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ADTRAN,Inc. (NASDAQ:ADTN)

Q3 2007Earnings Call

October 16, 2007, 10:30 a.m. ET

Executives

TomStanton - Chairman and Chief Executive Officer

JimMatthews - Chief Financial Officer

Analysts

ScottColeman - Morgan Stanley

EhudGelblum – JPMorgan

Vivek Arya- Merrill Lynch

Cobb Sadler- Deutsche Bank Securities

MarcusKupferschmidt - Lehman Brothers

NikosTheodosopoulos – UBS

PaulBonenfant - Morgan, Keegan & Company

RaimundoArchibold - Kaufman Brothers

Brian Coyne- Friedman, Billings, Ramsey Group

ToddKoffman - Raymond James & Associates

Eric Buck -Brean Murray Carret & Co.

PaulSilverstein - Credit Suisse

Operator

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

During the course of the conference call,ADTRAN representatives expect to make forward-looking statements, which reflectmanagement's best judgment based on factors currently known.  However, these statements involve risks anduncertainties, including the successful development and market acceptance ofnew products, degree of competition in the market for such products, theproduct and channel mix, component costs, manufacturing efficiencies, and otherrisks detailed in our annual report on Form 10-K for the year ending December31, 2006 and Form 10-Q for the quarter ending June 3, 2007.  These risks and uncertainties could causeactual results to differ materially from those in the forward-lookingstatements which may be made during the call.

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

Tom Stanton

Thank you for joiningus for our third quarter 2007 conference call. With me this morning is Jim Matthews, Senior Vice President and ChiefFinancial Officer.

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

and 41% sequentially.  Our networking products saw its fifthconsecutive record revenue quarter led by a strong performance in the NetVantaproduct category.

Broadband accessrevenues were down, driven largely by reduced spending levels at two carriercustomers.  HDSL product revenues remainsteady with year-to-date revenues slightly ahead of the same period last year.

Expanding further onOptical Access, we continue to advance our positions across all carriersegments, adding to the momentum we saw in the second quarter.  Shipments increased to Tier 1, Tier 2 andother carriers, as we were able to expand applications and gain market share inour existing customers.  Moving forward,we continue to operationalize new applications awarded to us, and we expect tosee 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 earlystage momentum that is building in our distribution channels. Although ITGateways were hindered by a slowdown at one carrier customer, we achievedmeaningful revenue growth in the NetVanta product line reflective of thebroad-based support we are seeing as we work to leverage our carrierdistribution channels and our growing dealer base.

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

Now let us move to ourprogress on other initiatives, which will have impact on our long termbusiness.  As many of you on this callknow, we have shown significant success in securing awards across all segmentsof the North American carrier market with the Total Access 5000 product line.  During the quarter, we continued to makemeaningful progress towards capitalizing on the revenue potential of theseawards.  Most notably, during thequarter, we began shipments to two Tier 2 carriers in North America.  AlthoughI would characterize these as initial shipments, we believe these awards willevolve into meaningful revenues in 2008.  We remain on track for all of our Tier 1activities and continue to anticipate shipments to Tier 1 carriers to commencein 2008.  As mentioned previously, webelieve Tier 3 shipments will have a nearer-term impact as approval timelinesare shorter.

Although we are verypleased with the number of awards to date in our Total Access 5000 productfamily, we should remind you that carriers require significant time tooperationalize complex products like the Total Access 5000 platform, and thetiming of these opportunities can vary significantly from currently anticipateddates.  Total Access 5000 platformssignificantly broadens our range of Broadband Access products, as it istargeted to address the growing requirements for applications, including IPTV, Metroethernet and the move towards IP-centric networks.

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

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

traditional NorthAmerican carrier base.

Going forward, webelieve our growth businesses will continue to see strength, based onmarket-share gains related to both current and future product introductions andcustomer spending trends.  Ourtraditional businesses will continue to track on

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

I would like JimMatthews to review our results for the third quarter 2007 and comments on thefourth quarter.  We will then open theConference Call for

questions.  Jim?

Jim Matthews 

Thank you, Tom, andgood morning, everyone.

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

'07 and $59.1 millionfor Q3 of '06.  Comparing Q3 of '07 to Q2of '07, the increase in Loop Access product revenues was primarily attributableto an increase in HDSL revenues partially offset by a decline in Enterprise T1revenues.  Comparing T3 L7 to the sameperiod the prior year, the decrease was attributable to a decrease inenterprise T1 revenues and a decrease in HDSL revenues.

