UNITED STATES ~~SECURITIES AND EXCHANGE COMMISSION~~

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þx QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~FOR~~For ~~THE~~the ~~QUARTERLY~~quarterly ~~PERIOD~~period ~~ENDED~~ended ~~SEPTEMBER~~ September 30, ~~2005~~ 2007

ORor

o¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

~~COMMISSION~~Commission ~~FILE~~file ~~NUMBER~~number: 000-24597

CARRIER ACCESS CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE		84-1208770
Delaware		84-1208770
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
5395 Pearl Parkway, Boulder, CO		80301
(Address of principal executive offices)		(Zip Code)

(~~Address of principal executive offices~~303) ~~(Zip~~218-5455 ~~Code)~~

(Registrant’s telephone number, including area code)

Indicate by check mark whether the ~~registrant~~Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the ~~Securities~~ Exchange Act ~~of 1934~~ during the preceding 12 months (or for such shorter period that the ~~registrant~~Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ x No ¨ o

Indicate by check mark whether the ~~registrant~~Registrant is a large accelerated filer, an accelerated filer, ~~(as~~or ~~defined~~a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the ~~Securities~~ Exchange Act of(Check ~~1934~~one)~~. Yes~~: ~~þ No o~~

~~Indicate~~Large byaccelerated filer ¨ Accelerated ~~check mark whether the registrant is a shell company (as defined in Rule 12b~~filer x Non-2accelerated ~~of the~~filer ¨ ~~Securities Exchange Act of 1934). Yes o No þ~~

~~The~~Indicate ~~number~~by ofcheck ~~shares~~mark ~~outstanding~~whether of the ~~issuer’s~~Registrant ~~common~~is ~~stock,~~a ~~par~~shell ~~value~~company ~~$0.001~~(as ~~per~~defined ~~share,~~in ~~as of~~Rule ~~September 30,~~12b-2 ~~2005~~of ~~was~~the ~~34,681,789~~Exchange ~~shares~~Act). Yes ¨ No x

~~Carrier~~On ~~Access~~October 31, ~~Corporation~~ 2007, there were 34,700,640 shares of the Registrant’s common stock outstanding.

Table of Contents

	Page
	No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)		3
Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004		3
Condensed Consolidated Statements of Operations for the Three & Nine Months Ended September 30, 2005 and 2004 (Restated)		4
Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the Nine Months Ended September 30, 2005		5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004 (Restated)		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3. Quantitative and Qualitative Disclosures About Market Risk		33
Item 4. Controls and Procedures		33
PART II OTHER INFORMATION
Item 1. Legal Proceedings		34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		35
Item 3. Defaults Upon Senior Securities		35
Item 4. Submission of Matters to a Vote of Security Holders		35
Item 5. Other Information		35
Item 6. Exhibits		35
SIGNATURES		36
Certification of CEO Pursuant to Rules 13a-14(c) and 15d-14(a)
Certification of CFO Pursuant to Rules 13a-14(c) and 15d-14(a)
Certifications of CEO and CFO Pursuant to Section 906

Page 2

~~PART~~ CARRIER I.ACCESS ~~FINANCIAL~~CORPORATION ~~INFORMATION~~

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended September 30, 2007


		Page
	PART I

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	22

	PART II

Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Submission of Matters to a Vote of Security Holders	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
	Signatures	36

PART I

ITEM 1.

FINANCIAL STATEMENTS

~~Carrier~~CARRIER ~~Access~~ACCESS ~~Corporation~~CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS ~~(UNAUDITED)~~

(in thousands, except per share ~~amounts~~data)

	September 30,			December 31,
	September 30,2007			December 31,2006
	2005			2004
	(Unaudited)
ASSETS
Current Assets:
Current Assets
Cash and cash equivalents	$	4842,~~502~~119		$	4677,~~753~~948
Marketable securities available for sale		57,778			61,930
Investments in marketable securities		38,996			32,824
Accounts receivable, net of allowance for doubtful accounts of $754 and $359 in 2005 and 2004, respectively		13,476			11,949
Accounts receivable, net of allowance for doubtful accounts of $201 and $245 at September 30, 2007 and December 31, 2006, respectively		4,401			7,096
Income tax receivable		6779			~~161~~64
Deferred income taxes		~~311~~112			~~363~~112
Inventory, net		2816,~~866~~899			3218,~~009~~212
Prepaid expenses and other		29,~~481~~766			410,~~513~~503
Total current assets		~~151~~112,~~481~~372			~~157~~146,~~678~~759
Property and equipment, net of accumulated depreciation and amortization of $20,624 and $18,585 in 2005 and 2004, respectively		11,509			12,239
Property and equipment, net		9,698			10,471
Goodwill		78,~~588~~734			7,~~588~~614
Intangible assets, net of accumulated amortization of $2,520 and $1,580 in 2005 and 2004, respectively		5,582			6,412
Intangible assets, net		6,900			4,023
Other Assets		—			218
Total Assets	$	137,704		$	168,867
Total assets	$	176,160		$	184,135
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current Liabilities
Accounts payable	$	98,~~604~~281		$	118,~~246~~759
Accrued compensation payable		3,~~217~~260			24,~~917~~134
Accrued expenses and other liabilities		19,~~229~~624			19,~~116~~248
Deferred revenue		~~663~~592			~~352~~183
Total current liabilities		1421,~~713~~757			1522,~~631~~324
Deferred income taxes		~~311~~112			~~363~~112
Total liabilities		15,024			15,994
Total Liabilities		21,869			22,436
Stockholders’ equity:
Stockholders’ Equity
Common stock, $0.001 par value, 60,000 shares authorized, 34,682 shares issued and outstanding at September 30, 2005, and 34,479 shares issued and outstanding at December 31, 2004		35			34
Preferred stock, $0.001 par value, 5,000 shares authorized and no shares issued or outstanding at September 30, 2007 and December 31, 2006		—			—
Additional paid-in capital		188,670			188,147
Common stock, $0.001 par value, 60,000 shares authorized, 34,701 shares issued and outstanding at September 30, 2007, and 34,308 shares issued and outstanding at December 31, 2006		35			34
Accumulated deficit		(27,205	)		(19,910	)
Additional paid-in capital		190,857			187,885
Accumulated other comprehensive loss		(364	)		(130	)
Accumulated deficit		(75,063	)		(41,378	)
Total stockholders’ equity		161,136			168,141
Accumulated other comprehensive loss		6			(110	)
Total liabilities and stockholders’ equity	$	176,160		$	184,135
Total Stockholders’ Equity		115,835			146,431
Total Liabilities and Stockholders’ Equity	$	137,704		$	168,867

The accompanying notes are an integral part of these condensed consolidated financial statements.

~~Page~~1 3

~~Carrier~~CARRIER ~~Access~~ACCESS ~~Corporation~~ CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share ~~amounts~~data)

	Three Months Ended						Nine Months Ended
	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	September 30,						September 30,
	2007			2006			2007			2006
	2005			2004			2005			2004
Revenue, net of allowances for sales returns	$	7,353		$	16,083		$	23,656		$	62,897
				(As restated)						(As restated)
Cost of sales		8,353			9,862			21,060			34,387
Revenue, net of allowances for sales returns	$	20,862		$	21,284		$	54,483		$	79,372
Gross profit (loss)		(1,000	)		6,221			2,596			28,510
Cost of Sales		11,918			12,625			32,789			44,347
Operating expenses
Gross profit		8,944			8,659			21,694			35,025
Research and development		5,102			6,953			19,953			19,550
Operating Expenses:
Sales and marketing		3,416			3,855			10,651			10,791
Research and development		4,138			5,230			13,195			13,897
General and administrative		2,481			2,235			7,872			7,677
Sales and marketing		2,623			3,707			9,155			12,332
Bad debt expense (recoveries)		46			25			(42	)		(74	)
General and administrative		3,411			3,910			7,127			7,429
Insurance recoveries, net		—			(232	)		(610	)		(232	)
Bad debt expense (recoveries)		38			(165	)		424			(446	)
Restructuring charges		363			—			762			—
Restructuring charges		84			—			453			92
Intangible asset amortization		492			307			1,352			921
Intangible asset amortization		307			307			921			962
Total operating expenses		11,900			13,143			39,938			38,633
Total operating expenses		10,601			12,989			31,275			34,266
Loss from operations		(12,900	)		(6,922	)		(37,342	)		(10,123	)
Income (loss) from operations		(1,657	)		(4,330	)		(9,581	)		759
Interest income		1,101			1,458			3,643			3,813
Other income, net		820			621			2,286			1,331
Loss before income taxes		(11,799	)		(5,464	)		(33,699	)		(6,310	)
Income (loss) before income taxes		(837	)		(3,709	)		(7,295	)		2,090
Income tax benefit		(14	)		(18	)		(14	)		(25	)
Income tax		—			—			—			67
Net loss	$	(11,785	)	$	(5,446	)	$	(33,685	)	$	(6,285	)
Net income (loss)	$	(837	)	($	3,709	)	($	7,295	)	$	2,023
Loss per share
Income (loss) per share:
Basic and diluted	$	(0.34	)	$	(0.16	)	$	(0.98	)	$	(0.19	)
Basic and diluted	($	0.02	)	($	0.11	)	($	0.21	)	$	0.06
Weighted average common shares
Weighted average common shares outstanding:
Basic and diluted		34,619			34,084			34,458			33,921
Basic		34,671			34,054			34,608			32,430
Diluted		34,671			34,054			34,608			34,400

The accompanying notes are an integral part of these condensed consolidated financial statements.

~~Page~~2 4

~~Carrier~~CARRIER ~~Access~~ACCESS ~~Corporation~~ CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE

INCOME (LOSS) (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2005

(in thousands)

										Accumulated
					Additional					Other			Total
	Common Stock				Paid-in		Accumulated			Comprehensive			Stockholders’
	Shares Amount				Capital		Deficit			Income (loss)			Equity
Balances at January 1, 2005		34,479	$	34	$	188,147		($19,910	)		($130	)	$	168,141
Exercise of stock options		203		1		495		—			—			496
Stock-based compensation						28		—			—			28
Comprehensive loss:
Net change in unrealized loss on investments		—		—		—		—			(234	)		(234	)
Net loss		—		—		—		(7,295	)		—			(7,295	)
Total comprehensive loss														(7,529	)
Balances at September 30, 2005		34,682	$	35	$	188,670		($27,205	)		($364	)	$	161,136

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 5

Carrier Access Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

		Nine Months Ended September 30,
		Nine Months EndedSeptember 30,
		2005			2004
		2007			2006
					(As restated)
Cash flows from operating activities
Cash flows from operating activities:
Net loss		$	(33,685	)	$	(6,285	)
Net income (loss)		$	(7,295	)	$	2,023
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization expense			3,407			2,631
Depreciation and amortization expense			3,064			3,433
Provisions for inventory obsolescence			4,404			1,212
Provision for (recoveries of) doubtful accounts, net			424			(446	)
Stock-based compensation			2,309			1,824
Stock-based compensation			28			—
Changes in operating assets and liabilities:
Accounts receivable			(12,~~951~~791	)		51,~~042~~117
Income tax receivable			94			—
Inventory			(970	)		1,983
Inventory			3,145			(4,914	)
Prepaid expenses and other			(523	)		(247	)
Prepaid expenses and other			2,141			871
Accounts payable and accrued expenses			181			2,294
Deferred revenue			311			—
Net cash provided by (used in) operating activities			(22,086	)		4,529
Accounts payable and accrued expenses			(1,232	)		(1,166	)
Cash flows from investing activities
Net cash provided (used) by operating activities	(	$	1,271	)	$	4,843
Purchases of property and equipment			(810	)		(1,328	)
Cash flows from investing activities:
Proceeds from the sale of property and equipment			80			—
Purchases of property and equipment			(1,394	)		(1,938	)
Purchases of marketable securities available for sale			(45,611	)		(28,869	)
Proceeds from sales of property			—			368
Sales of marketable securities available for sale			39,800			41,815
Acquisition			—			(350	)
Payment for acquisition			(7,868	)		—
Purchases of marketable securities			(41,581	)		(79,189	)
Net cash provided by (used in) investing activities			(14,409	)		11,618
Sales and maturities of marketable securities available for sale			45,499			46,151
Cash flows from financing activities
Net cash provided (used) by investing activities		$	2,524		$	(34,958	)
Proceeds from exercise of stock options			658			1,116
Cash flows from financing activities:
Net cash provided by financing activities			658			1,116
Proceeds from stock offering			—			83,607
Effect of exchange rate changes on cash and cash equivalents			8			—
Stock issuance costs			—			(5,227	)
Net increase (decrease) in cash and cash equivalents			(35,829	)		17,263
Proceeds from exercise of stock options			496			2,148
Cash and cash equivalents at beginning of the period			77,948			55,279
Net cash provided by financing activities		$	496		$	80,528
Cash and cash equivalents at end of the period		$	42,119		$	72,542
Net increase (decrease) in cash and cash equivalents		$	1,749		$	50,413
Cash and cash equivalents at beginning of period		$	46,753		$	10,107
Cash and cash equivalents at end of period		$	48,502		$	60,520

The accompanying notes are an integral part of these condensed consolidated financial statements.

~~Page~~3 6

~~Carrier~~CARRIER ~~Access~~ACCESS ~~Corporation~~ CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~Note~~ 1. ~~Restatement~~Basis of ~~Consolidated~~Presentation and ~~Financial~~Significant ~~Statements~~ Accounting Policies

The ~~fiscal~~accompanying ~~2003~~unaudited ~~and~~condensed ~~fiscal 2004~~ consolidated financial statements for the three and ~~related~~nine ~~interim~~month ~~financial~~periods ~~information~~ended ofSeptember 30, ~~Carrier~~2007 ~~Access~~and ~~Corporation~~2006 ~~(the~~have ~~“Company”)~~been ~~were~~prepared ~~restated~~ in ~~the~~accordance ~~Company’s Annual~~with ~~Report~~accounting onprinciples ~~Form~~generally ~~10-K/A~~accepted ~~for~~in the ~~fiscal~~United ~~year~~States ~~ended~~of ~~December 31,~~America ~~2004~~ (~~the~~ “~~Form 10-K/A~~GAAP”), ~~filed with~~for ~~the~~interim ~~Securities~~financial ~~Exchange~~information ~~Commission~~and ~~(“SEC”)~~in onaccordance ~~August 2,~~with ~~2005~~the instructions to ~~correct~~Form ~~for~~10-Q ~~certain~~and ~~accounting errors.~~Article ~~The~~10 ~~restated financial statements include a number~~ of ~~adjustments~~Regulation ~~that~~S-X. ~~impacted previously reported revenue~~Accordingly, ~~costs~~these ofcondensed ~~sales,~~consolidated ~~accounts receivable and inventory reserves. The restated~~ financial statements ~~also~~do ~~included~~not ~~related~~include ~~adjustments~~all toof ~~deferred~~the ~~revenue,~~information ~~sales~~ and ~~marketing expenses,~~footnotes ~~income~~typically ~~taxes~~found ~~and~~in ~~a reallocation of~~ the ~~valuation~~audited ~~allowance~~consolidated onfinancial ~~deferred~~statements ~~income~~and footnotes ~~tax~~included ~~assets between~~in the ~~current~~Annual ~~and~~Report ~~non~~on ~~current portions. Other than filing the 2004~~ Form 10-K~~/A,~~ for the ~~Company has~~fiscal ~~not~~year ~~amended,~~ended ~~and does not anticipate amending~~December 31, ~~its~~2006 ~~previously~~(the ~~filed annual reports on~~ “Form 10-K or”) ~~its~~of ~~quarterly~~Carrier ~~reports~~Access onCorporation, ~~From~~and ~~10-Q~~its ~~for~~subsidiaries ~~any~~(the ~~periods~~“Company”). ~~However,~~In ~~this~~the ~~Form~~opinion ~~10-Q~~of ~~includes~~management, ~~restated~~all ~~information~~adjustments ~~for~~(consisting ~~the~~of ~~three~~those ~~and~~of ~~nine-month~~a ~~periods~~normal ~~ended~~recurring ~~September 30,~~nature) ~~2004.~~necessary ~~All~~for ~~2004~~the ~~amounts included~~fair ~~herein~~presentation ~~reflect~~of the ~~restatements;~~accompanying ~~September 30,~~condensed ~~2004~~consolidated ~~amounts~~financial ~~have~~statements ~~been restated; December 31, 2004 amounts~~ have been ~~previously reported as restated~~made. ~~A summary of the restatement adjustments follows.~~

~~Passage~~The condensed consolidated balance sheet at December 31, 2006 has been derived from the audited consolidated financial statements as of ~~Title~~that date but does not include all of the disclosures required by GAAP included in the Form 10-K.

~~Sales~~The ~~transactions~~Company ~~were~~disclosed ~~identified~~in ~~for~~Note ~~which~~1 ~~revenue~~to ~~should~~its consolidated ~~have~~financial ~~been~~statements ~~recognized~~included ~~upon~~in ~~delivery rather~~the ~~than~~Form ~~upon~~10-K ~~shipment.~~those ~~For~~accounting ~~certain~~policies that it considers to be significant in determining its results of ~~these~~operations ~~transactions,~~and ~~shipments~~financial ~~occurred~~position. atThere ahave ~~quarter~~been no material changes to or application of the ~~year~~accounting ~~end~~policies previously identified and described in the ~~deliveries~~Form ~~did~~10-K. ~~not~~The ~~occur~~accounting ~~until~~principles utilized by the ~~beginning~~Company ofin ~~the~~preparing ~~next~~its ~~accounting~~condensed ~~period. Adjustments~~consolidated ~~were~~financial ~~made~~statements conform in all material respects to ~~record~~GAAP. ~~the~~For ~~revenue~~further information, ~~and~~refer ~~related~~to ~~cost~~the ofconsolidated ~~sales~~financial ~~for~~statements ~~these~~and ~~transactions~~footnotes in the ~~appropriate~~ ~~periods~~Form 10-K.

