference call.

During the course of the conference call, ADTRAN representatives expect to make forward-looking statements, which reflect management's best judgment based on factors currently known.  However, these statements involve risks and uncertainties, including the successful development and market acceptance of new products, degree of competition in the market for such products, the product and channel mix, component costs, manufacturing efficiencies, and other risks detailed in our annual report on Form 10-K for the year ending December 31, 2006 and Form 10-Q for the quarter ending June 3, 2007.  These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements which may be made during the call.

I would now like to turn the call over to Tom Stanton, CEO of ADTRAN. Please go ahead, sir.

Tom Stanton

Thank you for joining us for our third quarter 2007 conference call.  With me this morning is Jim Matthews, Senior Vice President and Chief Financial Officer.

Although carrier spending was below previously anticipated levels during quarter, we saw continued positive momentum, most notably in two of our growth businesses.  The third quarter saw Optical Access product revenues grow 37% year-over-year

and 41% sequentially.  Our networking products saw its fifth consecutive record revenue quarter led by a strong performance in the NetVanta product category.

Broadband access revenues were down, driven largely by reduced spending levels at two carrier customers.  HDSL product revenues remain steady with year-to-date revenues slightly ahead of the same period last year.

Expanding further on Optical Access, we continue to advance our positions across all carrier segments, adding to the momentum we saw in the second quarter.  Shipments increased to Tier 1, Tier 2 and other carriers, as we were able to expand applications and gain market share in our existing customers.  Moving forward, we continue to operationalize new applications awarded to us, and we expect to see new approvals in the months ahead.

As previously stated, Internetworking products had its fifth consecutive record revenue quarter.  We believe this is indicative of the early stage momentum that is building in our distribution channels. Although IT Gateways were hindered by a slowdown at one carrier customer, we achieved meaningful revenue growth in the NetVanta product line reflective of the broad-based support we are seeing as we work to leverage our carrier distribution channels and our growing dealer base.

In Broadband Access, our business continued to migrate from being purely subscriber and reach driven to a mix which includes bandwidth upgrade initiatives. We see this upgrade cycle as having a positive impact as we move forward into 2008. Although this migration should have a positive effect on both our outside plant and central office product lines, during the quarter, we began to see the impact most notably with our outside plant product lines.

Now let us move to our progress on other initiatives, which will have impact on our long term business.  As many of you on this call know, we have shown significant success in securing awards across all segments of the North American carrier market with the Total Access 5000 product line.  During the quarter, we continued to make meaningful progress towards capitalizing on the revenue potential of these awards.  Most notably, during the quarter, we began shipments to two Tier 2 carriers in North America.  Although I would characterize these as initial shipments, we believe these awards will evolve into meaningful revenues in 2008.  We remain on track for all of our Tier 1 activities and continue to anticipate shipments to Tier 1 carriers to commence in 2008.  As mentioned previously, we believe Tier 3 shipments will have a nearer-term impact as approval timelines are shorter.

Although we are very pleased with the number of awards to date in our Total Access 5000 product family, we should remind you that carriers require significant time to operationalize complex products like the Total Access 5000 platform, and the timing of these opportunities can vary significantly from currently anticipated dates.  Total Access 5000 platforms significantly broadens our range of Broadband Access products, as it is targeted to address the growing requirements for applications, including IPTV, Metro ethernet and the move towards IP-centric networks.

Lastly during the quarter, we finalized a contract with a major Central American carrier customer for FTTN.  This customer has launched a major fiber-to-the-node initiative and will be utilizing our fiber-fed Total Access 1100 series of products.  We

anticipate shipments to this carrier will begin in the fourth quarter.  As we mentioned previously, we believe our new products, including the Total Access 1100 and 5000 series products, will over time provide new opportunities for growth outside of our

traditional North American carrier base.

Going forward, we believe our growth businesses will continue to see strength, based on market-share gains related to both current and future product introductions and customer spending trends.  Our traditional businesses will continue to track on

a macro level with enterprise demand, wireless network expansions and wireline capacity upgrades.

I would like Jim Matthews to review our results for the third quarter 2007 and comments on the fourth quarter.  We will then open the Conference Call for

questions.  Jim?

Jim Matthews 

Thank you, Tom, and good morning, everyone.

Revenue for the third quarter was $123.8 million, compared to $123.7 million in Q2 of '07 and $132.7 million in Q3 of '06.  For the total company, Loop Access revenues were $56.3 million for the third quarter of 2007, compared to $55 million for Q2 of

'07 and $59.1 million for Q3 of '06.  Comparing Q3 of '07 to Q2 of '07, the increase in Loop Access product revenues was primarily attributable to an increase in HDSL revenues partially offset by a decline in Enterprise T1 revenues.  Comparing T3 L7 to the same period the prior year, the decrease was attributable to a decrease in enterprise T1 revenues and a decrease in HDSL revenues.

Carrier Systems revenues were $44.6 million for Q3 of '07, compared to $46.5 million in Q2 of '07 and $50 million for Q3 of '06.  Comparing Q3 of '07 to Q2 of '07 and Q3 of '06, the decrease in Carrier Systems revenues was primarily attributable to revenue

decreases in Broadband Access and M13 Multiplexer products.  These decreases were primarily related to lower spending levels at a Tier 1 and a Tier 2 carrier customer.

Business networking revenues for Q3 of '07 were $23 million, compared to $22.2 million in Q2 of '07 and $23.5 million in Q3 of '06. Comparing Q3 of '07 to Q2 of '07, the increase in business networking revenues was primarily attributable to record revenue levels for Internetworking products.  The record revenue levels of the Internetworking products were in spite of an overall decrease in spending levels at a Tier 2 carrier customer.  Comparing Q3 '07 to the same period the prior year, the decrease in business networking revenues was primarily attributable to a decline in traditional integrated access device revenues, partially offset by a increase in Internetworking product revenues.

HDSL product revenues were $47.2 million in Q3 of '07, compared to $46.3 million in Q2 of '07 and $49.6 million in Q3 of '06.  Comparing Q3 of '07 to the same period the prior year, the decline in HDSL revenues was primarily the result of an overall

decrease in the spending levels at a Tier 1 carrier customer.  Broadband access product revenues for Q3 of '07 were $18.2 million, compared to $20.2 million in Q3 of '07 and $23.9 million in Q3 of '06. The declines in broadband access product revenues are primarily attributable to an overall decrease in spending levels at a Tier 1 carrier customer and at a Tier 2 carrier customer. These decreases were partially offset by a significant increase in broadband access revenues at another Tier 1 carrier customer.