Carrier Systemsrevenues were $44.6 million for Q3 of '07, compared to $46.5 million in Q2 of '07and $50 million for Q3 of '06.  ComparingQ3 of '07 to Q2 of '07 and Q3 of '06, the decrease in Carrier Systems revenueswas primarily attributable to revenue

decreases in BroadbandAccess and M13 Multiplexer products.  Thesedecreases were primarily related to lower spending levels at a Tier 1 and aTier 2 carrier customer.

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

HDSL product revenueswere $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 Q3of '07 to the same period the prior year, the decline in HDSL revenues wasprimarily the result of an overall

decrease in thespending 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 $23.9million in Q3 of '06. The declines in broadband access product revenues are primarilyattributable to an overall decrease in spending levels at a Tier 1 carriercustomer and at a Tier 2 carrier customer. These decreases were partiallyoffset by a significant increase in broadband access revenues at another Tier 1carrier customer.

Optical Access revenueswere $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.  Theincrease in Optical Access revenues were the result of market share gainsacross a broad range of customers.  Internetworkingproduct 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 productscontinues to be the result of accelerating order flow from persistent effortsto improve traditional enterprise channel focus and leverage carrierdistribution.  We achieved this record revenuelevel in spite of a significant decrease in overall spending at a Tier 2customer.

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

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

To provide thereporting of each of these categories, we have published them on our InvestorRelations web page at www.adtran.com.

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

Research andDevelopment expenses were $18.7 million in Q3 of '07, compared to $19.5 millionin Q2 of '07 and $18.3 million in Q3 of '06.  Comparing Q3 of '07 to Q2 of '07, the decreasein Research and Development expenses was primarily attributable to the timingof certain development expenses in our Broadband Access product category.  Comparing Q3 of '07 to the same period in theprior year, the increase in Research and Development expenses primarily relateto an increase in activities related to customer-specific development adverts.  Selling, General and Administrative Expenseswere $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 ofInterest Expense was $2.7 million in Q3 of '07, compared to $2.8 million in Q2of '07 and $2.9 million in Q3 of '06. The company’s income tax provision rate was 34.4% for the third quarterof '07, compared to 35.2%

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

Net cash provided by operatingactivities came in at approximately $17.3 million for the three months ended September 30, '07.  Unrestricted cash and marketable securitiestotalled $246 million at quarter end after paying $6.2 million in dividendsduring the quarter and after repurchasing 1.77 million shares of common stockfor $44.3 million during the quarter.

As you are aware,ADTRAN has traditionally seen sequential revenue decreases from the thirdquarter to the fourth quarter.  Althoughwe believe that new product revenues may help offset this sequential, thisseasonal decline, and that we will see year-over-year growth in the fourthquarter, given the current spending environment, we believe it is likely thatrevenues for the fourth quarter will be sequentially down. We also believe wewill execute our historic operating model at the achieved-revenue level in thefourth quarter.  Things that maypotentially impact results for the fourth quarter this year would be thefollowing: continued stability of our traditional product revenues, spendinglevels at our largest Tier 1 carrier customer and at second tier carriers,revenue traction at new international customers, the adoption rate of theOPTI-6100 with Tier 1 carriers, the adoption rate of our Total Access 5000platform, 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 questioncomes from Scott Coleman with Morgan Stanley.

Scott Coleman - Morgan Stanley

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

Jim Matthews

Well, Scott, I thinkwhat we mean for that is that recently we have seen gross margins in the high50s range and over the past couple of years in the high 50s range, and we areanticipating that level of gross margins in the fourth quarter.

Scott Coleman - Morgan Stanley

Okay.

Jim Matthews

In terms of opex, nosignificant change really from the fourth.  We may have a slight uptick in R&Dpotentially to a point somewhere between our R&D Expenses in the secondquarter 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 apre-tax margin perspective, that would seem to imply something below the 25%level.  Is that what your expectationsare at this point?

Jim Matthews

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

Scott Coleman - Morgan Stanley

Okay.

Jim Matthews

Okay.