~~Probability~~Use of ~~Collection~~ Estimates

~~Revenue~~The ~~was~~preparation ~~recognized~~of ~~upon~~financial ~~shipment~~statements ~~for~~in ~~sales~~conformity with GAAP requires management to ~~certain~~make ~~distributors~~estimates and assumptions that ~~were~~affect ~~not~~the ~~obligated~~reported amounts of toassets orand ~~could~~liabilities ~~not~~and ~~pay~~disclosure of contingent assets and liabilities at the ~~Company~~date ~~unless~~of the ~~Company’s~~financial ~~products~~statements, ~~were~~and ~~sold~~the ~~through~~reported toamounts anof ~~end~~revenues ~~user~~and expenses during the reporting period. IfSignificant estimates and judgments relied upon in ~~realization~~preparing these financial statements include allowances for doubtful accounts, inventory reserves, expected future cash flows to evaluate the recovery of ~~revenue~~long islived ~~contingent~~assets, ~~upon~~restructuring ~~sell-through~~and itother isrelated ~~not~~charges, ~~appropriate~~assumptions used to ~~recognize~~determine ~~revenue~~the ~~until~~fair ~~sell-through~~value ~~occurs~~of orstock ~~upon~~based ~~receipt~~compensation, contingent liabilities and the recoverability of ~~cash~~net deferred tax assets and related allowance. Actual results could differ from those estimates. The Company ~~made~~has ~~adjustments~~historically toexperienced, ~~recognize revenue~~and ~~for~~expects ~~sales~~to continue to ~~these~~experience, ~~distributors~~variability ~~upon~~in ~~receipt~~quarterly results. The condensed consolidated statement of ~~cash~~operations ~~rather~~for ~~than~~the ~~upon~~three ~~shipment~~and nine month periods ended September 30, 2007 are not necessarily indicative of ~~product.~~results for the full year ended December 31, 2007, or any other period.

~~Undelivered~~Loss ~~Elements~~ per Share

ItBasic ~~was~~earnings ~~determined~~per ~~that~~share ~~certain~~is ~~customer~~computed ~~arrangements~~by ~~contained~~dividing ~~obligations~~net toincome ~~provide training,~~or onloss ~~sight~~from ~~technical~~continuing ~~support~~operations ~~and~~by ~~other~~the ~~deliverables~~weighted ~~that~~average ~~had~~number ~~not~~of ~~previously~~common ~~been~~shares ~~accounted~~outstanding ~~for~~during asthe ~~separate~~period. ~~elements~~Diluted ofearnings ~~the~~per ~~arrangement.~~share ~~Generally~~from ~~accepted~~continuing ~~accounting~~operations ~~principles~~reflects in the ~~U.S. require~~additional ~~accounting~~dilution ~~for~~that ~~each~~could ~~separate~~occur ~~element~~if ~~and~~rights ~~that~~to aacquire ~~portion~~common ofstock ~~the~~were ~~arrangement~~exercised, ~~fee~~such beas ~~allocated~~ stock issuable pursuant to ~~each~~the exercise of ~~those~~stock ~~separable~~options ~~elements~~outstanding and ~~using~~shares anof ~~appropriate~~common ~~methodology~~stock subject to repurchase. The ~~Company~~treasury ~~made~~stock ~~adjustments to~~method ~~account~~is ~~for~~used to compute the ~~separate~~dilutive ~~elements~~effect ~~that~~of options and similar instruments. Potentially dilutive shares, ~~for~~including ~~some~~shares ~~arrangements~~of common stock that are subject to repurchase, ~~resulted~~are excluded infrom the ~~deferral~~computation of ~~a portion~~diluted ofearnings ~~the~~per ~~revenue~~share from ~~the~~continuing ~~arrangements~~operations when their effect is antidilutive. A reconciliation of weighted average shares used in computing amounts for basic and diluted loss per share from continuing operations is presented below. There were no adjustments to net loss in order to determine diluted loss per share (in thousands, except per share data):

Inventory Valuation


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Weighted average shares
Weighted average shares outstanding – basic		34,619			34,084			34,458			33,921
Net shares assumed issued through exercises of stock options		—			—			—			—

Average shares outstanding – diluted		34,619			34,084			34,458			33,921

Basic and diluted loss per share	$	(0.34	)	$	(0.16	)	$	(0.98	)	$	(0.19	)

It4 was discovered that the Company had reduced inventory reserves in situations in which it was determined that the products were saleable. Generally accepted accounting principles in the U.S. provide that once inventory has been written down below cost as of the close of a fiscal accounting period, it should not be written back up. As a result, the Company made adjustments to reduce inventory balances to the appropriate amounts at December 31, 2003 and 2004.

Summary

The following tables reconcile certain previously reported financial information to amounts as restated for the periods indicated, in thousands, except per share amounts:

Page 7

	Three Months			Nine Months
	Ended			Ended
	September 30,			September 30,
Statement of Operations	2004			2004
Revenues, as previously reported	$	21,561		$	80,952
Restatement adjustments:
Passage of title		330			(922	)
Probability of collection		(609	)		(609	)
Undelivered elements		2			(49	)
Total restatement adjustments		(277	)		(1,580	)
Revenues, as restated	$	21,284		$	79,372
Net income (loss), as previously reported	$	(3,827	)	$	2,432
Passage of title		226			(461	)
Probability of collection		(320	)		(320	)
Undelivered elements		(2	)		(60	)
Inventory valuation		214			432
Total restatement adjustments		118			(409	)
Net income, as restated	$	(3,709	)	$	2,023

As a result of the Company’s net losses for the three and nine month periods ending September 30, 2007 and 2006, all potentially dilutive securities were antidilutive and therefore were excluded from the computations of diluted loss per share. The number of shares excluded from the computations of diluted loss per share because their effect was antidilutive totaled approximately 2,167,500 and 2,379,200 as of September 30, 2007 and September 30, 2006, respectively.

	Three Months			Three Months			Nine Months		Nine Months
	Ended			Ended			Ended		Ended
	September 30,			September 30,			September 30,		September 30,
	2004			2004			2004		2004
	(as previously			(as restated)			(as previously		(as restated)
Statement of Operations	reported)						reported)
Revenue	$	21,561		$	21,284		$	80,952	$	79,372
Cost of sales		13,024			12,625			45,530		44,347
Gross profit		8,537			8,659			35,422		35,025
Sales and marketing		3,703			3,707			12,320		12,332
Total operating expense		12,985			12,989			34,254		34,266
Income (loss) from operations		(4,448	)		(4,330	)		1,168		759
Income before taxes		(3,827	)		(3,709	)		2,499		2,090
Net income		(3,827	)		(3,709	)		2,432		2,023
Per-share amounts:
Basic earnings per share	$	(0.11	)	$	(0.11	)	$	0.07	$	0.06
Diluted earnings per share	$	(0.11	)	$	(0.11	)	$	0.07	$	0.06

Comprehensive Loss

	Quarter Ended
	Nine Months
	Ended			Nine Months
	September 30,			Ended
	2004			September 30,
	(as previously			2004
Statement of Cash Flows	reported)			(as restated)
Net income	$	2,432		$	2,023
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Changes in operating assets and liabilities:
Accounts receivable		3,631			5,042
Inventory		(3,521	)		(4,914	)
Accounts payable and accrued expenses		(1,699	)		(1,166	)

The following table presents the components of comprehensive loss (in thousands):

Page 8


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Net loss	$	(11,785	)	$	(5,446	)	$	(33,685	)	$	(6,285	)
Other comprehensive income (loss):
Net change in unrealized gain on available for sale securities		59			157			93			203
Net change in cumulative foreign currency translation gain		2			—			21			—

Comprehensive loss	$	(11,724	)	$	(5,289	)	$	(33,571	)	$	(6,082	)

Warranty Costs

The Company provides for the estimated costs of product warranties at the time revenue for the product is recognized. The specific terms and conditions of the warranties vary depending on the specific product sold and the terms of the customer purchase agreements. In the case of hardware, our warranties generally start from the delivery date and continue for up to five years. Software products generally are under warranty for 90 days from the date of shipment. Our warranty liability for our software is limited to “patches” and “bug” fixes that are offered as part of, and covered by, our standard product warranty. The Company accrues for warranty obligations based on historical experience and estimates of future warranty costs. Charges and accruals to the warranty liability, which is reported as a component of “accrued expenses and other liabilities” in our condensed consolidated balance sheets, during the periods presented, are as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Product warranty liability beginning balance	$	1,390		$	1,041		$	1,534		$	709
Add: Current period accruals		337			700			863			1,779
Deduct: Current period charges		(290	)		(398	)		(960	)		(1,145	)

Product warranty liability ending balance	$	1,437		$	1,343		$	1,437		$	1,343

Restructuring Costs

Restructuring costs, which include employee termination benefits, contract termination costs, asset impairments and other restructuring costs are recorded at estimated fair value. The amounts for restructuring costs are based upon certain key estimates, including the timing of employees leaving the company, the terms that may be negotiated to exit contractual obligations, and the realizable value of certain assets to be disposed of, among others.

The Company entered into a restructuring plan effective December 2002 designed to improve future operating performance and position the Company for earnings growth in future periods, consistent with anticipated revenues. Included in this plan were employee termination costs, facility closures or downsizing, and disposal of excess or unused assets. In connection with the restructuring, the Company accrued $2.0 million in December 2002.

In April 2007, the Company announced a restructuring plan to consolidate facilities, restructure and downsize some of its remote development centers and eliminate contractors to reduce research and development costs. The Company incurred restructuring charges of $172,000 and $571,000 under the April 2007 plan for the three and nine month periods ended September 30, 2007, respectively, consisting of employee termination and relocation costs and asset relocation costs.

In July 2007, the Company announced a restructuring plan intended to better align expenses with current revenues. The restructuring plan includes a focus on key customers and product lines, consolidation of management positions, and a further and accelerated research and development (“R&D”) transition to Carrier Access’ Shanghai development center. For the three month period ended September 30, 2007, the Company incurred restructuring charges of $191,000 under the July 2007 plan, consisting solely of employee termination costs.

~~Note~~At 2.September 30, ~~Summary~~2007, ofthe ~~Significant~~remaining ~~Accounting~~accrued ~~Policies~~restructuring liability, which is reported as part of “accrued expenses and other liabilities” in our condensed consolidated balance sheets, consisted of remaining lease payments on vacated facilities and employee termination costs, as follows (in thousands):

a. Business and Basis of Presentation. The Company designs, manufactures and sells broadband access equipment to wireline and wireless carriers. The products are used to upgrade capacity and provide enhanced services to wireline and wireless communications networks. The products also enable our customers to offer enhanced voice and data services, delivered over multiple technologies, which historically have been offered onto separate networks, on a single converged network. The Company designs products to enable our customers to deploy new revenue-generating voice and data services, while lowering their capital expenditures and ongoing operating costs. The Company operates in one business segment and substantially all of its sales and operations are domestic.


	Accrued Restructuring Liability
Balance at January 1, 2006	$	242
Adjustments to reserve		—
Cash payments and other uses		(125	)

Balance at December 31, 2006	$	117
Adjustments to reserve		—
Cash payments and other uses		(32	)

Balance at March 31, 2007	$	85
Adjustments to reserve		399
Cash payments and other uses		(395	)

Balance at June 30, 2007	$	89
Adjustments to reserve		363
Cash payments and other uses		(413	)

Balance at September 30, 2007	$	39

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the SEC2. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC regulations. The unaudited condensed consolidated financial statements reflect all adjustments and disclosures that are, in the opinion of management, necessary for a fair presentation. All such adjustments are of a normal recurring nature. Certain amounts in the 2004 consolidated financial statements have been reclassified to conform to the 2005 presentation. Management does not believe the effects of such reclassifications are material. The results of operation for the interim period ended September 30, 2005 are not necessarily indicative of the results that may be expected for the full year or any fiscal quarter. For further information, refer to the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10Stock-~~K/A~~Based ~~for~~Compensation ~~the year ended December 31, 2004.~~

~~The~~Effective ~~preparation~~January 1, of2006, ~~consolidated~~the ~~financial~~Company ~~statements~~adopted inthe ~~conformity~~fair ~~with~~value ~~accounting~~recognition ~~standards generally~~provisions ~~accepted~~of inStatement ~~the~~of ~~United~~Financial ~~States~~Accounting ofStandard ~~America~~123(R) ~~requires~~“Share-Based ~~management~~Payment” to(“SFAS ~~make~~123(R)”) ~~estimates~~using ~~and~~the ~~assumptions~~modified ~~that~~prospective ~~affect~~transition ~~the~~method. ~~reported~~Under ~~amounts~~the ofmodified ~~assets~~prospective ~~and~~transition ~~liabilities~~method, ~~and~~compensation ~~disclosures~~cost ~~of contingent~~recognized ~~assets~~includes: ~~and~~(a) compensation ~~liabilities~~cost atfor ~~the~~all ~~date~~share-based ofpayments ~~the~~granted ~~consolidated~~prior ~~financial~~to, ~~statements~~but ~~and~~not ~~the reported~~yet ~~amounts~~vested as of ~~revenue~~January 1, ~~and~~2006, based ~~expenses~~on ~~during~~ the ~~reporting~~grant ~~period.~~date ~~Significant~~fair ~~estimates~~value ~~include accounts~~estimated ~~receivable~~in ~~and~~accordance ~~inventory~~with ~~reserve calculations,~~ the ~~estimated~~original ~~useful~~provisions ~~lives~~ of ~~depreciable~~ SFAS No. 123, and ~~amortizable~~(b) compensation ~~assets,~~cost asfor ~~well~~all asshare-based ~~methods~~payments ~~used~~granted tobeginning ~~estimate~~January 1, ~~contingencies~~2006, ~~and~~based ~~assumptions~~on ~~regarding~~ the grant date fair value. estimated ~~Actual~~in ~~results~~accordance ~~could~~with ~~differ~~the ~~from~~provisions ~~those~~of ~~estimates~~SFAS 123(R).

b.Compensation expense under SFAS 123(R) reduced our pre-tax operating results and increased our net losses for the three and nine month periods ended September ~~Earnings~~30, ~~Per~~2007 ~~Share~~by $907,000 and $2,309,000, respectively. ~~Basic~~This ~~earnings~~expense increased basic and diluted losses per share by $(~~“EPS”~~0.03) isand ~~computed~~$(0.07), bycompared ~~dividing~~to ~~net~~reported ~~income or~~basic ~~loss~~and bydiluted ~~the~~losses ~~weighted~~per ~~average~~share ~~number~~ of ~~common~~$(0.34) ~~shares~~and ~~outstanding~~$(0.98) ~~during~~for the ~~period~~three and nine month periods ended September 30, 2007, respectively. ~~Diluted~~For ~~EPS~~the three and nine month periods ended September 30, 2006 the increase in net losses due to stock-based ~~reflects~~compensation expense was $639,000 and $1,823,000, respectively. This expense increased basic ~~EPS~~and ~~adjusted~~diluted losses per share by $(0.02) and $(0.05), compared to reported basic and diluted losses per share of $(0.16) and $(0.19) for the ~~potential~~three ~~dilution~~and nine month periods ended September 30, ~~computed~~2006, ~~using~~respectively. The Company did not recognize a tax benefit from share-based compensation expense because the ~~treasury~~Company ~~stock~~considers ~~method~~ it more likely than not that ~~could~~the ~~occur~~related ifdeferred ~~securities~~tax orassets, ~~other~~which ~~contracts~~have tobeen reduced ~~issue~~in ~~common~~full by a valuation allowance, will not be realized. The following table summarizes stock-based ~~were~~compensation ~~exercised~~expense orrecorded ~~converted~~ under SFAS 123(R) for the three and ~~resulted~~nine inmonth periods ended September 30, 2007 and 2006, and its allocation within the ~~issuance~~condensed consolidated statements of ~~common~~operations ~~stock.~~ (in thousands):

A reconciliation of the weighted average shares used in computing basic and diluted earnings (loss) per share amounts is presented below. There were no adjustments to net income (loss) in order to determine diluted earnings (loss) per share.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Cost of sales	$	54	$	35	$	100	$	112

Research and development		232		187		537		559
Sales and marketing		229		228		625		550
General and administrative		392		189		1,047		603

Stock-based compensation expense included in operating expenses		853		604		2,209		1,712

Total stock-based compensation expense	$	907	$	639	$	2,309	$	1,824

	Three Months Ended				Nine Months Ended
	September 30,				Sept 30,
	2005		2004		2005		2004
Weighted-average shares
Average shares outstanding-basic		34,671		34,054		34,608		32,430
Shares assumed issued through exercises of stock options		—		—		—		1,970
Average shares outstanding-diluted		34,671		34,054		34,608		34,400
Number of shares excluded from computation because their effect is anti-dilutive		1,365		1,165		1,396		687

Due to the company’s net loss for the three and nine months ended September 30, 2005, all potentially dilutive securities are considered anti-dilutive and therefore the number of shares used to compute dilutive earnings per share is equal to the basic weighted average shares outstanding for the period.

c. Stock-Based Compensation. The following table summarizes relevant information regarding reported results under the intrinsic value method of accounting for stock awards, with supplemental information provided as if the fair value recognition provisions of SFAS No. 123, Accounting for Stock Based Compensation, had been applied for the three months and nine months ended September 30, 2005 and 2004 (in thousands, except per share amounts):

Page 9

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
				As restated						As restated
Net income (loss)	($	837	)	($	3,709	)	($	7,295	)		2,023
Add back: Stock-based compensation expense, as reported		(19	)		—			28			—
Deduct: Stock-based compensation expense, determined under fair-value-based method for all awards		(486	)		(326	)		(2,082	)		(2,637	)
Net income (loss), as adjusted	($	1,342	)	($	4,035	)	($	9,349	)	($	614	)
							($
Earnings (loss) per share — basic, as reported	($	0.02	)	($	0.11	)	($	0.21	)	$	0.06
Earnings (loss) per share — diluted, as reported	($	0.02	)	($	0.11	)	($	0.21	)	$	0.06
Earnings (loss) per share — basic, as adjusted	($	0.04	)	($	0.12	)	($	0.27	)	($	0.02	)
Earnings (loss) per share — diluted, as adjusted	($	0.04	)	($	0.12	)	($	0.27	)	($	0.02	)
Per share weighted average fair value of options granted during the period	$	4.11		$	5.92		$	4.52		$	8.29

The Black-Scholes option-pricing model was used to estimate the option fair values. The option-pricing model requires a number of assumptions, of which the most significant are expected stock price volatility, the expected pre-vesting forfeiture rate and the expected option term (the amount of time from the grant date until the options are exercised or expire). Expected volatility was estimated based upon actual historical stock price movements over a series of successively shorter periods ending September 30, 2007, ranging from 4 ¹/2 years, the expected option term, to the most recent two years. Expected pre-vesting forfeitures were estimated based on actual historical pre-vesting forfeitures over the most recent periods ending September 30, 2007 for the expected option term. The expected option term was calculated using the “simplified” method permitted by SAB 107. The fair value of restricted stock awards is determined based on the number of shares granted and the quoted price of our common stock on the grant date. Such fair values will be recognized as compensation expense over the requisite service or performance period, net of estimated forfeitures, using the straight-line method under SFAS 123(R). For awards with performance conditions, an evaluation is made each quarter as to the likelihood of the performance criteria being met and the expected number of shares to vest.