Optical Access revenues were $13.9 million for the third quarter '07, compared to $9.8 million in Q2 of '07 and $10.1 million in Q3 of '06.  The increase in Optical Access revenues were the result of market share gains across a broad range of customers.  Internetworking product revenues were a record $14.5 million in the third quarter of '07, compared to $13.6 million in Q2 of '07 and $9.2 million in Q3 of '06.  The increases in Internetworking products continues to be the result of accelerating order flow from persistent efforts to improve traditional enterprise channel focus and leverage carrier distribution.  We achieved this record revenue level in spite of a significant decrease in overall spending at a Tier 2 customer.

As a result of the above, network division revenues were $93.1 million and enterprise network division revenues were $30.7 million for Q3 of 2007.  International revenues

were $7.8 million for the third quarter of '07, compared to $8.3 million in Q2 of '07 and $8.1 million in Q3 of '06.

To provide the reporting of each of these categories, we have published them on our Investor Relations web page at www.adtran.com.

Gross margins were $59.9% of revenue for the third quarter of '07, compared to 59.5% for the second quarter of '07 and 59.3% for third quarter of '06.

Research and Development expenses were $18.7 million in Q3 of '07, compared to $19.5 million in Q2 of '07 and $18.3 million in Q3 of '06.  Comparing Q3 of '07 to Q2 of '07, the decrease in Research and Development expenses was primarily attributable to the timing of certain development expenses in our Broadband Access product category.  Comparing Q3 of '07 to the same period in the prior year, the increase in Research and Development expenses primarily relate to an increase in activities related to customer-specific development adverts.  Selling, General and Administrative Expenses were $25.3 million for Q3 of '07, compared to $26.2 million in Q2 of '07 and $25.9 million in Q3 of '06.

Other Income net of Interest Expense was $2.7 million in Q3 of '07, compared to $2.8 million in Q2 of '07 and $2.9 million in Q3 of '06.  The company’s income tax provision rate was 34.4% for the third quarter of '07, compared to 35.2%

for the second quarter of '07 and 35% for the third quarter of '06.  Earnings per share assuming dilution for Q3 of '07 were $0.31, compared to $0.28 for Q2 of '07 and $0.33 for Q3 of '06.

Inventories were $48 million at quarter end.  Net Trade Accounts Receivable were $69 million at quarter end resulting in DSOs of 51 days for the third quarter compared to 50 days for the third quarter of '06.

Net cash provided by operating activities came in at approximately $17.3 million for the three months ended September 30, '07.  Unrestricted cash and marketable securities totalled $246 million at quarter end after paying $6.2 million in dividends during the quarter and after repurchasing 1.77 million shares of common stock for $44.3 million during the quarter.

As you are aware, ADTRAN has traditionally seen sequential revenue decreases from the third quarter to the fourth quarter.  Although we believe that new product revenues may help offset this sequential, this seasonal decline, and that we will see year-over-year growth in the fourth quarter, given the current spending environment, we believe it is likely that revenues for the fourth quarter will be sequentially down. We also believe we will execute our historic operating model at the achieved-revenue level in the fourth quarter.  Things that may potentially impact results for the fourth quarter this year would be the following: continued stability of our traditional product revenues, spending levels at our largest Tier 1 carrier customer and at second tier carriers, revenue traction at new international customers, the adoption rate of the OPTI-6100 with Tier 1 carriers, the adoption rate of our Total Access 5000 platform, and continued growth in Internetworking revenues.

Tom, back to you.

Tom Stanton

Okay. Thanks, Jim.  Crystal, at this time we would like to open it up for questions.

Questions and Answers

Operator

Your first question comes from Scott Coleman with Morgan Stanley.

Scott Coleman - Morgan Stanley

Hi.  Thanks, guys.  Jim, I just want to go back over the guidance to make sure I understand it.  You are expecting a sequential decline for Q4, and you also talked about going back to a more typical margin environment.  Can you draw that out a little bit and help us understand what exactly you mean by that?

Jim Matthews

Well, Scott, I think what we mean for that is that recently we have seen gross margins in the high 50s range and over the past couple of years in the high 50s range, and we are anticipating that level of gross margins in the fourth quarter.

Scott Coleman - Morgan Stanley

Okay.

Jim Matthews

In terms of opex, no significant change really from the fourth.  We may have a slight uptick in R&D potentially to a point somewhere between our R&D Expenses in the second quarter and the third quarter.

Scott Coleman - Morgan Stanley

Okay.

Jim Matthews

SG&A, we believe, should stay pretty much in line.

Scott Coleman - Morgan Stanley

Okay, and so, from a pre-tax margin perspective, that would seem to imply something below the 25% level.  Is that what your expectations are at this point?

Jim Matthews

Well, it depends on revenue, Scott, but I think you can draw some reference to our operating levels at prior revenue levels.

Scott Coleman - Morgan Stanley

Okay.

Jim Matthews

Okay.

Scott Coleman - Morgan Stanley

Okay. Thanks for the clarification. And then maybe one more broad question.  Obviously the spending environment is a little tougher at this point than I think most were anticipating.  I am curious, Tom, what your thoughts are as to what is going on.  It seems like there are a lot of network builds going on, a lot of carriers, either it is 3G or telco video, yet spending levels remain somewhat depressed.  I am curious what your thoughts are as to why that might be and what is it that could possibly turn around the spending environment?

Tom Stanton

Yes, I can only speak to that in relation to our products and our customer base.  We saw a couple of things happen in the third quarter.  We had had a Tier 2 customer who just, significantly, the largest decline we saw in revenue was due to that one Tier 2 customer, who really put the brakes on their spending.  Rationale behind that is something that you'd really have to get from that customer, but what we have kind of modeled going forward is no change in the environment that we saw in the third quarter.

I hear as much as you do about the buildup on the wireless network and what is supposed to materialize.  I can just tell you that we did not see that in the third quarter.  The majority of our customer base, we had two customers that came in below where we expected our largest Tier 1 customer and that Tier 2 customer I previously mentioned.  The rest of the customer base was either flat or slightly up. I would not call it a robust environment by any means, but they were at least in the right direction.  Those other two just took a step backwards.

Scott Coleman - Morgan Stanley

Okay.  And then for this Tier 2 customer, it sounds like they are rethinking their business of being a distributor to Tier 3 customers.  If that indeed does happen, how quickly can you change your channel strategy, so that it is not disruptive to your business?