Scott Coleman - Morgan Stanley

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

Tom Stanton

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

I hear as much as youdo about the buildup on the wireless network and what is supposed tomaterialize.  I can just tell you that wedid not see that in the third quarter.  The majority of our customer base, we had twocustomers that came in below where we expected our largest Tier 1 customer andthat Tier 2 customer I previously mentioned.  The rest of the customer base was either flator slightly up. I would not call it a robust environment by any means, but theywere at least in the right direction.  Thoseother two just took a step backwards.

Scott Coleman - Morgan Stanley

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

Tom Stanton

Very, very quickly.  We have had this happen in the past.  If you remember, some of the largest carrierswere in distribution, and then we have had other ones realigned.  Even Tier 2 customers realigned theirdistribution 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 enoughoutlets 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 questioncomes from Ehud Gelblum with JPMorgan.

Ehud Gelblum - JPMorgan

Hi, Jim and Tom.Thanks.

First, housekeeping, any10% customers, and how do we look at that? And then looking at the revenueshortfalls 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 helpjust explain what the trends are there with respect to the customers that yousaid were weak, and so, why broadband access was kind of a roll off on regularDSL net adds?  Should we be looking atthe net add growth that was sort of somewhat weak last quarter, and was thatdovetailing into what you saw this quarter with DSL?

Tom Stanton

Sure. Let me, let Jimcover 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 wassequentially up.  I would tell you that,historically, we have seen HDSL tic up higher than what we saw in the thirdquarter.  The majority of that, if notall 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 andthat Tier 2 customer.

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

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

Ehud Gelblum - JPMorgan

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

Tom Stanton

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

As to whether or notthe fiber push is really affecting it, that bandwidth increase typicallyinvolves fiber.  So if I look at where wesaw good strength this quarter, it was where we were actually starting tofiber-feed a lot of our 1100s, which, in effect, turns into a fiber-to-the-nodeproduct.  I also mentioned the fact thatwe run some business outside of the U.S.  Thoseare fiber-to-the-node, you know, fiber-based projects.  So if you were to ask me, is fiber to the premaffecting it?  I would still say otherthan Verizon, no.

Ehud Gelblum - JPMorgan

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

gaining serioustraction?

Jim Matthews

Well, to be honest withyou, the on track and Optical Access is tough to talk about at this pointbecause 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 4million.

Jim Matthews

Pardon?

Ehud Gelblum - JPMorgan

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

Jim Matthews

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

Ehud Gelblum - JPMorgan

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

Jim Matthews

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

at the things that wehave going on, we still have, there is one Tier 1 customer that we have notpenetrated from a market base the way we want to, and that is still movingforward.  We have additional phases ofdeployment and a couple of other customers that are still moving forward righton track with where we had thought they were going to be one or two quarters ago. So you are seeing us actually get marketshare in the applications that we have been approved in, and we still havethose other applications that are yet to come.  So I would say, in general, we are very happywith this quarter on Optical Access.

Ehud Gelblum - JPMorgan

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

Jim Matthews

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

Ehud Gelblum - JPMorgan

Okay. That is terrific.Thanks so much.

Operator

Your next questioncomes from Vivek Arya with Merill Lynch.

Vivek Arya - Merrill Lynch

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

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

Tom Stanton

Well, we are absolutelyexpecting growth from this level.  Thelevel of approvals and applications, the business that we have won, that wehave not yet pushed through all of the approval process, there is still asignificant amount of that out there, so we absolutely are expecting growth inthis.

As far as the pop, thething about the increase that we saw this quarter, it was very broad-based, soI 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 revolveon and off also what is going to happen in fourth quarter.  I do not know what is going to happen in thefourth quarter.  We saw some seasonality inour Optical Access business in the fourth quarter of last year, so we do planon additional market opportunities coming on in the fourth quarter.  Whether or not it offsets that seasonality, Ireally do not know.

Vivek Arya - Merrill Lynch

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

Tom Stanton

Well, on HDSL, I do notknow if it is really impacted by carrier consolidation, except to the extentthat sometimes as carriers consolidate, they re-look at inventory levels andeven sometimes have a misstep in continuing of selling products.  I would also say on HDSL that the other thingthat impacts HDSL is wireless spend, so kind of outside of the SMB.

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

The other thing that wehave seen is inventory consolidation as one CLEC made by another CLEC.  We have seen them consolidate that inventoryand then have to burn that inventory down.  And then we have seen some price compressionover the last, let us say, year-and-a-half or so.  As these customers consolidate, they tend towant to fall to the lowest price that all of them are buying at, which you canunderstand.  So I think those are kind ofthe 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 declineslightly year-on-year.  Should we expectthe same kind of trends in 2008 also? If you are thinking that spendingconditions are not going to change dramatically, then we should expect asimilar trend for your traditional product sales in 2008 also, right?