The weighted average per share fair ~~values~~value of stock options granted during the three and nine month ~~months~~periods ended September 30, ~~2005~~2007 and ~~2004~~2006, ~~were~~and ~~estimated~~the assumptions used to estimate fair value as of the grant date using the Black-Scholes option- pricing model ~~with~~were ~~the following~~as ~~assumptions~~follows:

	Three Months Ended						Nine Months Ended
	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	September 30,						September 30,
	2007			2006			2007			2006
	2005			2004			2005			2004
Volatility		75	%		95	%		87	%		100	%
Volatility		105	%		110	%		106	%		110	%
Expected option term		4 1/2 years			4 1/2 years			4 1/2 years			4 1/2 years
Expected life	5 years			5 years			5 years			5 years
Risk free interest rate		4.6	%		4.8	%		4.6	%		4.9	%
Risk-free interest rate		4.2	%		3.4	%		4.0	%		3.1	%
Expected dividend yield		0	%		0	%		0	%		0	%
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Weighted average fair value per share	$	2.24		$	4.45		$	2.73		$	3.80

~~On August 26, 2005, the Company’s board of directors approved a modification to the expiration date of vested options held by certain former employees under its 1998~~ Stock Incentive Plan (the 1998 Plan). During the period from May 2, 2005 to September 14, 2005, the Company was not current with its SEC filings and could not issue shares of its common stock under its 1998 Stock Incentive Plan pursuant to its Form S-8 registration statements. This caused an extended blackout period during which the Company did not permit trading or option exercise. Under the terms of the modifications, the former employees will have an additional three months to exercise vested options adjusted by the number of days prior to May 3, 2005, if any, that the employee could have exercised the option. The Company has recognized compensation expense of approximately $28,000 for the three month period ended September 30, 2005, in accordance with the provisions of FASB Interpretation 44: Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25.

~~d. Product~~The ~~Warranty~~Company’s ~~and~~1998 ~~Service.~~Stock ~~The~~Incentive ~~Company~~Plan (the “Plan”) provides ~~warranties~~for ~~against~~five ~~defects~~separate incomponents. ~~materials~~The Discretionary Option Grant Program, ~~and~~administered ~~workmanship~~by the Compensation Committee appointed by the Company’s Board of Directors, provides for ~~its~~the ~~products~~grant ~~generally~~of ~~ranging~~incentive ~~from~~and ~~90 days~~non-qualified options to uppurchase common stock to ~~60 months~~employees, consultants or directors. AtThe Stock Issuance Program, administered by the ~~time~~Compensation Committee, provides for the issuance of Common Stock to employees, consultants or directors directly through the purchase of the shares at the fair market value of the shares at the date of issuance, or as a bonus ~~product~~tied isto ~~shipped~~the performance of services. The Salaried Investment Option Grant Program, if activated, allows executive officers and other highly compensated employees selected by the ~~Company~~Compensation ~~establishes~~Committee to apply a ~~provision~~portion of their base salary towards the acquisition of special below-market stock option grants. The Automatic Option Grant Program provides for ~~estimated~~automatic ~~expenses~~option grants at periodic intervals to eligible non-employee Board members to purchase shares of ~~providing~~Common ~~service~~Stock at a price equal to ~~under~~their ~~these~~fair ~~warranties~~market ~~based~~value on ~~historical~~the ~~warranty~~grant ~~experience~~date. AThe ~~summary~~Director ofFee ~~activity~~Option Program, if activated for ~~accrued~~one or more calendar years, allows non-employee Board members to apply a portion of their annual retainer fee to the acquisition of special below-market ~~product~~option ~~warranty~~grants. All stock options outstanding have been granted under the Discretionary Option Grant Program and ~~service~~the isAutomatic asOption ~~follows~~Grant Program. In April 2007, our Board of Directors approved the following: (ini) a ~~thousands~~form of agreement pursuant to which restricted stock units (“RSUs”): may be granted to eligible persons under the Plan; and (ii) a form of agreement pursuant to which restricted stock may be purchased by eligible persons under the Plan. The Company has not activated any of the other programs permitted by the Plan.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Beginning balance, accrued product warranties and service	$	616		$	634		$	634		$	410
Additions to the accrual for product warranties		284			328			669			1,133
Reductions for incurred warranty charges		(218	)		(325	)		(621	)		(906	)
Ending balance, accrued product warranties and service	$	682		$	637		$	682		$	637

The Plan currently authorizes the grant of options and issuance of stock of up to 10,342,014 shares of authorized common stock. On the first trading day of each year, the lesser of two and one-half percent (2.5%) of the shares of common stock outstanding as of the last trading day of the preceding calendar year, or an additional 562,500 shares, are made available for grant under the Plan. Expired options and stock awards are returned to the Plan and are made available for grant. Incentive stock options have a ten-year term and non-qualified stock options generally have a five-year term. A majority of the stock options vest 25% on the first anniversary date of the grant and 6.25% each quarter thereafter, with the remaining stock options vesting quarterly from the grant date. As of September 30, 2007, all outstanding options were non-qualified stock options. The Compensation Committee of the Board of Directors has discretion to use a different vesting schedule and has done so from time to time. Since the inception of the Plan, the Company has granted stock options to virtually all employees, and the majority has been granted to non-executive employees.

~~e. Reclassifications.~~In ~~Certain~~April ~~investments~~2007, inthe Company ~~auction~~issued ~~rate~~a ~~securities~~grant of ~~$24 million were reclassified as of December 31~~25,000 ~~2004~~RSUs ~~from~~pursuant ~~cash~~to ~~and~~the ~~cash~~Stock ~~equivalents~~Issuance ~~into~~Program ~~marketable~~under ~~securities available~~the ~~for~~Plan. ~~sale~~Vesting in the ~~consolidated~~RSU ~~balance~~award ~~sheet.~~is ~~Auction~~contingent ~~rate~~upon ~~securities~~achieving ~~are~~certain ~~used~~performance astargets. ~~part~~Of of the ~~Company’s~~25,000 ~~cash~~RSUs ~~management~~granted ~~strategy.~~in ~~These~~April ~~investments~~2007, ~~are~~9,000 ~~highly~~RSUs ~~liquid,~~vested ~~variable-rate~~in ~~debt securities~~June 2007. During ~~While~~ the ~~underlying~~three ~~security~~and ~~typically~~nine ~~has~~month aperiods ~~stated~~ended ~~maturity of 20 to 30~~September ~~years~~30, 2007, the ~~interest~~ ~~rate~~Company isrecorded ~~reset~~compensation ~~through~~expense ~~Dutch~~related ~~auctions~~to ~~that~~this ~~are~~RSU ~~held~~award ~~every~~totaling 7,approximately ~~28 or 35 days~~$26,000 ~~creating~~and ~~a highly liquid~~$102,000, ~~short-term instrument~~respectively. ~~The~~This ~~securities~~expense ~~trade~~is atincluded ~~par~~in ~~and~~the ~~are~~total ~~callable at par on any~~stock-based ~~interest~~compensation ~~payment~~expense ~~date~~that atwas ~~the~~recorded ~~option~~by of the ~~issuer.~~Company ~~Interest~~during ~~is paid at~~ the ~~end~~quarter ofended ~~each~~September 30, ~~auction period~~2007. WeThe ~~have~~remainder ~~also~~of ~~reclassified~~ the ~~purchase~~restricted ~~and~~stock ~~sales~~unit ofaward ~~these~~is ~~auction~~expected ~~rate~~to ~~securities~~vest inor ~~our consolidated~~be ~~statement~~forfeited ofby ~~cash flows~~December 31, ~~increasing~~ 2007.

~~Page~~7 10

~~previously~~During ~~reported~~the ~~cash~~three ~~used~~months byended ~~investing~~September 30, ~~activities~~2007, bythe ~~$19.0 million~~Company ~~for~~issued ~~the~~grants ~~nine~~of ~~months~~907,500 ~~ended~~RSUs to ~~September 30~~certain employees pursuant to the Stock Issuance Program under the Plan, ~~2004~~400,000 of which are performance based and 507,500 of which are time based. The ~~reclassification~~performance ~~had~~based noRSUs ~~impact~~are earned upon achievement of certain revenue and non-GAAP operating income targets. These performance based RSUs generally vest in two equal annual installments, with 50% vesting on ~~previously~~the ~~reported~~first ~~total~~anniversary ~~current~~of ~~assets~~the grant date and an additional 50% vesting on the second anniversary of the grant date, assuming achievement ~~total~~of ~~assets,~~the ~~working~~performance ~~capital~~targets. ~~position~~The time based RSUs vest in either two or ~~results~~three equal annual installments from the date of ~~operations~~grant. Vesting for both performance based and ~~does~~time ~~not~~based ~~affect~~grants ~~previously~~is accelerated in the event of a change in control. The Company ~~reported~~recorded ~~cash~~compensation ~~flows~~expense ~~from~~related ~~operating~~to orthese ~~financing~~RSU ~~activities~~awards totaling approximately $322,500 during the three and nine month periods ended September 30, 2007. This expense is included in the total stock-based compensation expense that was recorded by the Company during the quarter ended September 30, 2007.

~~f. Exit~~Restricted ~~and~~stock ~~Disposal~~unit ~~Activities.~~activity Infor ~~December 2002,~~ the Company completed a restructuring plan designed to reduce its expenses in accordance with anticipated reductions in revenue. Included in this plan were reductions in salary-related expenses, facility closures or downsizing, and disposal of excess or unused assets. As a result of these expense reductions, the Company took a charge in the fourth quarter of 2002 of $2.0 million. In the first nine months ~~of 2005, the Company recorded~~ended an additional provision of $453,000 as the Company made corrections to and revised its estimates of the losses on abandoned leases. The Company paid approximately $400,000 of this charge in the fourth quarter of 2002, approximately $1September ~~million in 2003~~30, ~~approximately~~2007 ~~$500,000~~is insummarized ~~2004~~as ~~and approximately~~follows: $440,000 in the first nine months of 2005. Although most of the remaining cash disbursements related to the restructuring plan will be paid by December 31, 2005, the Company does not anticipate that the total amount will be paid until December 31, 2007.

Restructuring reserve activity resulting from the 2002 fourth quarter restructuring plan for 2005 is detailed below (in thousands):


	Number of RSUs		Weighted Average Grant-date Fair Value
RSUs outstanding at March 31, 2007	—		$	—
Granted	25,000			4.65
Vested	(9,000	)		4.65
Forfeited	—			—

RSUs outstanding at June 30, 2007	16,000		$	4.65
Granted	907,500		$	4.87
Vested	—			—
Forfeited	—			—

RSUs outstanding at September 30, 2007	923,500		$	4.86

	Beginning Reserve		Restructuring					Ending Reserve
	Balance		Charges		Payments			Balance
2003		1,586		—		(1,050	)		536
2004		536		218		(494	)		260
2005		260		453		(440	)		273

Total estimated unrecognized compensation cost from unvested RSUs as of September 30, 2007 was approximately $1,986,500, which is expected to be recognized over a weighted average period of approximately 1.49 years.

~~g. Development~~During ~~Activities. The Company entered into two agreements to perform development~~the ~~activities~~three ~~for~~month ~~two~~period ~~customers.~~ended ~~Under~~September 30, 2006, the ~~terms~~Company ofgranted ~~the~~options ~~agreements,~~to ~~the~~non-employee ~~customers~~directors ~~paid~~to ~~the~~purchase ~~Company $275~~30,000 inshares ~~exchange~~of ~~for~~common ~~the~~stock ~~completion~~at ofan ~~certain~~exercise ~~development~~price ~~activities~~of $6.92 ~~The~~under ~~Company has accounted for~~ the ~~arrangement~~Automatic asOption aGrant ~~contract~~Program. toNo ~~perform~~options ~~research~~were ~~and~~granted ~~development in accordance with~~to ~~SFAS~~non-employee ~~68,~~directors ~~Research~~during ~~and~~the ~~Development~~three ~~Arrangements.~~month ~~The~~period ~~Company~~ended ~~has incurred costs of $238~~September 30,~~052~~ ~~in the first nine months of 2005 pursuant to such agreements~~2007.

~~h. Significant Customers.~~ The ~~Company’s~~following ~~sales~~table tosummarizes ~~one~~stock ~~significant customer resulted in a~~options ~~significant~~outstanding ~~concentration~~and ofchanges ~~revenue~~during ~~for~~ the three and nine ~~months~~month periods ended September 30, ~~2005 (as a percentage of sales)~~2007:

Three Months Ended September 30,					Nine Months Ended September 30,
	Outstanding Options
2005	2004				2005			2004
	Number ofShares			Weighted Average Exercise Price			Weighted AverageRemainingContractual Term (in years)	AggregateIntrinsicValue
55%		6	%			43	%		5	%
Options outstanding at December 31, 2006	3,140,031			$	6.32		—		—
Granted	821,500				5.21		—		—
Exercised	(96,813	)			3.51		—		—
Canceled or forfeited	(249,880	)			6.33		—		—
Options outstanding at March 31, 2007	3,614,838			$	6.14		3.72	$	2,160,620
Granted	196,750			$	4.55		—		—
Exercised	(127,174	)			0.98		—		—
Canceled or forfeited	(251,729	)			6.64		—		—
Options outstanding at June 30, 2007	3,432,685			$	6.20		3.71	$	1,090,599
Granted	44,000			$	4.62		—		—
Exercised	(159,669	)			1.24		—		—
Canceled or forfeited	(319,922	)			6.45		—		—
Options outstanding at September 30, 2007	2,997,094			$	6.42		3.71	$	186,395
Options exercisable at March 31, 2007	1,379,881			$	7.00		2.53	$	1,636,917
Options exercisable at June 30, 2007	1,300,636			$	7.38		2.71	$	910,727
Options exercisable at September 30, 2007	1,105,325			$	8.01		2.92	$	185,895

~~Note~~8 ~~3. Inventory~~

The components of inventory are as follows (in thousands):

	September 30,			December 31,
	2005			2004
Raw Materials	$	28,373		$	31,276
Work-in-progress		19			16
Finished goods		7,246			7,269
		35,638			38,561
Reserve for obsolescence		(6,772	)		(6,552	)
Total inventory, net	$	28,866		$	32,009

Note 4. Commitments and Contingencies

The Company leases office space under various noncancellable-operating leases that expire through 2007. The Company records rent expense under noncancellable operating leases using the straight-line method after consideration of increases in rental payments over the lease term, and records the difference between actual payments and rent expense as deferred rent concessions.

The Company has placed noncancellable purchase orders for $9.8 million of inventory from certain of its vendors for delivery in 2005. These orders are generally placed up to 4 months in advance based on the lead-time of the inventory.

Page 11

InThe ~~November~~total ofintrinsic ~~2003~~value, or the ~~Company~~difference ~~acquired~~between ~~Paragon Networks International, Inc (Paragon). In connection with~~ the ~~acquisition,~~exercise ~~the~~price ~~Company assumed liabilities for value-added taxes~~ and ~~employee~~the ~~payroll~~market ~~taxes~~price ~~that~~on ~~may~~the ~~be payable to certain~~date ~~foreign~~of ~~taxing~~exercise, ~~authorities. The estimated fair value~~ of ~~value-added~~all ~~taxes,~~options ~~employee~~exercised ~~payroll taxes~~during ~~and~~the ~~associated~~three ~~interest~~ and ~~penalties~~nine ~~assumed~~month isperiods ~~estimated~~ended toSeptember 30, be2007 was approximately $~~840~~547,~~000. Estimated~~600 ~~employee~~and ~~payroll taxes~~$1, ~~value-added taxes~~234,500, ~~and~~respectively. ~~interest~~Cash ~~and~~received ~~penalties~~from onstock ~~un-remitted balances~~options ~~incurred~~exercised ~~after~~during the ~~acquisition~~three ~~dates have been accrued~~ and ~~expensed.~~nine ~~Interest~~month ~~and~~periods ~~penalties~~ended ~~accrued~~September 30, ~~and~~2007 ~~expensed in 2004 related to pre-acquisition value-added taxes and employee payroll taxes~~ was approximately $80218,000. Inand ~~addition~~$658,000, ~~the~~respectively. The Company ~~continued~~did tonot ~~incur~~realize ~~value-added taxes~~any ~~and~~tax ~~employee~~deductions ~~payroll taxes, and~~ related ~~penalties~~to ~~and interest during 2004 that were accrued and expensed which totaled approximately $263,000. The total amount of~~ the ~~contingent~~exercise ~~liability as~~ of ~~December 31,~~stock ~~2004~~options ~~was~~during ~~approximately~~the $1quarter.~~2 million.~~ ~~During~~As ~~the~~discussed ~~first~~in ~~nine~~Note ~~months~~6 ~~ended~~– ~~September 30,~~Income ~~2005~~Taxes, ~~approximately $85,000 was accrued for payroll taxes and value added taxes. It is possible that~~ the Company~~’s estimates~~ will ~~differ~~record ~~from~~such ~~the~~deductions ~~amounts~~to ~~ultimately~~additional paid-in tocapital ~~settle~~when ~~this liability~~realized. ~~Adjustments~~ toShares ~~the~~available ~~Company’s~~for ~~estimates~~grant orunder tothe ~~what~~Plan isas ~~ultimately paid to taxing authorities in future periods will be included in earnings~~ of ~~the~~September 30, ~~period~~2007 inwere ~~which~~approximately ~~the adjustment is determined~~1,945,709.

~~Beginning~~Stock onoptions ~~June 3,~~outstanding ~~2005, three purported shareholder class action lawsuits were filed in the United States District Court for the District of Colorado against Carrier Access Corporation~~ and ~~certain~~ ofcurrently ~~our~~exercisable ~~officers~~at ~~and directors. The cases, captioned Croker v. Carrier Access Corporation, et al., Case No.~~September ~~05-cv-1011-LTB; Chisman v. Carrier Access Corporation~~30, et2007 ~~al., Case No. 05-cv-1078-REB, and Sved v. Carrier Access Corporation, et al, Case No. 05-cv-1280-EWN, have been consolidated by stipulation and~~ are ~~purportedly~~as ~~brought~~follows: on the behalf of those who purchased our publicly traded securities between October 21, 2003 and May 20, 2005. Plaintiffs allege that defendants made false and misleading statements, purport to assert claims for violations of the federal securities laws, and seek unspecified compensatory damages and other relief. The complaints are based upon allegations of wrongdoing in connection with our announcement of our intention to restate previously issued financial statements for the year ended December 31, 2004 and certain interim periods in each of the years ended December 31, 2004 and 2003.