Tom Stanton

Very, very quickly.  We have had this happen in the past.  If you remember, some of the largest carriers were in distribution, and then we have had other ones realigned.  Even Tier 2 customers realigned their distribution strategies relatively recently in the last year and a half or so, and we have never really skipped a beat there.  So I am pretty confident that we have enough outlets to be able to move that business without missing anything.

Scott Coleman - Morgan Stanley

All right, guys. Thanks, I will pass it along.

Operator

Your next question comes from Ehud Gelblum with JPMorgan.

Ehud Gelblum - JPMorgan

Hi, Jim and Tom. Thanks.

First, housekeeping, any 10% customers, and how do we look at that? And then looking at the revenue shortfalls and where you did okay.  HDSL, by your numbers, was actually up a little bit, maybe not as much as you thought.  But broadband access

was weak sequentially, back down to Q1 levels.  Can you help just explain what the trends are there with respect to the customers that you said were weak, and so, why broadband access was kind of a roll off on regular DSL net adds?  Should we be looking at the net add growth that was sort of somewhat weak last quarter, and was that dovetailing into what you saw this quarter with DSL?

Tom Stanton

Sure. Let me, let Jim cover the 10% customers first.

Jim Matthews

Okay, Ehud, the 10% customers for the quarter were AT&T, coming in at 22%,.  That does include BellSouth.  Verizon came in at 14%, Embarc came in at 12%, and Qwest came in at 14%.

Ehud Gelblum - JPMorgan

Okay.

Tom Stanton

On HDSL, HDSL was sequentially up.  I would tell you that, historically, we have seen HDSL tic up higher than what we saw in the third quarter.  The majority of that, if not all of that difference, was in that one Tier 1 customer.  As far as broadband access is concerned, broadband access would have also been up if it were not for that Tier 1 and that Tier 2 customer.

As far as a shift in what they are doing, I will tell you that the biggest upside that we saw in our customer base had as much to do with bandwidth upgrades as anything else.  We have got customers out there now; one of them that is very engaged and others that are starting to get engaged with trying to increase the bandwidth capability of their base and offer what they believe to be a more competitive service.

But the one Tier 1, the largest Tier 1, that was actually down in DSL, I cannot really explain if there was any fundamental change.  I do not believe  so.  They have not communicated that to us.  The Tier 2 customer, that customer also does distribute, and I am not sure if that did not affect some things also.

Ehud Gelblum - JPMorgan

As you look at where your DSL and broadband access products are going, do you have confidence that the sector of DSL continues to be strong and it rebounds?  Or have you started looking at perhaps the fiber build starting to eat into some of your DSL business even though you do support some fiber, you are not in the core of the main fiber builds?  What I am trying to get at is are we seeing sort of a temporary decline because of still-merger-related types of issues, or could we be seeing sort of the beginning of a secular decline of standard DSL in favor of  (Voice Overlap)?

Tom Stanton

I think that what we have not seen in a year or so at least, well, I will say probably a year to year-and-a-half, has been broad-based initiatives on footprint expansion, which is where a lot of our business came from when we first got into the business three years ago or so.  I think what we are seeing now more is just net subscriber adds and seeing the real strength that we see now in going forward is people upgrading that bandwidth.

As to whether or not the fiber push is really affecting it, that bandwidth increase typically involves fiber.  So if I look at where we saw good strength this quarter, it was where we were actually starting to fiber-feed a lot of our 1100s, which, in effect, turns into a fiber-to-the-node product.  I also mentioned the fact that we run some business outside of the U.S.  Those are fiber-to-the-node, you know, fiber-based projects.  So if you were to ask me, is fiber to the prem affecting it?  I would still say other than Verizon, no.

Ehud Gelblum - JPMorgan

Okay, a couple quick other ones.  On the TA5000 timing and the Optical Access contracts timing, it sounds like they are still on track with your expectations for Q4 and Q1 of next year. Is that true with respect to where you expected those products to start

gaining serious traction?

Jim Matthews

Well, to be honest with you, the on track and Optical Access is tough to talk about at this point because it has been substantially slower than we had hoped it would be.  I was pretty happy about this quarter.

Ehud Gelblum - JPMorgan

Hey, you are still at 4 million.

Jim Matthews

Pardon?

Ehud Gelblum - JPMorgan

You are still at 4 million this quarter.  It looks like this quarter, Optical Access actually did quite well.

Jim Matthews

Yes, yes, you are right, but I am talking about if we were to go back a year or so ago.

Ehud Gelblum - JPMorgan

Right. But when we were, let us say, over the summer, what you were expecting then?

Jim Matthews

Exactly right, exactly right.  I am pretty happy with, this quarter turned in pretty good profits for Optical Access.  The fact that it was broad based, that we are actually winning market share pretty much across the customer base, was good. If you look

at the things that we have going on, we still have, there is one Tier 1 customer that we have not penetrated from a market base the way we want to, and that is still moving forward.  We have additional phases of deployment and a couple of other customers that are still moving forward right on track with where we had thought they were going to be one or two quarters ago.  So you are seeing us actually get market share in the applications that we have been approved in, and we still have those other applications that are yet to come.  So I would say, in general, we are very happy with this quarter on Optical Access.

Ehud Gelblum - JPMorgan

Going forward, you are still, as for what we were talking about over the summer, you are still on track for where Q4 next year goes?

Jim Matthews

Still on track with that, and I would say the same thing with Total Access 5000.

Ehud Gelblum - JPMorgan

Okay. That is terrific. Thanks so much.

Operator

Your next question comes from Vivek Arya with Merill Lynch.

Vivek Arya - Merrill Lynch

Thank you.  A couple of questions.  First on optical sales, your strongest growth area, the sales have been in this $9-$10 million range for the last six to eight quarters now, and suddenly, there is this huge bump to over $13 million.  I am just curious to know what happened this specific quarter?  Why did you suddenly see this kind of market share gains?

As you look out, do you expect sales to now sort of stabilize around this $13 million level, or could that be for from the growth from this level?

Tom Stanton

Well, we are absolutely expecting growth from this level.  The level of approvals and applications, the business that we have won, that we have not yet pushed through all of the approval process, there is still a significant amount of that out there, so we absolutely are expecting growth in this.