Tom Stanton

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

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

Vivek Arya - Merrill Lynch

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

Tom Stanton

That is a goodquestion. That is a question that we struggle with every month here in justtrying to figure out what our operating model should be, and do we need tomodify that model?  Do we have enoughirons in the fire?  I would say theanswer to that is yes, we are investing enough. If we have, we have communicatedthat if we see a need to increase R&D spending, for example, that we woulddo that.  We actually are upyear-over-year. We believe that there will be growth going forward, so that wewill continue to be able to fund increased activity.

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

Vivek Arya - Merrill Lynch

Got it. Thank you.

Operator

Your next questioncomes from Cobb Sadler with Deutsche Bank.

Cobb Sadler - Deutsche Bank Securities

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

Tom Stanton

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

Cobb Sadler - Deutsche Bank Securities

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

Tom Stanton

It was more in thebroadband area.

Cobb Sadler - Deutsche Bank Securities

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

Tom Stanton

We have seen some pickup already.  In fact, we saw some prettystrong pickup in the third quarter on OC48s, and we are seeing, you know, thatis a business that basically did not exist.  So if you look at it on a percentage basis, mybelief would probably be OC12 and OC 48 will, on a percentage basis, be astronger uptick next year.  As far aswhere we see the growth across-the-board, but I would not, I would be surprisedif Tier 1 carriers were not the highest percentage of growth in '08.

Cobb Sadler - Deutsche Bank Securities

Great. Thanks a lot.

Operator

Your next questioncomes from Marcus Kupferschmidt with Lehman Brothers.

Marcus Kupferschmidt - Lehman Brothers

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

Tom Stanton

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

There is absolutely thepotential for it to be a meaningful customer. Our reluctance is going to be the fact that it is a new customer. Andthey have communicated what their long term plans are.  We are in there with other vendors, so it isnot like it is a full source award.  Wewill have to win business on a region-by-region basis, and we have already wonbusiness with that thought, with that concept in mind.  We fully expect to start shipping somethingbroader.  But it has the potential to bevery large, but here again, it is a new customer. We are going to have to winmarket share.

Marcus Kupferschmidt - Lehman Brothers

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

Tom Stanton

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

Marcus Kupferschmidt - Lehman Brothers

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

Tom Stanton

Right.

Marcus Kupferschmidt - Lehman Brothers

Do you see inventoryout there?  Do you think they just wereoverbuying at the beginning of the year?  Anything else to help us understand what isgoing on and why?

Tom Stanton

Well, yes. On the Tier2 customer, I think we have a customer that also distributes product, so theyhave inventory for distribution.  As towhat they end up doing as a distributor, that may impact what they do from the inventoryperspective.  And so I can kind ofunderstand that downtick a little bit more.  I think they also, that customer alsoperiodically has project-oriented builds, and I think that they basically havecurtailed those builds.

With our largest Tier 1customer, I really cannot tell you.  Themarket 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 ininventory, I really do not believe so.  AndI do not think that they, I think they have been a mode of not reallyinventorying 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.  Althoughthey also, they went through a consolidation here and had to deal withinventory levels with that consolidation. But I cannot point to any particular reason, Marcus.

Marcus Kupferschmidt - Lehman Brothers

Okay. Thanks.

Operator

Your next questioncomes from Nikos Theodosopoulos with UBS.

Nikos Theodosopoulos – UBS

I have got just acouple of quick questions.  Do you have arelative percentage breakdown of the Tier 2 customer?  How much of the business they do with you isdistribution versus deployment in their network?

Tom Stanton

No, we do not.

Nikos Theodosopoulos – UBS

Okay.

Tom Stanton

I can tell you our Tier2 customers that do distribution are Embarc and Windstream.

Nikos Theodosopoulos – UBS

But do you think, Imean, are they mostly deploying in their network or do you think they mostlydistribute the product?

Tom Stanton

That changes fromquarter 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 anestimate, Nikos, but it probably varies from probably 50-70% in-network ,out-of-network type of thing.