Beginning on June 13, 2005, three purported shareholder derivative lawsuits were filed in the United States District Court for the District of Colorado, against various of our officers and directors and naming Carrier Access as a nominal defendant. The cases are captioned Kenney v. Koenig, et al., Case No. 05-cv-1074-PSF, Chaitman v. Koenig, et al., Case No. 05-cv-1095-LTB and West Coast Management and Capital, LLC v. Koening [sic], et al. Case No. 05-cv-1134-RPM. These actions were consolidated on August 11, 2005. The complaints include claims for breach of fiduciary duty, abuse of control, waste of corporate assets, mismanagement and unjust enrichment; seek compensatory damages, disgorgement, and other relief; and are based on essentially the same allegations as the class actions described in the preceding paragraph. On October 12, 2005, the Company moved to dismiss for failure to plead demand futility, and the individual defendants moved to dismiss for failure to state a cause of action for breach of fiduciary duty, waste, and all of the other counts.


Range of exercise prices	Options Outstanding				Options Exercisable
Range of exercise prices	Number of Options Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise price		Number of Options Exercisable	Weighted Average Exercise Price
$0.77 — 4.33	397,707	4.41	$	3.66	223,165	$	3.26
4.36 — 4.56	400,000	3.97		4.51	57,749		4.40
4.61 — 5.00	410,188	3.26		4.75	157,187		4.72
5.10— 5.75	513,625	4.21		5.64	20,373		5.26
5.76 — 6.23	550,937	4.01		6.20	33,936		5.94
6.32 — 10.35	544,237	3.22		8.76	442,828		9.03
10.68 — 37.00	180,400	1.74		16.35	170,087		16.59

	2,997,094	3.71	$	6.42	1,105,325	$	8.01

OnTotal ~~September 12,~~estimated ~~2005,~~unrecognized acompensation ~~purported~~cost ~~shareholder~~from ~~derivative~~unvested ~~lawsuit~~stock ~~was~~options ~~filed~~as ~~in the Boulder County, Colorado District Court against various~~ of ~~our officers and directors and naming Carrier Access as~~ ~~a nominal defendant. This case is captioned Dietz v. Koenig, et al. On~~ September 2830, ~~2005~~2007 ~~a purported shareholder derivative lawsuit~~ was ~~filed~~approximately ~~in the 20th District in the State of Colorado~~$2, ~~Boulder County District Court~~381,100, ~~against~~which ~~various of our officers and directors and naming Carrier Access as a nominal defendant. This case~~ is ~~captioned~~expected ~~Novak v. Koenig, et al. On October 24, 2005, the Company removed the Novak action~~ to ~~federal~~be ~~court~~recognized ~~and~~over ~~the~~a ~~parties~~weighted ~~have~~average ~~stayed~~period ~~the~~of ~~Dietz matter~~approximately ~~pending the above filed motions~~1.39 The Dietz and Novak complaints include claims for breach of fiduciary duty, violation of by-laws and other relief; and are based on essentially the same allegations as the class actions described in the preceding paragraphsyears.

~~Management believes that the claims in the class action and related suits are without merit~~3. ~~Because~~Investments these lawsuits are at a very preliminary stage, management cannot at this time determine the probability or reasonably estimate a range of loss, if any. If an unfavorable outcome were to occur, it could have a material adverse impact on the Company’s financial position and results of operations for the period in which such outcome occurred.

InThe ~~addition,~~Company ~~Carrier~~has ~~Access~~investments ~~is involved~~ in ~~legal~~marketable ~~proceedings from time to time arising from the normal course of business activities including claims of alleged infringement of intellectual property rights~~securities, ~~commercial,~~all ~~employment and other matters. In the Company’s opinion, resolution~~ of ~~pending~~ ~~matters~~which iswere ~~not~~classified ~~expected~~as toavailable ~~have~~for ~~a material adverse impact on its consolidated results of operations~~sale, ~~cash~~as ~~flows~~follows ~~or its financial position, However, it is possible that an unfavorable resolution of one or more such proceedings could~~ (in ~~the future materially affect the Company’s~~ ~~future~~thousands): ~~results of operations, cash flows or financial position in a particular period.~~

The Company provides indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of the Company’s products. The Company evaluates estimated losses for such indemnifications under SFAS 5, Accounting for Contingencies, as interpreted by FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). The Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable


Balances as of September 30, 2007	Cost		Unrealized Gains		Unrealized Losses			Fair Value
US government securities	$	9,496	$	4	$	(11	)	$	9,489
State and local governments		9,375		—		—			9,375
Corporate debt securities		20,130		10		(8	)		20,132

Total Investments	$	39,001	$	14	$	(19	)	$	38,996

Page 12


Balances as of December 31, 2006	Cost		Unrealized Gains		Unrealized Losses			Fair Value
US government securities	$	10,325	$	—	$	(109	)	$	10,216
State and local governments		7,800		—		—			7,800
Corporate debt securities		14,817		—		(9	)		14,808

Total Investments	$	32,942	$	—	$	(118	)	$	32,824

~~estimate~~The offollowing table summarizes the ~~amount~~fair ofvalue ~~loss.~~and Togross ~~date,~~unrealized ~~the~~losses ~~Company~~on ~~has~~our ~~not~~investments ~~encountered~~in marketable ~~material~~securities ~~costs~~with asunrealized alosses, ~~result~~ aggregated by the type of ~~such~~investment ~~obligations,~~instrument and ~~has~~length ~~not~~of ~~accrued~~time ~~any~~that ~~liabilities~~the ~~related~~individual tosecurities ~~such~~have ~~indemnifications~~been in ~~its financial~~a ~~statements.~~continuous unrealized loss position as of September 30, 2007 and December 31, 2006 (in thousands):

Other accrued liabilities consist of the following (in thousands):


September 30, 2007	Less than 12 Months					12 Months or Greater					Total
September 30, 2007	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
US government securities	$	—	$	—		$	8,489	$	(11	)	$	8,489	$	(11	)
State and local governments		—		—			—		—			—		—
Corporate debt securities		6,807		(3	)		995		(5	)		7,802		(8	)

Total Investments	$	6,807	$	(3	)	$	9,484	$	(16	)	$	16,291	$	(19	)

	September 30,			December 31,
December 31, 2006	Less than 12 Months					12 Months or Greater					Total
	2005			2004
	Fair Value		Gross UnrealizedLosses			Fair Value		Gross UnrealizedLosses			Fair Value		Gross UnrealizedLosses
Accrued rent	$	79		$	189
US government securities	$	—	$	—		$	8,389	$	(109	)	$	8,389	$	(109	)
Warranty obligations		682			634
State and local governments		—		—			—		—			—		—
Accrued income taxes		17			17
Corporate debt securities		3,001		—			3,866		(9	)		6,867		(9	)
Accrued restructuring		273			261
Total Investments	$	3,001	$	—		$	12,255	$	(118	)	$	15,256	$	(118	)
Other accrued liabilities		178			15
	$	1,229		$	1,116

~~Note~~The 5Company’s investments include U.S., ~~Recently~~State ~~Issued~~and ~~Accounting~~municipal ~~Pronouncements~~government obligations and domestic public corporate debt securities. Investments are classified as short-term or long-term based on the availability of these securities to meet current operating requirements. All of these investments are held in the name of the Company at a limited number of financial institutions.

InAs ~~November~~of September ~~2004~~30, ~~SFAS~~2007 ~~No.~~and December ~~151~~31, ~~“Inventory~~2006, ~~Costs~~all —of anthe ~~amendment~~Company’s investments were marketable securities classified as short-term, available for sale securities, and reported at their fair values based upon quoted market prices as of ~~ARB~~the Noreporting date. ~~43,~~ ~~Chapter 4”~~If ~~was~~these investments are sold at a loss or experience a decline in value ~~issued~~that tois ~~clarify~~not temporary, the ~~accounting~~loss is recognized in the condensed consolidated statement of operations for ~~abnormal~~that ~~amounts~~period. Unrealized gains or losses that are considered temporary in nature are recorded as a separate component of ~~idle~~cumulative ~~facility~~other comprehensive ~~expense~~income (loss) in stockholders’ equity. Subsequent recoveries in the fair value, ~~freight~~if any, ~~handling costs~~are not recognized in the condensed consolidated statement of operations, ~~and~~but ~~wasted~~as ~~material~~a component of cumulative other comprehensive income (~~spoilage~~loss). The ~~provisions~~specific ofidentification ~~this~~method ~~Statement~~is ~~must~~used beto ~~adopted~~determine ~~for inventory~~the ~~costs~~cost ~~incurred~~of ~~during~~securities ~~fiscal~~disposed ~~years~~of, ~~beginning~~with ~~after~~realized ~~June 15~~gains and losses recorded in interest income, ~~2005~~net. ~~Earlier~~During ~~application~~the ~~is permitted~~three ~~for~~and ~~inventory~~nine ~~costs~~month ~~incurred~~periods ~~during~~ended ~~fiscal~~September 30, ~~years~~2007 ~~beginning~~and ~~after~~2006, the ~~date~~Company did ~~this~~not ~~Statement is~~incur ~~issued~~significant realized gains or losses on disposals of marketable securities. The ~~Company~~unrealized ~~plans~~loss balances on ~~adopting~~U.S. ~~the~~Government ~~Statement~~and ~~effective~~Corporate ~~January 1,~~debt ~~2006.~~securities ~~The~~resulted ~~guidance~~primarily ~~in SFAS~~from Nointerest rate increases. ~~151~~ isBecause ~~not~~the ~~expected~~Company has the ability and intent to ~~have~~hold these securities until a ~~material~~recovery ~~effect~~of onfair ~~our~~value, ~~results~~which ofmay ~~operations~~be orat ~~financial position~~maturity, the Company does not consider these securities to be other than temporarily impaired at September 30, 2007.

InThe ~~December 2004,~~Company’s ~~the~~investment ~~Financial~~policy ~~Accounting~~limits ~~Standards~~the ~~Board~~concentration ~~(FASB) issued~~of ~~SFAS~~its ~~No. 123~~investments ~~(revised 2004),~~in ~~Share~~any ~~Based~~single ~~Payment.~~instrument ~~SFAS~~to ~~No. 123(R) is~~ a ~~revision~~maximum of ~~FASB Statement No~~$3. ~~123,~~0 ~~“Accounting for~~million ~~Stock~~or ~~Based Compensation”~~10%, ~~and supercedes APB Opinion (“APB”) No. 25, “Accounting for Stock~~whichever ~~Issued~~is ~~to Employees”~~less, ~~and~~other ~~amends~~than ~~SFAS No~~U. ~~95, “Statement of Cash Flows”~~S. ~~SFAS~~Government ~~No. 123(R)~~or ~~requires all~~Agencies ~~share-based~~securities, ~~payments~~which todo ~~employees,~~not ~~including~~have ~~grants~~limitations. All of ~~employee~~the ~~stock~~Company’s ~~options,~~securities tomust be ~~recognized in~~readily ~~the~~marketable ~~income~~and ~~statement~~have ~~based~~high onquality ~~their~~debt ~~fair~~ratings ~~values.~~from ~~The~~either ~~amount~~Moody’s, ofFitch ~~compensation~~or ~~cost will be~~Standard & ~~measured~~Poors. ~~based~~Investments onmay ~~the~~not ~~grant~~have ~~date~~maturities ~~fair~~in ~~value~~excess of ~~the~~three ~~equity~~years, orand ~~liability instruments issued. Compensation cost will be recognized over~~ the ~~period~~average ~~that~~portfolio anmaturity ~~employee~~is ~~provides~~maintained ~~service~~at in18 ~~exchange for~~months ~~the~~or ~~award~~less. ~~Pro~~The ~~forma~~weighted ~~disclosure~~average isportfolio nodays ~~longer~~to anmaturity ~~alternative.~~for ~~The~~marketable ~~provisions~~securities ofavailable ~~this~~for ~~statement~~sale was ~~will~~approximately ~~become~~136 ~~effective~~days ~~for~~at ~~the Company beginning January~~September 130, ~~2006~~2007.

~~SFAS~~10 ~~No. 123(R) permits public companies to adopt its requirements using one of two methods:~~

	1.		A “modified prospective” method in which the compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.
	2.		A “modified retrospective” method which includes the requirements of the modified prospective method, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures for either: (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company has not determined the method it will use upon adoption of SFAS No. 123(R).

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using the APB No. 25 intrinsic value method and generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R) will have a significant impact on the Company’s results of operations, although it will have no impact on the financial position or cash flows. The impact of the adoption of SFAS No. 123(R) cannot be predicted with certainty at this time because it will depend on the share-based payments granted in the future. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the adoption. The Company has not assessed the impact of this provision on net operating loss carryforwards.

In December 2004, SFAS Statement No. 153, “Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29” was issued. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets

Page 13

~~and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance~~4. ~~A nonmonetary~~Inventory exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. As the Company has not entered into nonmonetary exchanges, the Statement will not have an impact on the Company’s results of operations or financial position.

InInventories ~~May~~are ofvalued ~~2005,~~at ~~SFAS Statement No. 154 “Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3” was issued. This Statement provides guidance on~~ the ~~accounting~~ ~~for~~lower ~~and reporting~~ of ~~accounting~~cost ~~changes~~or ~~and error corrections. It establishes~~market, ~~unless impracticable,~~with ~~retrospective~~cost ~~application~~computed asusing ~~the~~standard ~~required~~costs ~~method~~that ~~for~~approximate ~~reporting~~average apurchase ~~change~~costs. ~~in accounting~~Consideration ~~principle~~is ingiven ~~the absence of explicit transition requirements specific~~ to ~~the~~obsolescence, ~~newly adopted~~excessive ~~accounting~~levels, ~~principle.~~deterioration ~~This Statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable~~ and ~~for~~other ~~reporting~~factors ~~a change when retrospective application is impracticable. The correction of an error~~ in ~~previously~~evaluating ~~issued~~net ~~financial~~realizable ~~statements is not an accounting change~~value. ~~However,~~Inventories ~~the~~consist ~~reporting~~ of ~~an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore,~~ the ~~reporting~~following ~~of a correction of an error by restating previously issued financial statements is also addressed~~ (in ~~this~~ ~~Statement.~~thousands): ~~We are not aware of any error that would have a material impact on our results of operations or financial position.~~


	September 30, 2007			December 31, 2006
Raw materials	$	22,318		$	20,371
Work-in-process		59			10
Finished goods		4,841			5,510
Reserve for obsolescence		(10,319	)		(7,679	)

	$	16,899		$	18,212

5. Goodwill and Intangibles

The following table presents details of the Company’s intangible assets as of September 30, 2007 and December 31, 2006 (in thousands):


Intangible Assets	Useful Life (years)	September 30, 2007						December 31, 2006
Intangible Assets	Useful Life (years)	Gross Value		Accumulated Amortization		Net Value		Gross Value		Accumulated Amortization		Net Value
Customer Relationships	7	$	7,020	$	2,953	$	4,067	$	5,100	$	2,246	$	2,854
Developed Technology	5		4,820		2,187		2,633		2,500		1,542		958
Trademarks and Patents	17		297		97		200		295		84		211

Total		$	12,137	$	5,237	$	6,900	$	7,895	$	3,872	$	4,023

The estimated future amortization expense for intangible assets as of September 30, 2007 is as follows (in thousands):


Year ending December 31,	Amount
Remainder of 2007	$	497
2008		1,943
2009		1,484
2010		1,423
2011		756
Thereafter		797

Total	$	6,900

In the third quarter of 2007, the Company completed its annual goodwill and purchased intangibles impairment tests as required by Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Our assessment of goodwill impairment was conducted by estimating and comparing the fair value of our reporting unit, as defined in SFAS 142, to the reporting unit carrying value as of that date. The assessment of purchased intangibles impairment was conducted by comparing the estimated fair value of the purchased intangible with its carrying amount as of that date. Based on the results of these impairment tests, the Company determined that its goodwill and purchased intangible assets were not impaired. The Company plans to continue to conduct annual impairment tests in the third quarter of each year, unless impairment indicators exist at an earlier date each year.

6. Income Taxes

On January 1, 2007, the Company adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109,” which was issued in July 2006. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. If there are changes in net assets as a result of application of FIN 48, these will be accounted for as an adjustment to retained earnings. There were no unrecognized tax benefits as of January 1, 2007, the date FIN 48 was adopted. If there was an adjustment related to implementation of FIN 48, there would be a reduction to the deferred tax assets and a corresponding reduction to the valuation allowance, resulting in no net effect on accumulated deficit. If any unrecognized benefit would be recognized, it would not affect the Company’s effective tax rate since it is subject to a full valuation allowance.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrued interest or penalties as of January 1, 2007, the date FIN 48 was adopted, and has no accrued interest or penalties at September 30, 2007.

As of the date of these financial statements, the 2006, 2005, 2004, and 2003 income tax years are open to the possibility of examination by federal, state, or local taxing authorities.

The Company did not record a provision for income taxes for the three and nine month periods ended September 30, 2007 or 2006 as a result of operating losses and current estimated operating results for the current fiscal year. The Company has recorded valuation allowances to fully reserve its deferred tax assets, as management believes it is more likely than not that these assets will not be realized. It is possible that management’s estimates as to the likelihood of realization of its deferred tax assets could change as a result of changes in estimated operating results. Should management conclude that it is more likely than not that these deferred tax assets are, at least in part, realizable, the valuation allowance will be reduced and recognized as a deferred income tax benefit in the statement of operations in the period of change, except as noted herein. The valuation allowance at September 30, 2007 includes a reserve established on the acquisition of Paragon Networks International, Inc. in 2003 related to net deferred tax assets acquired of approximately $6.9 million. Should the Company conclude the valuation allowance with respect to these acquired net deferred tax assets is no longer necessary, the amount will be recorded as a decrease in the carrying amount of acquired goodwill. Also included in the valuation allowance is a $15.0 million reserve for the federal tax benefit resulting from certain exercises of employee non-qualified stock options. To the extent the valuation allowance related to these federal tax benefits is no longer considered necessary and actual tax benefits realized are less than deferred taxes recognized, an adjustment will be recorded directly to additional paid-in capital.

7. Business Combinations

Mangrove Systems, Inc.