As far as the pop, the thing about the increase that we saw this quarter, it was very broad-based, so I think it is a matter of just consistently going out there.  As we get these things through the labs, winning market share in the field with these products, the question may revolve on and off also what is going to happen in fourth quarter.  I do not know what is going to happen in the fourth quarter.  We saw some seasonality in our Optical Access business in the fourth quarter of last year, so we do plan on additional market opportunities coming on in the fourth quarter.  Whether or not it offsets that seasonality, I really do not know.

Vivek Arya - Merrill Lynch

Okay.  The second thing, Tom, is --and this is probably just my ignorance-- but as you look at your traditional products, HDSL, T1 -related products and IAD products, I am under the impression that they are related more to spending by small, medium-sized businesses.  If that is the case, that segment should be relatively immune to carrier consolidation because it is not the carrier footprint that is driving those product sales.  It is really small, medium-sized businesses at those carriers.  So can you please help me better understand what the dynamics are?  That why should that segment be, why should your traditional products be impacted by carrier consolidation?

Tom Stanton

Well, on HDSL, I do not know if it is really impacted by carrier consolidation, except to the extent that sometimes as carriers consolidate, they re-look at inventory levels and even sometimes have a misstep in continuing of selling products.  I would also say on HDSL that the other thing that impacts HDSL is wireless spend, so kind of outside of the SMB.

The real impact that we talked about is in the IAD segment, and in the IAD segment we have seen an awful lot of consolidation.  As those properties have consolidated, sometimes the marketing plans of those properties will change in particular regions, and we can see an impact from that.  Although we hope that is near-term impact and the customers change their direction as they move forward in their plans.

The other thing that we have seen is inventory consolidation as one CLEC made by another CLEC.  We have seen them consolidate that inventory and then have to burn that inventory down.  And then we have seen some price compression over the last, let us say, year-and-a-half or so.  As these customers consolidate, they tend to want to fall to the lowest price that all of them are buying at, which you can understand.  So I think those are kind of the most easily visible things that would affect that business.

Vivek Arya - Merrill Lynch

So if you look out, say, 2007, your traditional products have been roughly flattish to decline slightly year-on-year.  Should we expect the same kind of trends in 2008 also? If you are thinking that spending conditions are not going to change dramatically, then we should expect a similar trend for your traditional product sales in 2008 also, right?

Tom Stanton

Yes, I could understand why you think that and I would not necessarily argue strongly against that because I do not know when the consolidation stops and how that may impact.  I definitely do not have a good feel as to when wireless access spending will actually tic up or if it will actually tic up, so those are kind of the, I would say wireless is probably the biggest wild card in that, as to whether or not we see an increase in bandwidth demand and actually bandwidth deployment to cell sites.  I would say of all of the pieces in that legacy product mix, that is probably the biggest variable.

One other thing to point out is we have an awful lot of products in this legacy product set, and if you look at the largest decline that we actually saw really was not in IADs.  It was actually in M13s, which are just very up and down quarter to quarter.

Vivek Arya - Merrill Lynch

Noted.  Just a last question, Tom, more bigger picture, strategic question. Do you think you are investing enough for the long term success of the business? That is, if you look at your business over the last six to eight quarters, sales growth has come down dramatically.  I understand the bulk of it is just the large exposure to U.S. carriers, and they have been going through some turbulence.  But as you look out the next year, two years, three years, are you investing appropriately?  Are you saying that, “Okay, should I be investing more in international opportunities,” as an example?  So just more of a bigger picture, more strategic question.  Thank you.

Tom Stanton

That is a good question. That is a question that we struggle with every month here in just trying to figure out what our operating model should be, and do we need to modify that model?  Do we have enough irons in the fire?  I would say the answer to that is yes, we are investing enough. If we have, we have communicated that if we see a need to increase R&D spending, for example, that we would do that.  We actually are up year-over-year. We believe that there will be growth going forward, so that we will continue to be able to fund increased activity.

We have also substantially increased, by the way, our international SGA spend, if you take a look at where we are today versus let us say two years ago, and we are starting to see some fruit in those areas.  So that is always a question that we look at.  There is no fear here to increase the spend level if we believe that in the long term interest of growing revenue and ultimately growing our value that we need to do that.  So that is really not what's keeping us from that.  It is just we do try to make sure that as we spend money, it is in the right areas.

Vivek Arya - Merrill Lynch

Got it. Thank you.

Operator

Your next question comes from Cobb Sadler with Deutsche Bank.

Cobb Sadler - Deutsche Bank Securities

Thanks a lot. You guided to down quarter-over-quarter Q4 revenue, and sometimes, HDSL reuse cycle in Q4 has kind of shifted you up a little bit.  Have you seen anything to date in the quarter that made you think that is going on in one of your major customer?

Tom Stanton

If I look at the AT&T spending level, I would have a hard time to believe that it is not going on, and because you know, there really has been no shift in strategy on the way that they are deploying T1s.  If I look at their revenue on HDSL versus the rest of our customer base, you kind of get the sense that they have to be at this point in time reusing products.  My general thought, though, is that they have kind of entered that mode some time in the period in the past, and they have been reusing products for quite some time.  So I would not expect some type of hiccup because of some increased reuse program going forward, because I think it is been going on.

Cobb Sadler - Deutsche Bank Securities

Great. Okay.  It looks like Qwest was up for you quarter-over-quarter.  Was that more optical or fiber to the premise, or can you say ?

Tom Stanton

It was more in the broadband area.

Cobb Sadler - Deutsche Bank Securities

Okay.  And then in '08, on the optical side, where do you think most of the growth? Are you seeing, are you expecting material upticks from Tier 1 customers, or is it  primarily going to be the Tier 2s?  And by speed too, is it going to be OC12 or OC48? And that is it. Thanks a lot.

Tom Stanton

We have seen some pick up already.  In fact, we saw some pretty strong pickup in the third quarter on OC48s, and we are seeing, you know, that is a business that basically did not exist.  So if you look at it on a percentage basis, my belief would probably be OC12 and OC 48 will, on a percentage basis, be a stronger uptick next year.  As far as where we see the growth across-the-board, but I would not, I would be surprised if Tier 1 carriers were not the highest percentage of growth in '08.

Cobb Sadler - Deutsche Bank Securities

Great. Thanks a lot.

Operator

Your next question comes from Marcus Kupferschmidt with Lehman Brothers.

Marcus Kupferschmidt - Lehman Brothers

Just want to clarify.  You talked about a new international win I think in Latin America.  Are you starting to factor that into some revenues in the fourth quarter?  When is that starting?  Can you give us a sense of how meaningful an opportunity this could be for ADTRAN in the next year?