Nikos Theodosopoulos – UBS

Okay, that is goodenough.  A question on the TA5000. Imean, it is right now probably a very small part of the overall broadbandaccess business.  As you look out to2008, if you were to look at the TA5000 business potential and say everything wentwell, how big could it be?  If everythingcontinued to move slowly, how small could it be?  Could you give a range for that business nextyear?  Because that seems to be a bigdriver for your growth next year ,and I am just trying to get a sense of howwould you bracket the opportunity for that product?

Tom Stanton

The problem you have istiming, which in a year period of time, and when you are dealing with theselarge 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 theopportunities that we have won, and let me talk about, more in general, theopportunities that we have won, without being able to tell you exactly when anyparticular carrier will start shipping, the opportunities that we have won arein the multiple tens of millions, and I mean multiple, not being two, tens ofmillions of dollars.  That is with opportunitiesthat 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 acarrier actually let the thing go out in the field and start being deployed.

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

Nikos Theodosopoulos – UBS

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

Tom Stanton

Yes.  I am going to be real nervous to tie a numberaround 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 anunrealistic 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 andkind of get their sense.  But I do notthink that is an unrealistic number.

Nikos Theodosopoulos – UBS

All right, great. Thankyou.

Operator

Your next questioncomes from Simon Leopold with Morgan Keegan.

Paul Bonenfant - Morgan, Keegan & Company

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

Jim Matthews

Okay, Paul.  The stock based compensation or the FAS 123(NYSE:R)expense.  Cost of Sales for the quarterwas $96 thousand.  Selling, General andAdministrative Expense line was $1.023 million. The Research and Development Expense line was $1.086 million.  The tax benefit for expenses associated withnon-qualified options is $263 thousand.. Okay, so that would be a net after-taxexpense of $1.942 million.  Paul, sorryyour 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 somewherebetween 34.5% to 35%.

Paul Bonenfant - Morgan, Keegan & Company

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

Tom Stanton

Well, it depends onwhere we end up in that range in the fourth quarter.  Essentially though, if you take a look at therange, we have got to be in the mid-teens or something to be flat.  Essentially, that range is indicative of aflat year-over-year.  I am not going toargue 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-basedmarket share gains, but you did say that it was not about wireless.  Could you talk about the applications that diddrive growth this quarter and how

you see themprogressing 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 sharegains.  In those market share gains, someof those incumbent carriers were actually deploying in wireless and wireless areas. So there is no doubt that the OPTIproduct line grew because of wireless activity.  It was wireless activity that, two quarters agoor 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 havetalked much about independence.  Havethey slowed demand for DSL?  If so, doesit have to do with capex or demand or maybe they are studying alternativeswatching the Tier 1s play out relative to their deep-fiber initiatives?

Tom Stanton

I would not say thereis a slowdown.  I mean, the 5000 activitythat we have seen to date has been about broadband DLC which includes DSL.  There was no doubt that at that Tier 1 carrierwe saw a slowdown, but I would not say that was indicative of the entiremarket.  I would characterize it asstable at this point.

Paul Bonenfant - Morgan, Keegan & Company

Okay. Well, thank youfor taking my questions.

Operator

Your next questioncomes from Raimundo Archibold with Coffman Brothers.

Raimundo Archibold - Coffman Brothers

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

Jim Matthews

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

Raimundo Archibold - Coffman Brothers

Okay.

Tom Stanton

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

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

The second piece isdealer-based growth and trying to get more dealers out there selling ourNetVanta product line, and that has been successful as well.  Our NetVanta sales to that channel continue togrow, and they actually grew quarter to quarter, Q2 to Q3.  So I think both of those things are startingto, actually, I think we have seen that benefit actually through this lastyear, 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 ofreinforcing some of what we are doing in the dealer base, and we will justcontinue to move forward with that.

The only thing that wehave been reluctant to really say; we had very good growth in that area.  We are not trying to forecast some type oftipping point moment, where all of a sudden, we see stair-step growth in anyparticular quarter.  We are looking for justgood 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 wasnon-U.S. this quarter?

Tom Stanton

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

Raimundo Archibold - Coffman Brothers

Thank you.

Operator

Your next questioncomes from Brian Coyne with Friedman Billings.