On March 2, 2007, the Company completed its acquisition of substantially all of the assets of Mangrove Systems, Inc. (“Mangrove”) pursuant to the terms of an Asset Purchase Agreement of the same date. Mangrove products include the Piranha 100 and 600, which have been rebranded as the Carrier Access EdgeFLEX(TM) 100 and 600, respectively. These new optically-fed IP transport integration products add to the Carrier Access portfolio of IP service convergence solutions at both access and optical edge locations. Integrated products and solutions will be supported and offered to combined customers of Carrier Access and Mangrove Systems. Customers include Mobile Network Operators, Broadband and Ethernet Service Providers, and Government Networks. Carrier Access FLEXengine software-definable IP interworking and optimization technology will be integrated with the new EdgeFLEX product offerings to further consolidate network capital and operational costs for high-bandwidth IP networks. The acquired assets primarily consist of optically-fed IP transport integration products which complement the Company’s portfolio of IP service convergence solutions at both access and optical edge locations.

Pursuant to the Asset Purchase Agreement, Mangrove creditors received $6.7 million in cash at closing and were eligible to receive a maximum of $1.2 million for outstanding liabilities assumed by the Company. Approximately $700,000 of the closing cash was placed into escrow to be held as security for losses incurred by the Company in the event of certain breaches of the representations and warranties covered in the Asset Purchase Agreement. Acquisition-related transaction costs include legal fees and other third party costs directly related to the acquisition. The total purchase price of $8.1 million was comprised of (in thousands):


Cash paid	$	6,700
Liabilities assumed		1,200
Acquisition-related transaction costs		178

Total consideration	$	8,078

Liabilities assumed include accounts payable and accrued expenses. As of September 30, 2007, approximately $993,000 of the total $1.2 million in liabilities assumed had been paid to creditors, and this payment is reflected in our Consolidated Statement of Cash Flows as part of the acquisition, in investing activities. The remaining amount due related to the assumed liabilities is approximately $207,000.

The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the net tangible and intangible assets acquired based on preliminary fair values on the acquisition date. The Company engaged an independent third party valuation firm to assist with an appraisal of certain acquired assets. The Company has allocated the purchase price as follows (in thousands):


Inventories	$	2,120
Other assets		77
Property and equipment		533
Goodwill		1,108
Other intangible assets:
Developed product technology		2,320
Customer relationships		1,920

Total consideration	$	8,078

Since March 2, 2007, the results of operations of the acquisition have been included in the Company’s consolidated statements of operations. Intangible asset amortization related to the Mangrove acquisition was $185,000 and $431,000 in the three and nine month periods ended September 30, 2007, respectively. The amount of goodwill is expected to be deductible for tax purposes.

The unaudited financial information in the table below summarizes the combined results of operations of the Company and Mangrove, on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The Company’s results of operations for the three and nine months ended September 30, 2007 included the results of Mangrove since March 2, 2007, the acquisition date. The unaudited pro forma financial information for the nine months ended September 30, 2007 combines the Company’s results for this period with the results of Mangrove for the period January 1, 2007 to March 1, 2007. The unaudited pro forma financial information for the three and nine months ended September 30, 2006 combines the Company’s results for these periods with Mangrove’s results for the same periods. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each of the periods presented or of results that may occur in the future (in thousands, except for per share amounts).


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Revenue, net	$	7,353		$	16,117		$	23,656		$	63,313
Net loss		(11,785	)		(8,035	)		(34,884	)		(16,548	)
Net loss per share – basic and diluted		(0.34	)		(0.24	)		(1.01	)		(0.49	)

8. Commitments and Contingencies

Except as described below, the Company’s contractual obligations and commercial commitments have not materially changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K for the year ended December 31, 2006. As of September 30, 2007, the Company had placed non-cancellable purchase orders for approximately $5.0 million of inventory, supplies and services from certain of its vendors for delivery in 2007. These orders are generally placed up to 4 months in advance based on the lead-time of the inventory.

Guarantees

The Company provides indemnifications of varying scope and size to certain customers against claims made by third parties of intellectual property infringement arising from the use of our products. The Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of loss. To date, the Company has not encountered material costs as a result of such obligations, and has not accrued any liabilities related to such indemnifications in our consolidated financial statements.

Officer and Director Indemnification

As permitted or required under Delaware law and to the maximum extent allowable under that law, the Company has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. These indemnification obligations are valid as long as the officer or director acted in good faith and in a manner the person reasonably believed to be in or not opposed to the bests interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations

is unlimited; however, the Company has a director and officer insurance policy that mitigates the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification obligations is minimal.

Other Indemnifications

As is customary in the Company’s industry, as provided for in local law in the U.S. and other jurisdictions, the Company’s standard contracts provide remedies to its customers, such as defense, settlement or payment of judgment for intellectual property claims related to the use of our products. From time to time, the Company provides standard indemnification to our customers against combinations of loss, expense or liability arising from various trigger events related to the sale and use of our products and services.

Litigation

In November of 2003, the Company acquired Paragon Networks International, Inc. In connection with the acquisition, the Company assumed liabilities for value-added taxes and employee payroll taxes that may be payable to certain foreign taxing authorities. The estimated fair value of value-added taxes, employee payroll taxes and associated interest and penalties assumed was estimated to be approximately $840,000. Estimated employee payroll taxes, value-added taxes, and interest and penalties on unremitted balances incurred after the acquisition date have been accrued and expensed. The total estimated amount of the contingent liability as of September 30, 2007 was approximately $1.6 million. It is reasonably possible that the Company’s estimates will differ from the amounts that could ultimately be paid to settle this liability. Adjustments to the Company’s estimates to actual amounts ultimately paid to taxing authorities in future periods will be included in earnings of the period in which the adjustment is determined.

Beginning on June 2, 2005, three purported shareholder class action lawsuits were filed in the United States District Court for the District of Colorado against Carrier Access Corporation and certain of the Company’s officers and directors. The cases, captioned Croker v. Carrier Access Corporation, et al., Case No. 05-cv-1011-LTB; Chisman v. Carrier Access Corporation, et al., Case No. 05-cv-1078-REB, and Sved v. Carrier Access Corporation, et al., Case No. 05-cv-1280-EWN, have been consolidated and are purportedly brought on behalf of those who purchased our publicly traded securities between October 21, 2003 and May 20, 2004. Plaintiffs allege that defendants made false and misleading statements, purport to assert claims for violations of the federal securities laws, and seek unspecified compensatory damages and other relief. The consolidated complaint is based upon allegations of wrongdoing in connection with our announcement of our intention to restate previously issued financial statements for the year ended December 31, 2004 and certain interim periods in each of the years ended December 31, 2004 and 2003. On July 18, 2006, the Court denied defendants’ motions to dismiss the consolidated complaint. On February 6, 2007, the parties reached an agreement to settle the consolidated class actions for a payment of $7.4 million. The settlement will be funded in its entirety by the proceeds of the Company’s directors and officers’ insurance policy. The parties’ agreement must be documented and submitted to the court for its approval. The $7.4 million insurance recovery has been reported in prepaid expenses and other current assets, and the $7.4 million settlement liability is reported in accrued expenses and other liabilities as of September 30, 2007.

Beginning on June 13, 2005, three purported shareholder derivative lawsuits were filed in the United States District Court for the District of Colorado, against several of our officers and directors and naming Carrier Access as a nominal defendant. The cases are captioned Kenney v. Koenig, et al., Case No. 05-cv-1074-PSF, Chaitman v. Koenig, et al., Case No. 05-cv-1095-LTB and West Coast Management and Capital, LLC v. Koening {sic}, et al. Case No. 05-cv-1134-RPM. These actions were consolidated in August 2005. The consolidated complaint includes claims for breach of fiduciary duty, abuse of control, waste of corporate assets, mismanagement and unjust enrichment, seek compensatory damages, disgorgement, and other relief, and are based on essentially the same allegations as the class actions described in the preceding paragraph. On October 12, 2005, the Company moved to dismiss for failure to plead demand futility, and the individual defendants moved to dismiss for failure to state a cause of action for breach of fiduciary duty, waste and all of the other counts. On March 30, 2006, the District Court granted the Company’s Motion to Dismiss without prejudice. On March 7, 2007, a purported shareholder derivative lawsuit was filed in the United States District Court for the District of Colorado, against several of our officers and directors and naming Carrier Access as a nominal defendant. The case is captioned West Coast Management and Capital, LLC v. Koenig, et al. Case No. 1:07CV00459 and is based on essentially the same allegations as the derivative suit filed by this same plaintiff described earlier in this paragraph. On May 16, 2007, a purported shareholder derivative lawsuit was filed in the Colorado District Court in Boulder County, Colorado against several of our officers and directors and naming Carrier Access as a nominal defendant. The case is captioned Kenney v. Koenig, et al., Case No. 2007CV423, District Court, County of Boulder, State of Colorado and is based on essentially the same allegations as the derivative suit filed by this same plaintiff described earlier in this paragraph. On July 16, 2007, the parties reached an agreement to settle the purported shareholder derivative lawsuits for a payment of $385,000. One half of this amount will be funded by the proceeds of the Company’s directors and officers’ insurance policy and the other half will be paid by the Company. The parties’ agreement must be submitted to the court for its approval. The $193,000 insurance recovery has been reported in prepaid expenses and other current assets, and the $385,000 settlement liability is reported in accrued expenses and other liabilities as of September 30, 2007.

On August 16, 2007, QPSX Developments 5 PTY LTD filed a complaint against the Company and several other companies (“the QPSX Complaint”), in United States District Court for the Eastern District of Texas, Marshall Division. The case is captioned QSPX Developments 5 Pty Ltd v. Ciena Corporation et al., Civil Action No. 2:07-CV-118. The Complaint alleges infringement of U.S. Patent No. 5,689,499 (“the ‘499 patent). The Complaint also alleges willful infringement and seeks a preliminary and permanent injunction of alleged infringing acts by the Company, enhanced unspecified damages, pre and post judgment interest, and attorneys’ fees and costs. The QPSX Complaint also names as defendants Ciena Corporation, Ericsson, Inc., UTStarcom, Inc., Zhone Technologies, Inc., Tellabs, Inc., Rad Data Communications, Inc., Nokia Siemens Networks US LLC, and Network Equipment Technologies, Inc. No trial date has been set for this matter. The Company filed an answer and counterclaim to the QPSX Complaint on October 30. 2007. The answer denies infringement of the ‘499 patent and seeks a declaration that the Company does not infringe the ‘499 patent and that the ‘499 patent is invalid. The outcome of this matter and any possible liability, if any, for the Company, cannot reasonably be determined at this time.

Litigation is subject to inherent uncertainties, and were an unfavorable outcome to occur, it could have a material adverse impact on the Company’s financial position and results of operations for the period in which such outcome occurred. Legal fees associated with commitments or contingencies are expensed as incurred.

9. Recent Accounting Pronouncements

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”

Financial Accounting Standards Board Interpretation No. 48 , “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim-period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006. As a result, we adopted this pronouncement in the first quarter of 2007. This interpretation did not have a material impact on our financial statements during the first three quarters of 2007. See Note 6 of our condensed consolidated financial statements for more information.

Emerging Issues Task Force Issue 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities should be Presented in the Income Statement”

Emerging Issues Task Force Issue 06-3 (“EITF 06-3”), “How Taxes Collected from Customers and Remitted to Governmental Authorities should be Presented in the Income Statement (That is, Gross versus Net Presentation).” The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing activity between a seller and a customer, and may include, but is not limited to, sales, use, value added, and some excise taxes. EITF 06-3 concluded that the presentation of taxes within its scope on either a gross (included in revenue and cost) or net (excluded from revenues) basis is an accounting policy decision subject to appropriate disclosure. EITF 06-3 is effective for reporting periods beginning after December 15, 2006. As a result, we adopted this standard in the first quarter of 2007. This pronouncement did not have a material effect on our financial statements. We present the items within the scope of EITF 06-3 on a net basis (excluded from revenues).

Emerging Issues Task Force Issue 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities”

Emerging Issues Task Force Issue 07-3 (“EITF 07-3”), “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities.” The scope of EITF 07-3 is limited to nonrefundable advance payments for goods or services to be used or rendered in future research and development activities pursuant to an executory contractual arrangement. EITF 07-3 concluded that nonrefundable advance payments for goods or services to be used or rendered in future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. EITF 07-3 is effective for reporting periods beginning after December 15, 2007. We are currently evaluating the potential impact of EITF 07-3 on our financial statements.

Statement of Financial Accounting Standard No. 157, “Fair Value Measurements”

Statement of Financial Accounting Standard No. 157 (“SFAS 157”), “Fair Value Measurements”, defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. “Fair value” is defined as a market-based exchange price, or the price that would be received to sell the asset or paid to transfer the liability. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the potential impact of SFAS 157 on our financial statements.

Statement of Financial Accounting Standard No. 159, “Fair Value Option for Financial Assets and Liabilities”

Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. We are currently evaluating the potential impact of SFAS 159 on our financial statements.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NOTICE CONCERNING FORWARD-LOOKING STATEMENTS

This Management’s Discussion and Analysis contains “forward-looking statements” within the meaning of the federal securities laws, including forward-looking statements regarding ~~general economic conditions~~strategic ~~and~~alternatives, ~~industry~~revenue ~~consolidation~~for the fourth quarter of 2007, future sales of our products, ~~inventory~~to ~~levels~~our customers, ~~our~~ expectations regarding ~~research and development, expenses,~~ customer revenue mix, sources of revenue, gross profit margins, our tax liability, capital expenditures and operating costs and expenses. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “intends,” “plans,” “anticipates,” “estimates,” “potential,” or “continue”, “ or the negative thereof or other comparable terminology. These statements are based on current expectations and projections about our industry and assumptions made by ~~the~~ management and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition, as well as any forward-looking statements, isare subject to risks and uncertainties, including but not limited to the factors set forth under the heading “Risk Factors” in Part II, Item 21A of this ~~report~~Quarterly Report on Form 10-Q. All forward looking statements and reasons why results may differ included in this ~~report~~Quarterly Report on Form 10-Q are made as of the date hereof, and, unless required by law, we undertake no obligation to update any forward-looking statements or reasons why actual results may differ in this ~~report~~Quarterly Report on Form 10-Q.

~~Restatement~~Outlook ~~of Consolidated Financial Statements~~

AsIn ~~described~~fiscal ~~in our Annual Report on Form 10-K/A for the year ended December 31~~2007, ~~2004,~~ we ~~restated,~~ ~~among~~are ~~other~~focused ~~periods,~~on ~~our~~accelerating ~~financial~~development ~~statements and certain other information for each~~ of ~~the~~ ~~quarters~~new ofproduct ~~2004,~~platforms ~~with respect to our accounting for reported revenue, cost of sales, accounts receivable~~ and ~~inventory~~service ~~reserves.~~cards ~~The restated financial statements also include related adjustments~~ to ~~deferred~~expand ~~revenue, sales and marketing expense and income taxes and a reallocation of~~our ~~the~~existing ~~valuation~~Wireless ~~allowance~~radio onaccess ~~deferred~~network ~~income~~solutions ~~tax assets between the current~~ and ~~non~~Converged ~~current~~Access ~~portions. Please~~Voice ~~refer~~over toIP ~~Note 1 of Notes to Condensed Consolidated Financial Statements in this report for more detailed discussions of the restatement~~solutions.

~~Following~~In Wireless, our strategy is ato ~~summary~~leverage our oflarge ~~the~~installed ~~effects~~customer ofbase ~~the~~with ~~restatements~~new onscalable and upgradeable hardware and software solutions that enable our ~~results~~global ofwireless ~~operations~~customers ~~for~~to ~~the three~~grow and ~~nine~~expand ~~months~~their ~~ended~~networks ~~September 30~~and deliver web, ~~2004~~video ~~(in~~and ~~thousands~~entertainment services, ~~except~~without ~~per~~requiring ~~share~~our customers ~~amounts):~~to build separate overlay data networks. In Converged Access, we are focused on delivering new technology solutions that enable our customers to more economically deliver combined voice and internet services to their business user customers.

~~Page~~Effective 14August 1, 2007, Allen Snyder was promoted to President and Chief Executive Officer of Carrier Access, and the co-founders Roger Koenig and Nancy Pierce resigned from their operational responsibilities at Carrier Access. Mr. Koenig continues to serve as a director and as Chairman of the Board and Ms. Pierce continues to serve as a director.

In July 2007, we announced the engagement of Jefferies Broadview to advise us in evaluating strategic alternatives, including the possible sale of Carrier Access. We have aggressively pursued a range of possibilities, have met with a number of parties and are currently in ongoing discussions. However, we have not reached an understanding or agreement with any party. While there is no assurance that any transaction will result from this process, we are working hard to conclude these efforts within the next 60 to 90 days. These types of discussions involve sensitive and often time consuming negotiations, and it would be premature at this time for Carrier Access to speculate on either the nature or likelihood of any transaction being successfully concluded.

	Three Months Ended									Nine Months Ended
	September 30, 2004									September 30, 2004
							Diluted									Diluted
							earnings per									earnings per
	Net sales			Net income (loss)			share			Net sales			Net income			share
As previously reported	$	21,561		$	(3,827	)	$	(0.11	)	$	80,952		$	2,432		$	0.07
Effect of restatement		(277	)		118			0.00			(1,580	)		(409	)		(0.01	)
As restated	$	21,284		$	(3,709	)	$	(0.11	)	$	79,372		$	2,023		$	0.06

For a more complete analysis of the effects of the restatements on our results of operations and statements of cash flow for the year ended December 31, 2004 and on our balance sheet as of December 31, 2004, please refer to our amended annual report on Form 10-K/A as filed with the Securities and Exchange Commission on August 2, 2005.

Overview

We design, manufacture and sell next-generation broadband access communications equipment to wireline and wireless communications carriers. We were incorporated in September 1992 as a successor company to Koenig Communications, Inc., an equipment systems integration and consulting company that had been in operation since 1986. In the summer of 1995, we ceased our systems integration and consulting business and commenced our main product sales with the commercial deployment of our first network access products, which was followed by the introduction of our Wide Bank products in November 1997, Access Navigator products in January 1999, Adit products in December 1999, the Broadmore products in October 2000, which we acquired from Litton Network Access Systems, Inc., ~~or LNAS,~~ and the Axxius products in June ~~2002~~ 2003. In November , 2003 we acquired the MASTER Series and BROADway product lines through our acquisition of Paragon Networks International, Inc. In October 2006, we acquired White Rock Shanghai, Ltd. (subsequently renamed Carrier Access Networks (Shanghai), Ltd.) to expand our international presence and certain research and development activities. In March 2007, we acquired the optically-fed IP transport integration products of Mangrove Systems, Inc.