Tom Stanton

Yes.  I mean as far as factoring in the fourth quarter, what we have in effect laid out is a fairly broad range, so you could imagine, at the low end of that range, there is not a whole lot factored in at the high end of that range.  It was a little bit more factored in.

There is absolutely the potential for it to be a meaningful customer.  Our reluctance is going to be the fact that it is a new customer. And they have communicated what their long term plans are.  We are in there with other vendors, so it is not like it is a full source award.  We will have to win business on a region-by-region basis, and we have already won business with that thought, with that concept in mind.  We fully expect to start shipping something broader.  But it has the potential to be very large, but here again, it is a new customer. We are going to have to win market share.

Marcus Kupferschmidt - Lehman Brothers

Okay, great.  Secondly, do you feel that in terms of the third quarter revenues, there is any pulls any pull through of any fourth-quarter business?  Or do you think that was just a standard kind of puts-and-takes in the business in the third quarter?

Tom Stanton

I would say we saw the standard operating method in the third quarter.

Marcus Kupferschmidt - Lehman Brothers

Great.  And then my last question would be about kind of the current state of the broadband business.  You clearly said you do not see there is any change in the fundamentals for DSL demand out there.  But nonetheless, you had two customers that seemed to really hurt your broadband business in the quarter.

Tom Stanton

Right.

Marcus Kupferschmidt - Lehman Brothers

Do you see inventory out there?  Do you think they just were overbuying at the beginning of the year?  Anything else to help us understand what is going on and why?

Tom Stanton

Well, yes. On the Tier 2 customer, I think we have a customer that also distributes product, so they have inventory for distribution.  As to what they end up doing as a distributor, that may impact what they do from the inventory perspective.  And so I can kind of understand that downtick a little bit more.  I think they also, that customer also periodically has project-oriented builds, and I think that they basically have curtailed those builds.

With our largest Tier 1 customer, I really cannot tell you.  The market share situation that we are in there has been very stable.  We are approved in particular applications, and other people are approved in other applications.  That has not shifted.  As to whether or not they had a buildup in inventory, I really do not believe so.  And I do not think that they, I think they have been a mode of not really inventorying this particular flavor of DSL for some time, so they were slow.  And I cannot really point to the exact reason, as to why they were particularly slow.  Although they also, they went through a consolidation here and had to deal with inventory levels with that consolidation.  But I cannot point to any particular reason, Marcus.

Marcus Kupferschmidt - Lehman Brothers

Okay. Thanks.

Operator

Your next question comes from Nikos Theodosopoulos with UBS.

Nikos Theodosopoulos – UBS

I have got just a couple of quick questions.  Do you have a relative percentage breakdown of the Tier 2 customer?  How much of the business they do with you is distribution versus deployment in their network?

Tom Stanton

No, we do not.

Nikos Theodosopoulos – UBS

Okay.

Tom Stanton

I can tell you our Tier 2 customers that do distribution are Embarc and Windstream.

Nikos Theodosopoulos – UBS

But do you think, I mean, are they mostly deploying in their network or do you think they mostly distribute the product?

Tom Stanton

That changes from quarter to quarter.  My sense is that Embarc, that both of those customers in normal quarters mostly deploy in their network.  But I would not say that it was 90/10.  It is probably more, and this is just an estimate, Nikos, but it probably varies from probably 50-70% in-network , out-of-network type of thing.

Nikos Theodosopoulos – UBS

Okay, that is good enough.  A question on the TA5000. I mean, it is right now probably a very small part of the overall broadband access business.  As you look out to 2008, if you were to look at the TA5000 business potential and say everything went well, how big could it be?  If everything continued to move slowly, how small could it be?  Could you give a range for that business next year?  Because that seems to be a big driver for your growth next year ,and I am just trying to get a sense of how would you bracket the opportunity for that product?

Tom Stanton

The problem you have is timing, which in a year period of time, and when you are dealing with these large carriers, as you know, a year seems like a long time.  Unless you are dealing with a large carrier, and then all of a sudden, it seems like a very short period of time.

But if you look at the opportunities that we have won, and let me talk about, more in general, the opportunities that we have won, without being able to tell you exactly when any particular carrier will start shipping, the opportunities that we have won are in the multiple tens of millions, and I mean multiple, not being two, tens of millions of dollars.  That is with opportunities that we have currently on or are in the lab with, or doing field trials with.  So they are very meaningful to our business.  The difficulty that we have is one with a carrier actually let the thing go out in the field and start being deployed.

And then in some of this business, if you look at things like ethernet-over-copper, there is a component of ethernet over copper which is dependent upon the carrier trafficking the service properly and selling the service.  So there is potentially a buildout phase, and then they need to go out in the market and sell the phase.  So that one is probably a little bit more difficult to actually forecast, because you have that lag period where they get to go out and sell, and they will probably win some deals and probably have deals in their pipeline today that will start shipping.  But then the long term, it has got to be built out by that marketing efforts of that particular carrier.  They are very bullish on it.  They think that it will, over time, be very significant to a company our size, probably any company.  But that will take time, and it is hard to judge.

Nikos Theodosopoulos – UBS

Okay.  So if I look out, let us say, two years from now, not next year but two years from now, based on the deals that you have won and the opportunity, this business should be $50-$100 million a year.  Is that reasonable?  I mean, your current broadband business is that size.  Your HDSL business is much higher than that.  Based on what you just said, it sounds like if I look out a couple of years, this should be somewhere in that range.  Is that fair?

Tom Stanton

Yes.  I am going to be real nervous to tie a number around that because of the variables associated with that.  I would say if you did not tie a time frame, if you look at the businesses that we have won, I would say that is not an unrealistic number.

Nikos Theodosopoulos – UBS

Okay.

Tom Stanton

And I would encourage, Nikos, you have got people that you can talk to at these different accounts and kind of get their sense.  But I do not think that is an unrealistic number.

Nikos Theodosopoulos – UBS

All right, great. Thank you.

Operator

Your next question comes from Simon Leopold with Morgan Keegan.

Paul Bonenfant - Morgan, Keegan & Company

This is Paul Bonenfant for Simon Leopold.  I will start with a housekeeping item or two, if I could.  If you have not already, could you give us stock-based compensation in the quarter, and if you guided toward a tax rate in the fourth quarter?