Brian Coyne - Friedman, Billings, Ramsey Group

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

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

Jim Matthews

Well, we did have asequential increase in gross margin. A bit of that was mix. We did have overallhigher 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 thehigh 50s.  Whether or not we come in at59.9, we really do not know.  It is goingto be based on product mix and potentially channel mix and things of thatnature.  So at this point, it is hard tosay exactly where it is going to come in exactly. But again, we think it willbe in the high 50s range.

Brian Coyne - Friedman, Billings, Ramsey Group

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

Tom Stanton

The pricing environmenthas been, at least for our company and the products that we are selling, hasbeen relatively stable.  I mean, we continueto be the aggressor in our growth areas, whether or not that is a NetVanta orInternetworking or Optical Access or Broadband Access, including the TotalAccess 5000.  So I think that to theextent that needle is moving downward is probably something that we areactually doing and trying to win market share, I would call it stable.

Brian Coyne - Friedman, Billings, Ramsey Group

Okay, great. And thenjust one other one.  You are expectingcontinued growth in the optical business from sort of the levels you saw in thethird quarter, and a lot of that coming from market share gains.  I was wondering if you could talk just perhapsa little bit about what you are really doing in order to get that?  Would you say it is primarily, again as youmentioned, 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 havegot strong relations with a lot of these carriers, but our competitors havestrong relations, too.  In the Optical Accesspiece, I think the thing that we have been trying to bring to the table is, reallyrevolves around total cost of ownership.  So if you look at our product set, and ourproduct set as compared to our competitors' product set; not only is theproduct itself typically at a lower price point, but in the particularapplications, for instance in sales side deployment, it is substantially lower whenyou factor in the labor cost, the cabinet cost and all of these other piecesthat the carrier has to factor into when they are going out and deploying this. So I think we do bring a good costadvantage.

The other thing thatour Optical Access line brings is forward migratability towards ethernet, whichis becoming more and more of a box that you have to check and even somecarriers are starting to deploy.  So thefact that we have actually built this to where we could migrate fairlyseamlessly into an ethernet environment, I think, has also been a big plus.

Brian Coyne - Friedman, Billings, Ramsey Group

That is great. Veryhelpful. Thanks again.

Operator

Your next questioncomes from Todd Koffman With Raymond James.

Todd Koffman - Raymond James & Associates

Thank you.  Can I just follow up on the market sizing ofthe TA5000?  If you look at the broadbandsegment, Tom, over the last, I do not know, three or four years, you built aphenomenally successful $80-million-a-year broadband business.  As the TA5000 ramps, and you said it is goingto be provisioned for ethernet over copper and IPTV, and you threw out a numberor maybe Nikos threw out a number.  Howmuch of that cannibalizes the successful traditional DSL DSLAM deploymentwithin this segment that you have really represent the bulk of that segment thelast, 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, andwhere it cannibalizes is really in the Total Access 3000 product area. So sayour old central office, I should not call it old, but our older central officeDSLAM.  I think the 1100 series, which ismore of a fiber-to-the-node product for carriers.  It is kind of a different animal in mostapplications. So I do not think it will really cannibalize what we got goingon, and I think they are complementary.  Alot of carriers are looking at having the 1100 series products home-runned offof the 5000.

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

We also do IP ATMInternet working or Interworking, which has been a lot of potential as carrierstry to migrate their products over to IP.  That one is incremental. We do not play inthat space today/

Pure DSL, it would be, itwould pull away.  The other piece I thinkover time that ethernet over copper will impact the HDSL product line.  I think that will take some tim,e and we willsee 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 aquick follow-up then.  Is it largely.forthe immediate term will not cannibalize, what is the outlook for the olderbroadband, DSL DSLAM deployments?  Isthat 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 builtout and sub numbers are moderating.  Wheredoes that business go?

Tom Stanton

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

Todd Koffman - Raymond James & Associates

Thank you very much.Good luck.

Operator

Your next questioncomes from Eric Buck with Brean Murray.

Eric Buck - Brean Murray, Carret & Co.

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

Tom Stanton

I think that would be agood summary of it, yes.

Eric Buck - Brean Murray, Carret & Co.

Okay.  Turning to the again the Latin American dealthat you have won, can you kind of talk about the margin profile there?  Is that something that you had to be morecompetitive than normal?  Or would thatbe 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 aproduct 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 weare typically able to manage through that.

Eric Buck - Brean Murray, Carret & Co.

Okay.

Tom Stanton

So I would expect it togravitate towards what everything else is.

Eric Buck - Brean Murray, Carret & Co.