During the late 1990s, a substantial number of carriers, including competitive local exchange carriers, or CLECs, invested heavily in network infrastructure and service delivery projects, which accelerated growth in the telecommunications equipment market. By 2000, when our annual net revenues reached $148.1 million, we relied on a limited number of CLECs for a significant portion of our net revenue. However, starting in late 2000, many of these CLECs encountered sharp declines in the amount of capital they had available to fund network infrastructure and service delivery projects. As a result, there was a significant decline in the demand for telecommunications equipment, including demand for our products.

We have since broadened our product portfolio into new markets, including wireless carriers and incumbent wireline carriers. For example, in 2000, approximately 62% of our net revenue was derived from CLECs, 13% from incumbent local exchange carriers, or ILECs, and 5% from wireless carriers compared to 8approximately 11%, 1112% and 6029%, respectively, in the ~~third~~nine ~~quarter~~month ofperiod ~~2005~~ended September 30, 2007. Currently, the wireless and ILEC markets are dominated by a small number of large companies, and we continue to rely upon a small number of customers in these markets for a significant portion of our revenue. ~~For the three months ended September 30, 2005, direct sales to one wireless customer accounted for approximately 55% of our revenue.~~

~~When~~Historically, most of the ~~downturn~~sales inof ~~the~~our products ~~telecommunications~~have ~~industry~~been ~~adversely~~through ~~affected~~a limited number of distributors and original equipment manufacturers, or OEMs. Walker & Associates accounted for 10% of our net revenue for the nine months ended September 30, 2007 and 11% of annual net ~~operating~~revenue ~~results~~for infiscal ~~late~~year ~~2000~~2006. Recently, wehowever, ~~reduced~~an increasing proportion of our ~~operating~~product ~~expenses~~sales inhave anbeen ~~effort~~made directly to ~~better~~telecommunications ~~position our~~carriers ~~business~~and ~~for~~OEMs. For the ~~long~~three ~~term.~~and Innine ~~December~~months ended September ~~2002~~30, we2007, ~~completed~~direct asales ~~restructuring~~to ~~plan~~AT&T (formerly ~~designed~~known ~~to reduce~~as ~~our~~Cingular) ~~expenses~~accounted for approximately 16% and ~~align~~14%, ~~our~~respectively, ~~workforce~~of ~~and~~our ~~operations~~net torevenue, bedown ~~more~~from in20% ~~line~~and ~~with~~42% ~~anticipated~~of net ~~revenues.~~ Asrevenue aduring ~~result~~each of the ~~restructuring~~three ~~plan,~~and wenine ~~recorded~~month aperiods ~~$2.0~~ended September ~~million~~30, ~~restructuring~~2006. ~~charge~~This significant decline in sales has had a material adverse effect on our operating results since the ~~fourth~~third quarter of ~~2002~~2006. ~~This~~In ~~charge~~addition ~~was~~to ~~comprised~~AT&T ofand ~~$1.4~~Walker ~~million~~& ~~for~~Associates, ~~future~~we ~~rent~~had ~~payments related~~one toother ~~facility~~customer ~~closures~~who ~~and~~accounted ~~downsizing~~for 16% and ~~$600,000~~13% ~~for~~of ~~salary-related~~our ~~expenses~~net ~~due~~revenue tofor the three and ~~reductions~~nine inmonth ~~our~~periods ~~workforce~~ended September 30, 2007, respectively. ~~Our~~We ~~objective~~expect ~~has~~that ~~been~~our toproduct ~~focus~~sales onwill ~~cost~~continue ~~controls~~to ~~while~~be ~~continuing~~made to ~~invest~~ inan ~~the~~increasingly ~~development~~concentrated number of ~~new~~distributors, OEMs, and ~~enhanced~~direct ~~products~~customers. As a result, ~~which~~the weloss ~~believe~~of, ~~will~~or ~~position~~reduction usin sales to, ~~take advantage~~any of ~~sales~~our ~~opportunities~~significant ascustomers ~~economic~~would ~~conditions~~have ~~improve~~a ~~and~~material ~~demand~~adverse ~~recovers~~effect on our business. International net revenues, aor ~~trend~~net ~~that we~~revenues ~~have~~for ~~started~~products toshipped ~~see~~outside ~~over~~of the ~~past~~United ~~year. However~~States, weaccounted ~~believe~~for ~~current~~approximately ~~economic~~7% ~~conditions~~ and ~~industry~~ ~~consolidations~~10% ~~may~~of ~~continue~~our tototal ~~cause~~net revenues ~~our~~for ~~customers~~the ~~and~~nine ~~potential~~month ~~customers~~periods toended ~~defer~~September 30, 2007 and ~~reduce~~ ~~capital~~2006, ~~spending~~respectively.

~~Historically,~~Our ~~most~~objective ofhas ~~the sales of our products have~~ been ~~through~~to afocus ~~limited~~on ~~number~~cost ofcontrols ~~distributors~~while ~~and~~continuing ~~OEM’s. Sales~~ to ~~one~~invest ~~distributor,~~in ~~Walker~~the &development ~~Associates~~of ~~accounted~~new ~~for~~and ~~11%~~enhanced ~~in 2003~~products, ~~7% in~~which ~~2004~~we ~~and~~believe 7%will ~~for~~position ~~the~~us ~~three months ended September 30, 2005. Sales~~ to ~~distributors~~take ~~and~~advantage ~~OEM’s~~of ~~in 2004~~sales ~~accounted~~opportunities ~~for~~as ~~47%~~our ofcustomers ~~our~~develop ~~annual~~and ~~revenue.~~upgrade ~~Recently,~~their ~~however,~~networks anand ~~increasing~~telecom ~~proportion~~infrastructure ofto ~~our~~incorporate ~~product~~technological ~~sales~~improvements ~~have~~which ~~been~~improve ~~made~~the ~~directly~~value tothey ~~wireless~~provide ~~telecommunications~~to ~~carriers~~their customers. ~~For the three months ended September 30~~However, ~~2005,~~we ~~one~~believe ~~wireless~~current ~~customer~~economic ~~accounted~~conditions ~~for~~and ~~approximately~~industry ~~55%~~consolidation ofhas ~~our~~resulted ~~net~~in ~~revenue. We~~a ~~expect~~significant ~~that~~reduction ~~the~~in ~~sale of~~ our ~~products~~sales ~~will~~since ~~continue~~the tothird bequarter ~~made to a small number~~ of ~~distributors~~2006, ~~OEMs,~~ and may ~~direct~~continue ~~customers. As a result, the loss of, or reduction of sales~~ to, ~~any~~cause ofour ~~these~~ customers ~~would~~and ~~have~~potential acustomers ~~material~~to ~~adverse~~defer ~~effect~~and onreduce ~~our~~capital ~~business~~spending.

Our net ~~revenue~~revenues ~~continues~~continue to be affected by the timing and number of orders for our products, which continue to vary from quarter to quarter due to factors such as demand for our products, economic conditions, and the financial stability and ordering patterns of our direct customers, distributors, and OEMs. In addition, a significant portion of our net revenues has been derived from a limited number of large orders, and we believe that this trend will continue in the future, especially if the percentage of OEM and direct sales to customers continues to increase since such customers typically place larger orders than our distributors. The timing of such orders and our ability to fulfill them has caused material fluctuations in our operating results, and we anticipate that such fluctuations will continue in the future.

~~Page~~Presentation 15

The presentation is organized in a way that provides the information required, while highlighting the information that we believe will be instructive for understanding the relevant trends going forward. An overview of the operational results is provided below.

~~patterns~~Results of ~~our~~Operations ~~direct~~for ~~customers,~~the ~~distributors,~~Three and ~~OEMs.~~Nine InMonth ~~addition,~~Periods aEnded ~~significant portion of our net revenue has been derived from a limited number of large orders~~September 30, ~~and~~2007 ~~we believe that this trend will continue in the future, especially if the percentage of OEM~~ and ~~direct~~2006 sales to customers continues to increase since such customers typically place larger orders than our distributors. The timing of such orders and our ability to fulfill them has caused material fluctuations in our operating results, and we anticipate that such fluctuations will continue in the future.

Results of Operations


	Three Months Ended										Nine Months Ended
	September 30, 2007					September 30, 2006					September 30, 2007					September 30, 2006
$ in thousands				% of revenues					% of revenues					% of revenues					% of revenues
Net revenues	$	7,353		100	%	$	16,083		100	%	$	23,656		100	%	$	62,897		100	%
Cost of sales		8,353		(114	)%		9,862		61	%		21,060		89	%		34,387		55	%

Gross profit		(1,000	)	(14	)%		6,221		39	%		2,596		11	%		28,510		45	%
Research and development		5,102		69	%		6,953		43	%		19,953		84	%		19,550		31	%
Sales and marketing		3,416		46	%		3,855		24	%		10,651		45	%		10,791		17	%
General and administrative		2,481		34	%		2,235		14	%		7,872		33	%		7,677		12	%
Bad debt recoveries		46		—	%		25		—	%		(42	)	—	%		(74	)	—	%
Insurance recoveries, net		—		—	%		(232	)	(1	)%		(610	)	(2	)%		(232	)	—	%
Restructuring charges		363		5	%		—		—	%		762		3	%		—		—	%
Intangible asset amortization		492		7	%		307		2	%		1,352		6	%		921		1	%

Loss from operations		(12,900	)	(175	)%		(6,922	)	(43	)%		(37,342	)	(158	)%		(10,123	)	(16	)%
Interest income		1,101		15	%		1,458		9	%		3,643		16	%		3,813		6	%

Loss from operations, pre-tax		(11,799	)	(160	)%		(5,464	)	(34	)%		(33,699	)	(142	)%		(6,310	)	(10	)%
Income taxes (benefit)		(14	)	—	%		(18	)	—	%		(14	)	—	%		(25	)	—	%

Net loss	$	(11,785	)	(160	)%	$	(5,446	)	(34	)%	$	(33,685	)	(142	)%	$	(6,285	)	(10	)%

~~Net~~The ~~Revenue~~decreases in net revenues for the three and ~~Cost~~nine months ended September 30, 2007, compared to the same periods in 2006, were primarily due to a decrease in the number of ~~Goods~~MASTERseries, ~~Sold~~Adit (600, Broadmore and Axxius units sold. The decreases in ~~thousands):~~MASTERseries units sold in the three and nine month periods ended September 30, 2007 were due to a significant decline in sales to one of our major wireless customers. The decline in the Adit 600 and Broadmore units sold in the same periods were due to a decline in sales to our distributors. We anticipate revenue in the fourth quarter of fiscal 2007 to remain substantially unchanged from the third quarter of fiscal 2007.

	Three Months Ended September 30,										Nine Months Ended September 30,
					$			%							$			%
	2005		2004		Change			Change			2005		2004		Change			Change
	(unaudited)		(unaudited)								(unaudited)		(unaudited)
			As restated										As restated
Net revenue		20,862		21,284		(422	)		(2	%)		54,483		79,372		(24,889	)		(31	%)
Cost of goods sold		11,918		12,625		(707	)		(6	%)		32,789		44,347		(11,558	)		(26	%)

A significant portion of our net revenue has been derived from a limited number of large orders, and we believe that this trend will continue. For the nine month periods ended September 30, 2007 and 2006, approximately 23% of our net revenues were derived from 15 and 22 customer sales orders, respectively. We have experienced a substantial decrease in the number of orders from some of our major customers as a result of decreases in their capital spending budgets and the effect of mergers involving some of these customers. In 2007, we expect to generate the majority of our net revenues from several key product lines, including our MASTERseries, Adit 600 and Axxius products. In order to maintain or grow our net revenue, as well as offset the decline in anticipated net revenue from some of our prior customers, we will need to sell more products to both our remaining customers and new customers, and we can provide no assurance that we will be able to make such sales. Our net revenue was, and continues to be, affected by the timing and quantities of orders for our products which may vary from quarter to quarter in the future, as they have in the past, due to factors such as demand for our products, economic conditions, capital spending budgets of our customers, bankruptcies of our customers and distributors, and ordering patterns of distributors and OEMs, and other direct customers. We believe that this trend could continue in the future, especially if the percentage of direct sales to end-users increases. The timing of customer orders and our ability to fulfill them can cause material fluctuations in our operating results, and we anticipate that such fluctuations will occur in the future.

~~The~~Gross ~~net~~Profit revenue for the three months ended September 30, 2005 decreased slightly from revenues for the three months ended September 30, 2004. Revenues decreased for the nine months ended September 30, 2005 from nine months ended September 30, 2004 primarily due to a significant decrease in sales from our OEM customers supplying product into the wireless market offset by increased sales into our direct wireless customer. In addition, sales to direct customers for integrated T-1 business offerings declined and were not offset by sales of our converged access products, including Voice Over IP offerings, as carriers were determining their roll out strategies for Voice over IP business service offerings. These events resulted in decreases in the number of units sold into the converged business access markets in the three and nine months ended September 30, 2005 as compared to the prior year period. The decreased unit sales related primarily to Widebank and Adit products for the three month period ended September 30, 2005. The decreased unit sales for the nine month period ended September 30, 2005 related primarily to Axxius, Broadway, Widebank and Adit products.

A significant portion of our net revenue has been derived from a limited number of large orders, and we believe that this trend will continue in the future, especially if the percentage of direct sales to end-users increases. In each of fiscal 2003, fiscal 2004 and for the nine months ended September 30, 2005, 23% of our net revenue was derived from 16, 24 and 8 orders, respectively. We have experienced a substantial decrease in the number of orders from some of these customers as a result of decreases in their capital spending budgets and the impact of adverse economic conditions both in general and in the telecommunications equipment industry in particular, which has resulted in decreased demand for telecommunications equipment during this period. In order to maintain or grow our net revenue, as well as offset the loss of anticipated net revenue from some of our prior customers, we will need to sell more products to both our remaining customers and new customers, and we can provide no assurance that we will be able to make such sales. Our net revenue was, and continues to be, affected by the timing and quantities of orders for our products which may vary from quarter to quarter in the future, as they have in the past, due to factors such as demand for our products, economic conditions, bankruptcies of our customers and distributors, and ordering patterns of distributors and OEMs, and other direct customers. We believe that this trend could continue in the future, especially if the percentage of direct sales to end-users increases. The timing of customer orders and our ability to fulfill them can cause material fluctuations in our operating results, and we anticipate that such fluctuations will occur in the future.


$ in thousands	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
$ in thousands	2007			2006			Change			2007			2006			Change
Gross profit	$	(1,000	)	$	6,221		$	(7,221	)	$	2,596		$	28,510		$	(25,914	)
% of Net Revenues		(14	)%		39	%		(116	)%		11	%		45	%		(91	)%

~~During~~The decreases in gross profit for the ~~first~~three and nine months ofended ~~2005~~September 30, ~~approximately~~2007, compared ~~26.3%~~to ofthe ~~our~~same ~~revenue~~periods ~~was~~in ~~derived~~2006, ~~from~~were partially due to inventory write downs. During the ~~sales~~ third quarter of ~~our~~fiscal ~~products~~2007, ~~through~~we concluded that our ~~distributors~~recent price reductions and ~~OEMs.~~sales ~~Our~~incentive ~~success~~plans ~~depends~~were innot ~~part~~adequately onreducing ~~the~~inventory related to ~~continued~~certain ~~sales~~products and ~~customer~~product ~~support~~configurations. ~~efforts~~Lower ofsales ~~our~~volumes, ~~network~~market ofconditions, ~~distributors~~continued ~~and~~poor ~~OEMs~~visibility asinto ~~well~~future ~~as increased~~ sales toopportunities ~~our~~and ~~direct~~reductions ~~customers.~~in Weour ~~expect~~international ~~that~~sales ~~the~~staff ~~sale~~associated ofwith our ~~products~~July ~~will~~2007 ~~continue~~restructuring toplan resulted bein ~~made~~our toreduction aof ~~small~~the ~~number~~carrying value of ~~distributors~~this inventory. ~~Accordingly,~~As ~~the~~a ~~loss of~~result, orwe arecorded ~~reduction~~an inadditional ~~sales~~charge to~~, any~~ cost of ~~our~~sales ~~key~~of ~~distributors~~approximately or$2.8 ~~OEMs~~million ~~could~~in ~~have~~the athree ~~material~~month ~~adverse~~period ~~effect~~ended onSeptember 30, ~~our business~~2007. ~~In addition~~We toregularly ~~being~~evaluate ~~dependent~~our oninventory afor potential ~~small~~excess ~~number~~based ofon ~~distributors~~forecasted ~~and OEMs~~demand, ~~our~~economic ~~products~~trends ~~are~~and ~~sold directly~~technological toobsolescence ~~a limited number~~ of ~~service~~our ~~provider customers~~products. ~~For~~If ~~the~~future ~~three~~demand ~~months~~or ~~ended~~market ~~September 30,~~conditions ~~2005,~~are ~~approximately~~less ~~55%~~favorable ofthan our ~~net~~projections, ~~revenue~~additional ~~related~~inventory towrite-downs ~~one~~could ~~wireless~~be ~~customer.~~required Aand ~~decrease in~~would ~~sales~~be toreflected ~~this~~in orour ~~other~~cost ~~significant~~of ~~customers~~sales ~~could~~in ~~have~~the aperiod ~~material~~the ~~adverse~~revision ~~effect~~is ~~on our business~~made.

~~Page~~18 16

~~Gross~~In ~~Margins~~addition (to the inventory impairment charge, the decreases in ~~thousands):~~gross profit for the three and nine month periods ended September 30, 2007, compared to the same periods in 2006, resulted from decreased sales volume, in particular our MASTERseries, Adit 600 and Axxius products. The decrease in average gross profit was due to a higher proportion of lower margin products, as well as the effects of higher per unit fixed costs associated with lower production volumes. We believe that we will continue to experience similar product gross profit during the fourth quarter of 2007.