Jim Matthews

Okay, Paul.  The stock based compensation or the FAS 123(R) expense.  Cost of Sales for the quarter was $96 thousand.  Selling, General and Administrative Expense line was $1.023 million.  The Research and Development Expense line was $1.086 million.  The tax benefit for expenses associated with non-qualified options is $263 thousand.. Okay, so that would be a net after-tax expense of $1.942 million.  Paul, sorry your next question?

Paul Bonenfant - Morgan, Keegan & Company

I am sorry.  The tax rate in the fourth quarter?

Jim Matthews

Okay.  We are estimating that it would be somewhere between 34.5% to 35%.

Paul Bonenfant - Morgan, Keegan & Company

Okay.  You have talked about an essential, sequential decline in the fourth quarter.  Can you give us some thoughts on what you are thinking year-over-year; down flattish, up slightly?

Tom Stanton

Well, it depends on where we end up in that range in the fourth quarter.  Essentially though, if you take a look at the range, we have got to be in the mid-teens or something to be flat.  Essentially, that range is indicative of a flat year-over-year.  I am not going to argue about $5 million one way or another. Essentially, for a company our size, it is going to be a flat year.

Paul Bonenfant - Morgan, Keegan & Company

Okay, fair enough.  In terms of what drove optical growth.  I know you said you had some broad-based market share gains, but you did say that it was not about wireless.  Could you talk about the applications that did drive growth this quarter and how

you see them progressing into 2008?

Tom Stanton

Yes.  Probably, if I said it was not about wireless, I do not think that that would be accurate.  I think that what it was about was market share gains.  In those market share gains, some of those incumbent carriers were actually deploying in wireless and wireless areas.  So there is no doubt that the OPTI product line grew because of wireless activity.  It was wireless activity that, two quarters ago or three quarters ago, we just were not participating in.

Paul Bonenfant - Morgan, Keegan & Company

Okay.  Last question.  In terms of DSL, I do not know that we have talked much about independence.  Have they slowed demand for DSL?  If so, does it have to do with capex or demand or maybe they are studying alternatives watching the Tier 1s play out relative to their deep-fiber initiatives?

Tom Stanton

I would not say there is a slowdown.  I mean, the 5000 activity that we have seen to date has been about broadband DLC which includes DSL.  There was no doubt that at that Tier 1 carrier we saw a slowdown, but I would not say that was indicative of the entire market.  I would characterize it as stable at this point.

Paul Bonenfant - Morgan, Keegan & Company

Okay. Well, thank you for taking my questions.

Operator

Your next question comes from Raimundo Archibold with Coffman Brothers.

Raimundo Archibold - Coffman Brothers

Thank you.  One, Jim, I did not recall hearing if you, what the tax rate guidance was for Q4. But I also just wanted to touch base on your Internetworking business.  If you can give us kind of an update, where that stands in terms of channel expansion that you had started, I guess, late last year and the early part of this year?  Are you starting to see some traction out of those new partners?  How should we think about that impacting the growth going forward?

Jim Matthews

Okay, Ray. this is Jim, I will take your tax rate question.  We are estimating a tax provision rate for the fourth quarter to be in the range of, say, 34.5% to 35%.

Raimundo Archibold - Coffman Brothers

Okay.

Tom Stanton

As far as the channel expansion, the channel expansion actually is going very well.  We have two focuses in the efforts that we have in moving NetVanta forward, Internetworking forward, but more specifically with the channel expansion, I will talk about NetVanta.

One was our carrier-based initiative where we were trying to leverage the strong relations that we have with some of these largest carriers and to being able to move our Internetworking product line, and that has been very successful so far this year pretty much across-the-board.  There were some announcements that were out earlier this year.  I think a couple of them were some carriers have adopted our NetVanta product line and some of our Internetworking products, and those are running very smooth and are growing. So that is been a very positive piece.

The second piece is dealer-based growth and trying to get more dealers out there selling our NetVanta product line, and that has been successful as well.  Our NetVanta sales to that channel continue to grow, and they actually grew quarter to quarter, Q2 to Q3.  So I think both of those things are starting to, actually, I think we have seen that benefit actually through this last year, and third quarter was just another example of that.  We are going to continue on those.  We have no plans to change those.  In

fact we are kind of reinforcing some of what we are doing in the dealer base, and we will just continue to move forward with that.

The only thing that we have been reluctant to really say; we had very good growth in that area.  We are not trying to forecast some type of tipping point moment, where all of a sudden, we see stair-step growth in any particular quarter.  We are looking for just good consistent growth and so far we have been able to see that.

Raimundo Archibold - Coffman Brothers

Okay.  Just one follow-up question.  Can you give us how much of the business was non-U.S. this quarter?

Tom Stanton

Yes.  Sure, the international business was $7.8 million for the the quarter.

Raimundo Archibold - Coffman Brothers

Thank you.

Operator

Your next question comes from Brian Coyne with Friedman Billings.

Brian Coyne - Friedman, Billings, Ramsey Group

First of all, I was wondering if you could talk perhaps just quickly about the pricing environment.  In relation to your gross margin expansion, was it mostly mix what you saw in the third quarter and sort of given the strength of Optical and NetVanta? Or something else going on just in terms of your costs?

And then just following on that, if you are looking for gross margins to come in a little bit in the fourth quarter or the third quarter, again, is that mostly a mix issue?

Jim Matthews

Well, we did have a sequential increase in gross margin. A bit of that was mix. We did have overall higher sequential revenues in the new product areas, which was beneficial.  In the fourth quarter, we want to be very, very careful in the expectation that we set.  Typically our gross margins have been at the high 50s.  Whether or not we come in at 59.9, we really do not know.  It is going to be based on product mix and potentially channel mix and things of that nature.  So at this point, it is hard to say exactly where it is going to come in exactly. But again, we think it will be in the high 50s range.

Brian Coyne - Friedman, Billings, Ramsey Group

Okay, great.  Again, just sort of the pricing environment you expected, generally speaking?

Tom Stanton

The pricing environment has been, at least for our company and the products that we are selling, has been relatively stable.  I mean, we continue to be the aggressor in our growth areas, whether or not that is a NetVanta or Internetworking or Optical Access or Broadband Access, including the Total Access 5000.  So I think that to the extent that needle is moving downward is probably something that we are actually doing and trying to win market share, I would call it stable.

Brian Coyne - Friedman, Billings, Ramsey Group

Okay, great. And then just one other one.  You are expecting continued growth in the optical business from sort of the levels you saw in the third quarter, and a lot of that coming from market share gains.  I was wondering if you could talk just perhaps a little bit about what you are really doing in order to get that?  Would you say it is primarily, again as you mentioned, price as you are trying to get some of that share?  Or just better customer focus you would say?  Or perhaps something else?  Thanks.