And then finally, justin terms of expense control.  You guys,it is amazing how well you did with the expenses this quarter given that therevenues came in below expectations.  Iassume you have some programs already in place to kind of continue to focus ontaking down expenses. And can you kind of talk about the longer trend, termtrend there?

Tom Stanton

Yes.  Well, what we did really was, we had mentionedon previous calls that because of the award levels that we were able to achieveon the Total Access 5000, that we needed to increase our R&D, and we wereadding some people, and we were going to just basically take a look atdiscretionary expenses and make sure that we are spending them in the rightareas.  That is one of those things thatonce you put that in place will typically have legs to it.  It has kind of had legs from the firstquarter, when we entered that initiative, all the way through now.

As we need to spendmoney, we are going to spend money.  I donot see a significant change really in the environment that we are today. Youwill see some expenses in R&D that will fall depending on what that expenseis 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 SGAand R&D, and our revenues will continue to grow.  So I would characterize it as no substantial changein 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 morecall?

Operator

Okay, your nextquestion comes from Paul Silverstein with Credit Suisse.

Paul Silverstein - Credit Suisse

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

Tom Stanton

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

Paul Silverstein - Credit Suisse

You have not shippedany?

Tom Stanton

Have not.

Paul Silverstein - Credit Suisse

If you had the demandtoday if they placed orders, technically, could you ship it, or it is not fullyformed yet?

Tom Stanton

We could.  And I will not say that we have not shipped ethernetover copper to any customer, because we have shipped ethernet-over copper toother customers.  We are still goingthrough, we are not out of the valuation or the testing phase at the customers thatyou 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 thatthe 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 operatingenvironment, what you would see from telos, from their operation, not theirdistribution 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 detailyou want to give us.  But can you give usa sense for how big that product is either in dollar amount or percentage ofrevenue?

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

Tom Stanton

Well I do not think wegot into that detail on the 3000, which is our central, mainly used as acentral office DSLAM.  I mean, to theextent we see cannibalization in the 5000, I think that is where it will comefrom.  I do not know if I wouldcharacterize that as flat.  I think asthe 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 beenanywhere 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 outsideplan DSLAMs with a major bandwidth upgrades that are going on.  We will tell you that they are probably alittle bit less than that this quarter.

Paul Silverstein - Credit Suisse

Okay.  Finally, maybe more an observation than aquestion, but I think there is a question here.  If I look over your last eight quarters, Ithink you did $135 million or thereabouts with the third quarter of '06.  You have not come close to that mark in any ofthe 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 theAT&T integration issues with BellSouth and Cingular.  But I guess I am wondering, is there a largerissue?  You have some hot new products.  You are gaining markets with Optical Accessnow, it looks like with the TA5000.  DSLAMshave flattened out.  I guess I am tryingto understand the exact issue.  Is this customerspecific from where you sit?  Is it alarger issue in terms of having filled so much legacy exposure and the newproducts where it is still being too small in terms of overall revenue tooffset the lack of in terms of overall capex?

Tom Stanton

Yes, I mean, I think thereis 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 hangingin there pretty well.  And then we had acouple of project-oriented things come in. We had Telstra come in.  And then we had a large at that time, I thinkit 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 andgone, more especially Telstra probably than anything else.  At this point in time, where we really are iswe have a legacy set of products that from quarter to quarter are lumpy, but wehave not seen growth out of those products.  And then we have an awful large set of newproducts that are coming onboard.  Untilthose new products are coming onboard and contributing in a very meaningfulway, the overall results are kind of absolutely significantly influenced bywhat that legacy product base does.

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

Paul Silverstein - Credit Suisse

And so I know you haveoften referenced the fact that your visibility is not much more than ten days.  I take it, consistent with the comments youhave just made, it is way too early for to you have visibility as to when youhave 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 thatpredictability and there is a lot less lumpiness to be seen.

Tom Stanton

Yes, that is true.  The way that we are measuring ourselves is wedo worry about the quarterly numbers in trying to make sure that we are asaccurate 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 ofbusiness.  As new business opportunitiescome in, we are able to capitalize on those.  The timing of these things has been thedifficult piece.

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

Paul Silverstein - Credit Suisse

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

Tom Stanton

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

Paul Silverstein - Credit Suisse

Okay. Appreciate theinsight. Thank you.

Tom Stanton

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

Operator

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

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