	Three Months Ended September 30,											Nine Months Ended September 30,
							$		%									$			%
	2005			2004			Change		Change			2005			2004			Change			Change
	(unaudited)			(unaudited)								(unaudited)			(unaudited)
				As restated											As restated
Gross profit		8,944			8,659			285		3	%		21,694			35,025			(13,331	)		(38	%)
Gross margin		43	%		41	%				2	%		40	%		44	%					(4	%)

We believe that average selling prices and the related gross profit will decline for our mature products, as volume price discounts in OEM and distributor contracts, and direct sales relationships are subject to upward pressure due to competition. We have experienced declines in average selling prices per unit for our Axxius and MASTERseries products in 2007, Adit 600 and Axxius products in 2006, and MASTERseries, Navigator and Adit 3000 products during 2005. In addition, significant reduction in production in response to lower customer demand, as we experienced in the first three quarters of 2007, could harm our gross profit due to lower absorption of fixed manufacturing overhead costs. We are in the process of consolidating the work of our contract manufacturers into a single-source third-party manufacturer in order to streamline production, reduce required inventory volumes and moderate volatility in gross margins related to sales volume. The third-party manufacturer will also assume a significant portion of our final assembly and test operations. This transition is expected to be complete by the end of the first quarter of fiscal year 2008. Any delays in this transition or disruptions to our ability to supply product could have an adverse effect on our net revenues and operating results.

~~Gross~~We ~~margins~~include ~~increased~~direct ~~for~~and ~~the~~indirect ~~quarter~~materials ~~ended~~and ~~September 30~~labor, ~~2005~~certain ~~from~~warehousing the quarter ended September 30, 2004 primarily due to cost improvements in the configuration of our MASTERseries product. Gross margins decreased for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004 due to lower sales volumes and ~~the~~other ~~related~~allocable ~~impact~~fixed ofmanufacturing ~~fixed~~ overhead ~~amounts per unit. In addition~~costs, ~~gross~~including ~~margins were impacted by shifts in product mix to~~depreciation, ~~lower margin products such as MASTERseries product shipped with lower margin service cards~~ in ~~the first~~our ~~quarter~~calculation of ~~2005.~~cost Weof ~~believe that the average selling prices and the related gross margins will decline for mature products as volume price discounts in distributor contracts and direct~~ sales ~~relationships take effect due to competition~~. We have seen the average selling price for the Wide Bank products, Adit products, and MASTERseries products decrease during 2004 and 2005. In addition, new product introductions could decrease gross margins until production volume increases.

Research and Development ~~Expenses~~Expense ~~(in thousands):~~

	Three Months Ended September 30,												Nine Months Ended September 30,
$ in thousands	Three Months EndedSeptember 30,						Change			Nine Months EndedSeptember 30,						Change
							$			%									$			%
	2007			2006						2007			2006
	2005			2004			Change			Change			2005			2004			Change			Change
Research & development expense	$	5,102		$	6,953		$	(1,851	)	$	19,953		$	19,550		$	403
	(unaudited)			(unaudited)									(unaudited)			(unaudited)
% of Net Revenues		69	%		43	%		(27	)%		84	%		31	%		2	%
Research & development expenses		4,138			5,230			(1,092	)		(21	%)		13,195			13,897			(702	)		(5	%)
As a percentage of net revenue		20	%		25	%					(5	%)		24	%		18	%					(6	%)

Research and development ~~expenses~~expense for the ~~three~~quarter ~~months~~ ended September 30, ~~2005~~2007, ~~decreased~~compared ~~from~~ to the same ~~three~~period ~~months~~in ~~ended September 30~~2006, ~~2004~~decreased $1.9 ~~This~~million. ~~decrease~~During ~~was~~the ~~primarily~~third ~~related~~quarter ~~to decreases in pilot expenses~~ of ~~approximately $650~~2007,~~000~~ ~~and~~we ~~related~~continued ~~consulting~~to ~~expenses~~invest ofin ~~$315,000~~the ~~for~~development ~~projects completed~~of atnew ~~the~~and ~~end~~enhanced ofproducts, ~~2004~~including ~~related~~our toFLEXengine ~~our~~release ~~wireless~~2.0 and ~~Voice~~VoicePage voice over IP ~~product~~software ~~introductions~~solution. ~~These product~~At ~~introductions occurred in~~ the ~~first~~same time, ~~quarter~~we ofwere ~~2005.~~focused ~~The~~on ~~decrease~~cost ~~was~~controls, ~~also~~including ~~caused~~the bytransition ~~net decrease~~ of ~~salaries~~our ofresearch ~~approximately~~and ~~$290,000,~~development ~~which~~work ~~were~~to ~~offset~~our byShanghai ~~increases in software~~ development ~~expenses of $420~~center,~~000~~ ~~for~~ the ~~period.~~closing ~~Research~~of our research and development ~~expenses~~facilities ~~for~~in ~~the~~Bethel, ~~nine months~~CT ~~ended~~and ~~September 30~~Tulsa, ~~2005~~OK ~~decreased~~and ~~from~~a ~~the~~restructuring ~~nine~~plan announced ~~months~~in ~~ended~~July ~~September 30,~~2007 ~~2004 due~~ to ~~decreased~~ ~~pilot~~better ~~expenses~~align ~~of $750,000 and related consulting~~ expenses ofwith ~~$480,000~~current revenue. These ~~decrease were~~cost ~~offset~~controls byresulted ~~increases~~ in ~~software~~reduced ~~development~~employee ~~expenses~~costs of approximately $~~850,000~~1.9 ~~for~~million ~~the~~and ~~period.~~a Inreduction ~~addition, at~~in ~~the~~consulting ~~end~~expense of ~~the~~approximately ~~second~~$1.5 ~~quarter,~~million wein ~~entered~~the ~~into~~third ~~development~~quarter ~~agreements with two~~ of ~~our customers~~ ~~for~~2007. ~~which~~These wereductions were ~~paid~~offset ~~$275,000~~by inincreased ~~exchange~~employee ~~for~~compensation ~~achieving~~and ~~certain~~other ~~milestones.~~costs ~~This~~of ~~amount~~approximately ~~was offset~~$1.9 ~~set~~million ~~against~~as ~~expenses~~a ~~incurred~~result ~~during~~of ~~the~~our ~~periods.~~acquisitions Weof ~~believe~~Carrier ~~that~~Access ~~the~~Networks ~~trend~~(Shanghai) inLtd. ~~our research~~ and ~~development~~Mangrove ~~expenses~~Systems, ~~could~~Inc. ~~continue~~in ~~for~~ the ~~rest~~fourth ofquarter ~~2005 as we accelerate our development~~ of ~~new~~ ~~product platforms~~ 2006 and ~~service~~first ~~cards~~quarter ~~for~~of ~~our~~2007, ~~existing development for wireless and Voice over IP solutions~~respectively.

~~Page~~Research 17and development expenses increased $403,000 for the nine months ended September 30, 2007, as compared with the same period in 2006, due to increased employee compensation and other costs of approximately $5.1 million as a result of our acquisitions of Carrier Access Networks (Shanghai), Ltd. and Mangrove Systems, Inc. These increased costs were offset by a reduction in consulting expense of $3.0 million and decrease in employee costs of approximately $2.5 million related to the cost controls implemented in the second and third quarters of 2007 as discussed above. During the first nine months of 2006, we received non-recurring “milestone” payments of approximately $952,000 in exchange for development work that we offset against our research and development expenses in 2006.

We believe that our level of research and development expenses will remain substantially unchanged for the remainder of 2007 as we continue development of our existing wireless and converged access development projects.

~~Selling,~~Sales ~~General~~ and ~~Administrative~~Marketing ~~Expenses~~Expense ~~(in thousands):~~

	Three Months Ended September 30,												Nine Months Ended September 30,
$ in thousands	Three Months EndedSeptember 30,						Change			Nine Months EndedSeptember 30,						Change
							$			%									$			%
	2007			2006						2007			2006
	2005			2004			Change			Change			2005			2004			Change			Change
Sales & marketing expense	$	3,416		$	3,855		$	(439	)	$	10,651		$	10,791		$	(140	)
	(unaudited)			(unaudited)									(unaudited)			(unaudited)
% of Net Revenues		46	%		24	%		(11	)%		45	%		17	%		(1	)%
				As restated												As restated
Sales and marketing expenses		2,623			3,707			(1,084	)		(29	%)		9,155			12,332			(3,177	)		(26	%)
General and administrative expenses		3,411			3,910			(499	)		(13	%)		7,127			7,429			(302	)		(4	%)
Bad debt expense (recoveries)		38			(165	)		203			123	%		424			(446	)		870			195	%
Restructuring charges		84						84						453			92			361			392	%
Intangible asset amortization		307			307			—						921			962			(41	)		4	%
Total selling, general and administrative expenses		6,463			7,759			(1,296	)		(17	%)		18,080			20,369			(2,289	)		(11	%)
Total selling, general and administrative expenses as a percentage of net revenue		31	%		36	%					(7	%)		33	%		26	%					7	%

Sales and marketing ~~expenses~~expense for the ~~three~~quarter ~~months~~ ended September 30, ~~2005~~2007, ~~decreased~~compared ~~from~~to the same ~~three~~period ~~months~~in ~~ended September 30~~2006, ~~2004~~decreased $439,000 primarily due to ~~decreases~~lower ~~in personnel expenses and~~ sales ~~commissions~~ ofcommission ~~$1.0 million~~expense ~~and~~associated ~~related~~with ~~travel~~lower ~~expenses~~net ~~of $63,000~~revenues. Sales and marketing ~~expenses~~ expense for the nine months ended September 30, ~~2005~~2007, ~~decreased~~compared ~~from~~to the ~~nine~~same ~~months~~period ~~ended~~in ~~September 30~~2006, decreased ~~2004~~$140,000 primarily due to ~~decreases~~lower insales ~~personnel~~commission ~~expenses~~expense, ~~and~~offset ~~sales~~by ~~commissions~~higher salary expense related to the reorganization of $2our sales force.~~8 million~~ ~~and~~Because ~~related travel~~commission ~~expenses~~expense does not constitute a major component of ~~$208~~our sales and marketing expense,~~000.~~ ~~General~~the decline in sales and ~~administrative~~marketing ~~expenses~~expense for the three ~~months~~and nine month periods ended September 30, ~~2005~~2007, ~~decreased~~compared ~~primarily~~to ~~due~~the tosame ~~decreases~~period in ~~legal costs of $750~~2006,~~000~~ ~~related~~does ~~to fees~~not ~~used~~correspond todirectly ~~settle~~with the ~~SMTC~~decline ~~lawsuit~~ in ~~September 2004.~~revenues ~~General~~we ~~and~~experienced. ~~administrative~~We ~~expenses~~have ~~for~~devoted the majority of ~~nine~~our ~~months~~sales ~~ended~~and ~~September 30,~~marketing ~~2005~~resources ~~were~~to ~~consistent~~developing ~~with~~new ~~the~~sales ~~nine~~opportunities ~~months~~and ~~ended~~supporting ~~September 30,~~existing ~~2004, as~~customers. ~~decreases~~We ~~related~~believe this will position us to ~~the~~take ~~SMTC~~advantage ~~lawsuit~~of insales ~~September 2004~~opportunities ~~were~~as ~~offset~~our bycustomers ~~increases~~develop ~~professional service~~and ~~costs,~~upgrade ~~including~~their ~~legal~~networks and ~~accounting~~telecom infrastructure ~~expenses~~to ~~associated~~incorporate ~~with~~technological ~~the~~improvements ~~restatement~~which ofimprove the ~~fiscal~~ ~~2003~~value ~~and~~they ~~fiscal~~provide ~~2004~~to ~~financial~~their ~~statements~~customers, however, we can provide no assurance that ~~occurred~~we inwill ~~2005~~be able to make such sales.

~~Other~~General ~~Income~~and Administrative Expenses, ~~Net~~ Bad Debt Recoveries, Insurance Recoveries, Restructuring Charges and Intangible Amortization

Interest and other income, net for the three months ended September 30, 2005 increased to $820,000 from $621,000 for the three months ended September 30, 2004. The increase was attributable to higher interest rates during 2005. For the nine months ended September 30, 2005 interest and other income, net increased to $2,286,000 from $1,331,000. The increase was attributable to having a larger position invested in marketable securities than cash during 2005.


$ in thousands	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
$ in thousands	2007			2006			Change			2007			2006			Change
General & administrative expense	$	3,382		$	2,335		$	1,047		$	9,334		$	8,292		$	1,042
% of Net Revenues		46	%		15	%		45	%		39	%		13	%		13	%

~~Income~~General ~~Taxes~~and administrative expense, including bad debt recoveries, insurance recoveries, restructuring charges and intangible amortization, for the quarter ended September 30, 2007, compared to the same period in 2006, increased $1.0 million primarily due to restructuring costs of $363,000, higher litigation costs of $302,000 and higher amortization of intangible assets primarily resulting from the acquisition of Mangrove Systems, Inc. of $185,000. In addition, there were no insurance recoveries related to shareholder litigation during the three months ended September 30, 2007, compared to $232,000 in recoveries in the same period in 2006. General and administrative expense for the nine months ended September 30, 2007, compared to the same period in 2006, increased $1.0 million primarily due to restructuring charges of $762,000, higher amortization of intangible assets resulting from the acquisition of Mangrove Systems, Inc. of $431,000, and higher stock based compensation expense of $442,000, which were offset by higher insurance recoveries related to shareholder litigation of $377,000.

WeRestructuring ~~did~~charges ~~not~~of ~~record~~$363,000 anand ~~income~~$762,000 ~~tax~~for ~~provision in~~ the ~~third~~three ~~quarter~~and ofnine ~~2005. While we have~~months ~~identified~~ended ~~net~~September 30, ~~operating~~2007, ~~loss~~consist ~~carryforwards~~primarily ~~that~~of ~~may~~employee betermination ~~used~~costs. toSubstantially ~~offset~~all ~~up to $50.4 million~~ of ~~future~~ ~~taxable~~these ~~income~~costs ~~for~~have ~~federal~~been ~~tax~~expensed ~~purposes~~ and uppaid toby ~~$35.2 million~~the ~~for~~end ~~state tax purposes, we cannot conclude that realization~~ of the ~~resulting~~third ~~deferred~~quarter ~~tax~~of ~~assets is more likely than not~~2007. ~~As these~~From ~~net operating loss carryforwards are utilized~~December 31, we2006 ~~will~~until ~~reduce the related valuation allowance. Reductions in the valuation allowance~~September 30, ~~if any~~2007, ~~will generally be recognized in~~ our ~~statements~~headcount ofhas ~~operations~~decreased asfrom an304 ~~income~~employees ~~tax~~to ~~benefit,~~271 ~~and may offset any current income tax expense~~employees. In ~~addition,~~This ~~should~~includes ~~we demonstrate~~ a ~~history~~decrease ofin ~~sustained~~North ~~profitability,~~America ~~we may reverse all or a significant portion~~ of ~~the~~75 ~~remaining~~employees ~~valuation~~due ~~allowance. A portion of the valuation allowance relates~~ to ~~deferred tax assets obtained in connection with~~ our ~~acquisition~~restructuring ofplans ~~Paragon~~as inwell ~~2003. Should~~as wenatural ~~reverse the valuation allowance related to these acquired deferred tax assets~~attrition, ~~such reversal~~offset ~~will~~by ~~result in~~ an ~~increase~~increased toheadcount ~~the~~in ~~amount~~our ofShanghai ~~acquired~~development ~~goodwill and will have no impact on~~center ~~our~~of ~~income~~42 ~~tax provision~~employees.

~~Page~~Interest 18 Income


$ in thousands	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
$ in thousands	2007			2006			Change			2007			2006			Change
Interest income	$	1,101		$	1,458		$	(357	)	$	3,643		$	3,813		$	(170	)
% of Net Revenues		15	%		9	%		(24	)%		16	%		6	%		(4	)%

Interest income for the three month period ended September 30, 2007 decreased $357,000, compared to the same period in 2006 primarily due to lower average cash and investment balances. Interest income for the nine month period ended September 30, 2007 decreased $170,000, compared to the same period in 2006 primarily due to lower average cash and investment balances.

Liquidity and Capital Resources

As of September 30, 2007, our primary source of liquidity was cash, cash equivalents and short-term investments in marketable securities of $81.1 million

~~Liquidity~~ compared to $110.8 million as of December 31, 2006. The decrease of $29.7 million was primarily due to our net operating loss and ~~Capital~~cash ~~Resources~~used (for the acquisition of Mangrove Systems, Inc. We believe our current cash, cash equivalents and marketable securities will provide us with adequate liquidity to meet our cash requirements for at least the next 12 months, including investments in ~~thousands):~~research and development, sales and marketing, and matters related to known regulatory and other legal proceedings. In the future, however, we may need to secure additional funding to finance our operations. It may be difficult for us to raise additional capital if and when it is required. If adequate capital is not available to us as required, or if it is not available on favorable terms, our business and financial condition would be adversely affected.

	September 30, 2005		December 31, 2004
	(unaudited)
Working capital	$	136,768	$	142,047
Cash, cash equivalents and marketable securities	$	106,280	$	108,683
Total assets	$	176,160	$	184,135

Cash Flows

	Nine Months Ended
	September 30, 2005			September 30, 2004
	(unaudited)			(unaudited)
(in thousands)				As restated
Net cash provided (used) by:
Operating activities	($	1,271	)	$	4,843
Investing activities	$	2,524		($	34,958	)
Financing activities	$	496		$	80,528

Cash used in operations was $22.1 million for the nine months ended September 30, 2007 compared to $4.5 million provided by operations for the nine months ended September 30, 2006. The decrease in cash from operating activities during the first nine months of 2007 was primarily due to the increase in net loss of $27.4 million. The amount of our net loss has increased recently and there can be no assurance that we will be able to reduce the amount of the net loss in future periods. During the first nine months of 2007, cash flow from working capital items (such as accounts receivable, inventory, and accounts payable and accrued expenses) decreased by approximately $3.7 million, compared to the same period in 2006. This decrease was offset by higher depreciation and amortization expense of $776,000, a higher provision for inventory obsolescence of $3.2 million and higher stock compensation expense of $485,000. Our net inventory levels decreased approximately $1.3 million to $16.9 million at September 30, 2007 from $18.2 million at December 31, 2006. This decrease is attributable to the total increase in our provision for inventory obsolescence in the third quarter of 2007 of $3.5 million, offset by an increase to inventory due to our purchase of the IP networking product assets of Mangrove Systems, Inc. in the first quarter of 2007 totaling $2.1 million.