Tom Stanton

Well, I think we have got strong relations with a lot of these carriers, but our competitors have strong relations, too.  In the Optical Access piece, I think the thing that we have been trying to bring to the table is, really revolves around total cost of ownership.  So if you look at our product set, and our product set as compared to our competitors' product set; not only is the product itself typically at a lower price point, but in the particular applications, for instance in sales side deployment, it is substantially lower when you factor in the labor cost, the cabinet cost and all of these other pieces that the carrier has to factor into when they are going out and deploying this.  So I think we do bring a good cost advantage.

The other thing that our Optical Access line brings is forward migratability towards ethernet, which is becoming more and more of a box that you have to check and even some carriers are starting to deploy.  So the fact that we have actually built this to where we could migrate fairly seamlessly into an ethernet environment, I think, has also been a big plus.

Brian Coyne - Friedman, Billings, Ramsey Group

That is great. Very helpful. Thanks again.

Operator

Your next question comes from Todd Koffman With Raymond James.

Todd Koffman - Raymond James & Associates

Thank you.  Can I just follow up on the market sizing of the TA5000?  If you look at the broadband segment, Tom, over the last, I do not know, three or four years, you built a phenomenally successful $80-million-a-year broadband business.  As the TA5000 ramps, and you said it is going to be provisioned for ethernet over copper and IPTV, and you threw out a number or maybe Nikos threw out a number.  How much of that cannibalizes the successful traditional DSL DSLAM deployment within this segment that you have really represent the bulk of that segment the last, I do not know, two or three years?

Tom Stanton

I can tell you, initially, that the cannibalization we will see is going to be very little, and where it cannibalizes is really in the Total Access 3000 product area. So say our old central office, I should not call it old, but our older central office DSLAM.  I think the 1100 series, which is more of a fiber-to-the-node product for carriers.  It is kind of a different animal in most applications. So I do not think it will really cannibalize what we got going on, and I think they are complementary.  A lot of carriers are looking at having the 1100 series products home-runned off of the 5000.

In the applications that we have been approved in today, where we have won awards, we have, a good segment of that, which is Broadband DLC.  We do not play in Broadband DLC today so that is POTS as well as DSL.  So I think that really, that is more incremental than detractive.

We also do IP ATM Internet working or Interworking, which has been a lot of potential as carriers try to migrate their products over to IP.  That one is incremental. We do not play in that space today/

Pure DSL, it would be, it would pull away.  The other piece I think over time that ethernet over copper will impact the HDSL product line.  I think that will take some tim,e and we will see that migrate as we typically do with these carriers.  But over time, that will pull away from HDSL.

Todd Koffman - Raymond James & Associates

Okay. So then just a quick follow-up then.  Is it largely.for the immediate term will not cannibalize, what is the outlook for the older broadband, DSL DSLAM deployments?  Is that business likely, I mean, it has been kind of steady for a while now.  Do you think it will hold steady?  Do you think it probably goes down?  The footprints seems to me to be largely built out and sub numbers are moderating.  Where does that business go?

Tom Stanton

Yes, I would definitely agree with what you just said there about the footprint.  The exuberance around growing footprint is not as strong today as it was two years ago; and where, I would fully expect our Total Access 3000, which is our central office DSLAM, to not see any growth.  I would expect our 1100 series, which is being driven by bandwidth upgrades and just incremental adds and now going out and increasing feeds to these customers, and being able to put the DSLAM at a reach that will actually allow higher speeds as well as fiber-feeding these DSLAMs, I would fully expect that to grow.  And then Total Access 5000 will definitely be growing.

Todd Koffman - Raymond James & Associates

Thank you very much. Good luck.

Operator

Your next question comes from Eric Buck with Brean Murray.

Eric Buck - Brean Murray, Carret & Co.

Tom, you mentioned that the range in terms of the guidance on the revenues for the quarter.  I guess I did not hear any numbers. Are you defining the range as higher than last year and lower than the third quarter?

Tom Stanton

I think that would be a good summary of it, yes.

Eric Buck - Brean Murray, Carret & Co.

Okay.  Turning to the again the Latin American deal that you have won, can you kind of talk about the margin profile there?  Is that something that you had to be more competitive than normal?  Or would that be something that, as it grows, should fall in line with the overall margin?

Tom Stanton

I would fully expect, as it grows, it will fall in line with the overall margin. Any time we launch a product like this, there is typically some startup costs that you have to do, but that is true with AT&T or Verizon or any of the rest of them, and we are typically able to manage through that.

Eric Buck - Brean Murray, Carret & Co.

Okay.

Tom Stanton

So I would expect it to gravitate towards what everything else is.

Eric Buck - Brean Murray, Carret & Co.

And then finally, just in terms of expense control.  You guys, it is amazing how well you did with the expenses this quarter given that the revenues came in below expectations.  I assume you have some programs already in place to kind of continue to focus on taking down expenses. And can you kind of talk about the longer trend, term trend there?

Tom Stanton

Yes.  Well, what we did really was, we had mentioned on previous calls that because of the award levels that we were able to achieve on the Total Access 5000, that we needed to increase our R&D, and we were adding some people, and we were going to just basically take a look at discretionary expenses and make sure that we are spending them in the right areas.  That is one of those things that once you put that in place will typically have legs to it.  It has kind of had legs from the first quarter, when we entered that initiative, all the way through now.

As we need to spend money, we are going to spend money.  I do not see a significant change really in the environment that we are today. You will see some expenses in R&D that will fall depending on what that expense is on one quarter boundary or another quarter boundary, which will cause fluctuations.  We will continue to manage it the same way.  I do expect over time, we will grow both SGA and R&D, and our revenues will continue to grow.  So I would characterize it as no substantial change in the way that we have been operating.

Eric Buck - Brean Murray, Carret & Co.

Okay, thanks.

Tom Stanton

All right. Thanks, Eric. Crystal?

Operator

Yes?

Tom Stanton

How about one more call?

Operator

Okay, your next question comes from Paul Silverstein with Credit Suisse.

Paul Silverstein - Credit Suisse

Thanks, Tom.  Just some clarifications, I apologize if you have already addressed these previously.  First off, on the ethernet over copper application, have you shipped any ethernet over copper whether to AT&T or Verizon?

Tom Stanton

We have not shipped any ethernet over copper in a revenue-producing mode to either of those two customers.

Paul Silverstein - Credit Suisse

You have not shipped any?

Tom Stanton

Have not.

Paul Silverstein - Credit Suisse

If you had the demand today if they placed orders, technically, could you ship it, or it is not fully formed yet?

Tom Stanton

We could.  And I will not say that we have not shipped ethernet over copper to any customer, because we have shipped ethernet-over copper to other customers.  We are still going through, we are not out of the valuation or the testing phase at the customers that you mentioned at this point.

Paul Silverstein - Credit Suisse

Okay.  Coming back to Nikos' question, I apologize.  I think I heard you say 50-70% revenue.  Is that from the distribution fees or is that the direct fees?

Tom Stanton

Yes.  Let me just caution; that is a rough, I mean, I think it does vary from time to time, but that would be, in a normal operating environment, what you would see from telos, from their operation, not their distribution fees.

Paul Silverstein - Credit Suisse

So again, I apologize. (Voice Overlap)

Tom Stanton

So the larger number, typically, is utilized internally within the operating company.

Paul Silverstein - Credit Suisse

Certainly.  All right.  So distribution would be 30-50%?

Tom Stanton

Yes.

Paul Silverstein - Credit Suisse

Okay.  TA3000, I am sure there is only so much detail you want to give us.  But can you give us a sense for how big that product is either in dollar amount or percentage of revenue?

To the outlook, I think you mentioned you do not expect much cannibalization of the product, but you do expect some.  At the same time, I think I heard you say that you expect it to be roughly flat year-over-year.

Tom Stanton

Well I do not think we got into that detail on the 3000, which is our central, mainly used as a central office DSLAM.  I mean, to the extent we see cannibalization in the 5000, I think that is where it will come from.  I do not know if I would characterize that as flat.  I think as the 5000, I think that is the area in DSL where the 5000 could have impact.  And that is varied from quarter to quarter, Paul. I think if you look historically, our central office DSLAMs have been anywhere from probably 40% of the revenue to 60%.  I would say that the fact that our largest, one of the bigger upticks that we saw this quarter in broadband DSL was for outside plan DSLAMs with a major bandwidth upgrades that are going on.  We will tell you that they are probably a little bit less than that this quarter.

Paul Silverstein - Credit Suisse

Okay.  Finally, maybe more an observation than a question, but I think there is a question here.  If I look over your last eight quarters, I think you did $135 million or thereabouts with the third quarter of '06.  You have not come close to that mark in any of the other six quarters, going back to the beginning of last year.  In fact, I think we could go back any further, last time, you had $140-plus.

I know you have had the AT&T integration issues with BellSouth and Cingular.  But I guess I am wondering, is there a larger issue?  You have some hot new products.  You are gaining markets with Optical Access now, it looks like with the TA5000.  DSLAMs have flattened out.  I guess I am trying to understand the exact issue.  Is this customer specific from where you sit?  Is it a larger issue in terms of having filled so much legacy exposure and the new products where it is still being too small in terms of overall revenue to offset the lack of in terms of overall capex?

Tom Stanton

Yes, I mean, I think there is an awful lot there that is just truthful.  If you look at when we hit a historic high, that high happened to be in a period of time where legacy products were hanging in there pretty well.  And then we had a couple of project-oriented things come in. We had Telstra come in.  And then we had a large at that time, I think it was Alltel on the Optical Access piece that came in that were project-oriented, that in effect, bolstered a couple of quarters. Those projects were done and gone, more especially Telstra probably than anything else.  At this point in time, where we really are is we have a legacy set of products that from quarter to quarter are lumpy, but we have not seen growth out of those products.  And then we have an awful large set of new products that are coming onboard.  Until those new products are coming onboard and contributing in a very meaningful way, the overall results are kind of absolutely significantly influenced by what that legacy product base does.

In that legacy product base, we have substantial market share, though our ability to go out and say, let us go grab more market share, whether that IADs or HDSL, is very limited. So until those newer products like the 5000, 1100 series of products, the NetVanta products, until those things actually weigh substantially more than the legacy products, or at least have enough growth coming in to offset that, I think that is indicative of what you saw this quarter.

Paul Silverstein - Credit Suisse

And so I know you have often referenced the fact that your visibility is not much more than ten days.  I take it, consistent with the comments you have just made, it is way too early for to you have visibility as to when you have more predictability into your business in terms of the new products, becoming a sufficient piece of business vis-a-vis the legacy that you have that predictability and there is a lot less lumpiness to be seen.

Tom Stanton

Yes, that is true.  The way that we are measuring ourselves is we do worry about the quarterly numbers in trying to make sure that we are as accurate and we are pushing as hard as we can.  But I will go back to the fact that we have won a substantial amount of business, and in fact to the point that we are really not losing an awful lot of business.  As new business opportunities come in, we are able to capitalize on those.  The timing of these things has been the difficult piece.

So you are right.  We do not have a whole lot of backlog.  The backlog piece worries you more quarter to quarter.  It does not really worry you as much long term.  The longer term thing that is difficult is figuring out when will AT&T or Verizon actually set things free, and that has just been historically difficult to forecast.

Paul Silverstein - Credit Suisse

Tom, one last question.  Putting aside the volatility from quarter to quarter, I understand that and appreciate it.  But in terms of HDSL and IADs to the extent they are still a decent piece of your business, it sounds like there is a larger issue beyond the volatility in terms of you do not know whether HDSL is flat 5% business or is it a down 10% to 15% business.  Same thing in your IADs.  (Voice Overlap)

Tom Stanton

Right, yes.  If you say, if you take out the comments you made at first, which is taking out the quarter to quarter business, I do not think it is hard to do the math.  I mean, where we are right now with HDSL year-to-date is just a flat business. I think we have tried to say that you need to look at HDSL on a quarter to quarter basis.  When you look at HDSL, look at it on a broader area, whether that be 12 months or whatever. And essentially, it has been flat. It has been flat for the last three years or so.  So no doubt, we would be surprised if we saw downtick over any period of time, any meaningful period of time by 15%.  Because that would be a change in what we have seen over the last few years, and we see no new piece of technology coming in and having that ability in a short period of time.

Paul Silverstein - Credit Suisse

Okay. Appreciate the insight. Thank you.

Tom Stanton

All right, well, thank you everybody for joining us on our conference call.  We look forward to talking to you again at the end of fourth quarter.  Thank you, Crystal.

Operator

You are welcome. This concludes today's conference call. You may now disconnect.

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