AtCash used in investing activities for the nine months ended September 30, ~~2005,~~2007 ~~our~~was ~~principal~~$14.4 ~~sources~~million ofcompared ~~liquidity~~to ~~included~~ cash, ~~cash~~provided ~~equivalents~~by ~~and marketable~~investing ~~securities~~activities ~~available~~of $11.6 million for ~~sale~~the ~~totaling~~nine ~~approximately~~months ~~$106.3~~ended September ~~million~~30, 2006. AtFor the nine months ended September 30, ~~2005~~ 2007, cash ~~our~~used ~~working~~in ~~capital~~investing ~~was~~activities ~~approximately~~included $~~136~~5.8 million. Wein ~~have~~net nopurchases ~~significant~~of ~~capital~~marketable ~~spending commitments~~securities, ~~although~~compared weto docash ~~have~~provided ~~inventory~~by ~~purchase~~net ~~commitments~~sales ~~and~~of ~~facilities~~marketable ~~leases~~securities of $12.9 for the same period in 2006, and the acquisition of the IP networking product assets of Mangrove Systems, Inc. totaling $7.9 million.

Cash ~~used~~provided by ~~operations~~financing ~~was~~activities ~~$1.3 million~~ for the nine months ended September 30, ~~2005~~ ~~contrasted~~2007 towas $~~4.8 million provided by operations in the nine months ended September 30~~658,000 ~~2004.~~compared ~~Cash used by operations for the nine months ended September 30, 2005 was primarily due~~ to ~~our net loss of~~ $~~7.3 million adjusted for depreciation and amortization expense of $3.~~1 ~~million, increases in prepaid expenses of approximately $2~~.1 ~~million,~~ ~~offset by increases in accounts receivable of $2.0~~ million ~~and~~for ~~decreases in accounts payable of $1.2 million. For~~ the nine months ended September 30, ~~2004~~ 2006, ~~our~~resulting from cash ~~provided~~receipts ~~by operations resulted~~ from ~~net~~the ~~income~~exercise of ~~$2.0 million~~stock ~~adjusted for depreciation and amortization expense of $3~~options.~~4 million,~~ ~~decreases in accounts receivable of $5.0 million, offset by increases in inventory of $4.9 million.~~

~~Cash~~Contractual ~~provided~~Obligations by investing activities for the nine months ended September 30, 2005 was $2.5 million compared to cash used in the nine months ended September 30, 2004 of $34.9 million. For the nine months ended September 30, 2005, we had net sales of $3.9 million of marketable securities compared to net purchases of $33.0 million for the nine months ended September 30, 2004. Our capital expenditures for the nine months ended September 30, 2005 were $1.4 million for equipment to support research, development, and ~~manufacturing~~Commercial ~~activities~~Commitments ~~compared to $1.9 million for the nine months ended September 30, 2004. We believe our current facilities are sufficient to meet our current operating requirements.~~

~~Financing~~Except ~~activities~~as ~~provided~~described ~~$496~~below,~~000~~ ~~for~~our ~~the~~contractual ~~nine~~obligations ~~months~~and ~~ended~~commercial commitments ~~September 30,~~have ~~2005,~~not ~~which~~materially ~~was the~~changed ~~result~~from ofthose ~~the~~reported ~~exercise~~in Management’s Discussion and Analysis of ~~stock~~Financial ~~options.~~Condition ~~Financing~~and ~~activities~~Results ~~provided~~of ~~$80.5 million~~Operations in the Form 10-K for the ~~nine~~ ~~months~~year ended December 31, 2006. As of September 30, ~~2004~~2007, ~~which~~we had ~~was~~placed ~~primarily~~non-cancellable ~~the~~purchase ~~result~~orders offor approximately $785.4 0 million of ~~net~~inventory, ~~cash received~~supplies ~~upon~~and ~~the~~services ~~completion~~from certain of ~~our~~its ~~public~~vendors ~~offering.~~for Indelivery ~~addition,~~in we2007 ~~received~~and $22008.~~1 million~~ ~~from~~These ~~the exercise~~orders ofare ~~stock~~generally ~~options~~placed ~~during~~up ~~the~~to ~~nine~~4 months ~~ended~~in ~~September 30,~~advance ~~2004.~~based on the lead-time of the inventory.

~~Our~~Off-Balance ~~net~~Sheet ~~inventory~~Arrangements levels decreased approximately $3.1 million to a net $28.9 million at September 30, 2005 from $32.0 million at December 31, 2004. The decrease was primarily the result of changes in our procurement practices.

WeAs ~~believe~~of ~~that our existing cash and investment balances are adequate to fund our projected working capital and capital expenditure requirements for a period greater than 12~~September ~~months. Although operating activities may provide cash in certain periods~~30, ~~to the extent we experience growth in the future~~2007, we ~~anticipate~~do ~~that~~not ~~our~~have ~~operating~~any ~~and~~off-balance ~~investing~~sheet ~~activities may use cash~~arrangements. We may consider using our capital to make strategic investments, acquisitions of companies, or to acquire or license technology or products. However, we cannot assure you that additional funds or capital will be available to us in adequate amounts and with reasonably acceptable terms.

~~Off~~Recent ~~Balance~~Accounting ~~Sheet~~Pronouncements ~~Arrangements. Other than operating leases and inventory purchase commitments~~ ~~discussed in Commitments and Contingencies, we have no off balance sheet arrangements.~~

See Note 9 of our condensed consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements applicable to our company.

Critical Accounting Policies

~~Our~~There ~~discussion~~have ~~and~~been ~~analysis~~no ofsignificant ~~our~~changes ~~financial~~to ~~condition~~our ~~and~~critical ~~results~~accounting ofpolicies ~~operations~~during ~~are based~~the ~~upon~~nine ~~our~~month ~~consolidated~~period ~~financial~~ended ~~statements~~September 30, ~~which~~2007 ~~have~~as ~~been~~compared ~~prepared~~to those we disclosed in ~~accordance~~Management’s ~~with accounting~~Discussion ~~principles generally~~and ~~accepted~~Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the ~~United~~fiscal ~~States~~year of ended December 31, 2006.

~~Page~~ITEM 19 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and interest rates. Historically, and as of September 30, 2007, we have had little exposure to market risk in the area of changes in foreign currency or exchange rates and we have not used derivative instruments or engaged in hedging activities.

~~America.~~As ~~The~~a ~~preparation~~result, ofour ~~these~~exposure ~~financial statements requires us~~ to ~~make~~market ~~estimates~~risk ~~and~~for ~~judgments that~~changes ~~affect~~in ~~the~~interest ~~reported~~rates ~~amounts~~relates ofprimarily ~~assets,~~to ~~liabilities, revenues and expenses, and related~~our ~~disclosure~~investments ofin ~~contingent~~marketable ~~assets and liabilities~~securities. OnThe aninvestment ~~ongoing~~portfolio ~~basis,~~is wecomprised ~~evaluate~~primarily ~~our~~of ~~estimates~~readily marketable, ~~including~~ ~~those~~high-quality ~~related~~securities todiversified ~~revenue~~ and ~~product~~structured ~~returns,~~to ~~inventory~~minimize ~~valuations,~~market ~~allowance~~risks ~~for doubtful~~while ~~accounts,~~providing ~~intangible~~a ~~assets,~~reasonable ~~deferred~~return ~~income~~on ~~taxes~~invested ~~and warranty reserves~~funds. We ~~base our~~target ~~estimates~~our onaverage ~~historical~~portfolio ~~experience~~maturity ~~and~~at on18 ~~various~~months ~~other~~or ~~assumptions~~less. ~~that~~Nevertheless, ~~are believed to be reasonable under~~ the ~~circumstances,~~securities ~~the~~held ~~results~~in ofour ~~which~~investments ~~form~~portfolio ~~the~~are ~~basis~~subject ~~for~~to ~~making~~changes ~~judgments~~in ~~about the~~fair ~~carrying~~market value ofin ~~assets~~response ~~and~~to ~~liabilities~~changes ~~that~~in ~~are~~interest ~~not readily apparent from other sources~~rates. ~~Actual~~ ~~results~~A ~~may~~significant ~~differ~~change ~~from~~in ~~these~~market ~~estimates~~interest ~~under different assumptions or conditions. We~~rates ~~consider~~could ~~the following accounting areas to~~ have ~~the~~a ~~most~~material ~~significant~~ impact on ~~our~~interest ~~reported financial~~income ~~results~~earned ~~and~~from ~~financial~~our ~~position~~investment portfolio.

~~Revenue~~Given ~~Recognition.~~the Wecurrent ~~recognize~~balance ~~revenue~~of ~~from~~$81.1 ~~product~~million ~~sales using guidance from SEC Staff~~of ~~Accounting~~investments ~~Bulletin~~classified ~~No. 101~~as “~~Revenue~~cash ~~Recognition~~and incash ~~Financial Statements,~~equivalents” as amended by Staff Accounting Bulletin No. 104. Our revenue from sales of products is recognized upon shipment or delivery based upon shipping terms, provided there is evidence of an arrangement, the fee is fixed and ~~determinable~~“marketable ~~and~~securities ~~collectibility~~available ~~is reasonably assured. Certain customers have the right to return products~~ for asale,” ~~limited time after shipment as part of~~ a ~~stock~~theoretical ~~rotation~~1% ~~program.~~change ~~Revenue~~in ~~is reduced~~average byinterest ~~estimated~~rates ~~stock~~would ~~rotation~~impact ~~returns~~our ~~based~~interest ~~upon~~income ~~historical~~positively ~~return~~or ~~rates.~~negatively Ifby ~~future returns~~approximately ~~exceed estimates~~$811,000 ~~revenue~~per ~~would be further reduced~~year.

~~When~~ITEM ~~collectibility is not reasonably assured, revenue is not recorded until such time as collection becomes reasonably assured, which is generally upon the receipt of cash~~4. WeCONTROLS ~~assess reasonable~~AND assurance of collectibility based on a number of factors, including past transaction history and the creditworthiness of the customer. We generally recognize revenue upon shipment to resellers and distributors unless they are thinly capitalized and their ability to pay is, in substance, contingent upon their resale of our product. If reliable reporting from the reseller or distributor exists, revenue is recognized when the reseller or distributor sells the product to an end-user (“sell through”). For multiple element arrangements, the fair value of the individual elements is determined primarily based on sales prices when the products and services are sold separately. Revenue from installation and training services is deferred and recognized when the services are performed. Revenue from maintenance services is deferred and recognized over the term of the maintenance agreement. PROCEDURES

~~For~~Evaluation ~~all sales, a binding contract, purchase order or another form~~ of ~~documented agreement is~~ ~~used~~Disclosure asControls evidence of an arrangement with the customer. Sales to distributors may be evidenced by a master agreement governing the relationship, together with binding purchase orders on a transaction-by-transaction basis. Delivery is considered to occur upon shipment of the product, so long as title and ~~risk~~Procedures of loss have passed to the customer. At the time of the transaction we assess whether the sale amount is fixed or determinable based upon the terms of the documented agreement. If it is determined the fee is not fixed or determinable, revenue is recognized when the fee becomes fixed and determinable.

~~For~~As ~~arrangements~~of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the ~~customers~~participation ~~that~~of ~~include~~our ~~acceptance~~Chief ~~provisions~~Executive Officer and Chief Financial Officer, ~~revenue~~evaluated the effectiveness of our disclosure controls and procedures, as such term is ~~recognized~~defined ~~upon~~in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the ~~customer~~reasonable assurance level to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management’s ~~acceptance~~assessment of the effectiveness ~~product,~~of ~~which~~our ~~occurs~~disclosure ~~upon~~controls and procedures is expressed at the ~~earlier~~level of ~~receipt~~reasonable ofassurance because a ~~written customer~~control ~~acceptance~~system, orno ~~expiration~~matter ofhow well designed and operated, can provide only reasonable, but not absolute, assurance that the ~~acceptance~~control system’s ~~period~~objectives will be met.

~~Inventory~~Changes ~~Reserves.~~in WeInternal ~~value~~Control ~~our~~over ~~inventory~~Disclosure ~~at the lower of the actual cost to purchase~~ and~~/or manufacture~~ orReporting the current estimated net realizable value of inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than our estimates, then additional inventory write-downs may be required.

~~Allowance~~There ~~for~~were ~~Doubtful~~no ~~Accounts.~~changes Wein ~~perform ongoing credit evaluations of~~ our ~~customers~~internal ~~and adjust~~control ~~open~~over ~~account~~financial ~~status~~reporting based upon payment history and the customer’s current creditworthiness, as determined by our review of current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon the age of outstanding invoices and any specific customer collection issues that weoccurred ~~have~~during ~~identified. While such credit losses have usually been within our expectations and~~ the ~~provisions~~quarterly ~~established,~~period weended ~~did recover a significant portion of aged receivables in 2003 and 2004 that we had previously reserved. This recovery amounted to approximately $3.1~~September ~~million.~~30, We2007 ~~cannot guarantee~~ that ~~we will continue to experience the same credit loss rates that we~~ have ~~in the past. Because our sales are concentrated~~ inmaterially ~~a relatively few number of customers~~effected, ~~a significant change in the liquidity~~ or ~~financial position~~are ofreasonably ~~any~~likely ~~one of these customers could have a material impact on our ability~~ to ~~collect~~materially ~~our accounts receivable and~~effect, ~~accordingly,~~our oninternal ~~our~~control ~~future~~over ~~operating~~financial ~~results~~reporting.

~~Valuation of Intangible Assets. We regularly evaluate the potential impairment of goodwill and~~ ~~other~~PART ~~intangible~~II assets. In assessing whether the value of our goodwill and other intangibles has been impaired, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of these assets. If these estimates or their related assumptions change in the future, we may be required to record additional impairment charges. At the time of an acquisition we estimate the fair value of identifiable intangible assets acquired and amortize the cost over the estimated useful life.

~~Page~~ITEM 20 1. LEGAL PROCEEDINGS

~~Deferred Income Taxes. Current income tax expense (benefit) represents actual or estimated~~ ~~amounts~~denied ~~payable~~defendants’ ormotions ~~receivable~~to ondismiss ~~tax~~the ~~return~~consolidated ~~filings each year~~complaint. ~~Deferred~~On ~~tax~~February 6, ~~assets~~2007, ~~and liabilities are recorded for~~ the ~~estimated~~parties ~~future~~reached ~~tax~~an ~~effects~~agreement ofto ~~temporary~~settle ~~differences between~~ the ~~tax bases of~~consolidated ~~assets~~class ~~and~~actions ~~liabilities and amounts reported in the accompanying balance sheets, and~~ for ~~operating loss~~a ~~and~~payment ~~tax~~of ~~credit~~$7.4 ~~carryforwards~~million. The ~~change~~settlement inwill ~~deferred~~be ~~tax~~funded ~~assets~~in ~~and~~its ~~liabilities~~entirety ~~for~~by the ~~period determines~~proceeds of the ~~deferred~~Company’s ~~tax~~directors ~~provision~~and orofficers’ ~~benefit~~insurance ~~for the period~~policy. ~~Effects~~The ofparties’ ~~changes~~agreement inmust ~~enacted~~be ~~tax laws~~documented ~~on deferred tax assets~~ and ~~liabilities~~submitted ~~are reflected as adjustments~~ to the ~~tax provision or~~court ~~benefit~~for inits ~~the~~approval. ~~period~~The ~~of enactment~~$7.4 Amillion ~~valuation~~insurance ~~allowance~~recovery ishas ~~required~~been toreported ~~reduce~~in ~~the~~prepaid ~~carrying~~expenses ~~amount of~~and ~~deferred~~other ~~tax~~current assets, ifand ~~management cannot conclude that realization of such assets is more likely than not at~~ the ~~balance sheet date~~$7.4 ~~Based~~million ~~upon~~settlement ~~our~~liability ~~recent~~is ~~history~~reported ofin ~~losses~~accrued ~~and~~expenses ~~an analysis of projected net taxable income for future operating periods, we determined that realization of our tax net operating loss carryforwards, tax credit carryforwards~~ and other ~~deferred~~liabilities ~~tax assets is not sufficiently assured. Based upon this analysis, a valuation allowance has been recorded~~ as of September 30, ~~2005, to reduce the carrying amount of our $29~~2007.~~0 million of net deferred tax assets~~ ~~to zero.~~

~~Warranty~~Beginning ~~Reserves.~~on WeJune 13, ~~offer~~2005, ~~warranties~~three ofpurported ~~various~~shareholder ~~lengths~~derivative tolawsuits ~~our~~were ~~customers~~filed ~~depending~~in onthe United States District Court for the ~~specific~~District ~~product~~of ~~and~~Colorado, ~~the~~against ~~terms~~several of our ~~customer~~officers ~~purchase~~and ~~agreements~~directors and naming Carrier Access as a nominal defendant. ~~Our~~The ~~standard~~cases ~~warranties~~are ~~require~~captioned Kenney v. Koenig, et al., Case No. 05-cv-1074-PSF, Chaitman v. Koenig, et al., Case usNo. 05-cv-1095-LTB toand ~~repair~~West orCoast ~~replace~~Management ~~defective~~and ~~product~~Capital, ~~returned~~LLC tov. usKoening ~~during~~{sic}, ~~the~~et ~~warranty~~al. ~~period~~Case atNo. 05-cv-1134-RPM. noThese ~~cost~~actions ~~to the~~were ~~customer~~consolidated in August 2005. WeThe ~~record~~consolidated ancomplaint ~~estimate~~includes claims for ~~warranty~~breach ~~related~~of ~~costs~~fiduciary duty, abuse of control, waste of corporate assets, mismanagement and unjust enrichment, seek compensatory damages, disgorgement, and other relief, and are based on ~~our~~essentially ~~actual~~the ~~historical~~same allegations as the class actions described in the preceding paragraph. ~~return~~On ~~rates~~October 12, ~~and~~2005, ~~repair~~the ~~costs~~Company atmoved to dismiss for failure to plead demand futility, and the ~~time~~individual defendants moved to dismiss for failure to state a cause of ~~sale~~action for breach of fiduciary duty, waste and all of the other counts. On March 30, an2006, ~~on-going~~the ~~basis~~District Court granted the Company’s Motion to Dismiss without prejudice. On March 7, ~~management~~2007, ~~reviews~~a ~~these estimates~~purported shareholder derivative lawsuit was filed in the United States District Court for the District of Colorado, against ~~actual~~several ~~expenses~~of our officers and ~~makes~~directors ~~adjustments~~and ~~when~~naming ~~necessary~~Carrier Access as a nominal defendant. ~~While~~The ~~our~~case ~~warranty~~is ~~costs have~~captioned ~~historically~~West ~~been~~Coast ~~within~~Management ~~our~~and ~~expectations~~Capital, LLC v. Koenig, et al. Case No. 1:07CV00459 and is based on essentially the ~~provisions~~same allegations ~~established~~as the derivative suit filed by this same plaintiff described earlier in this paragraph. . On May 16, we2007, ~~can~~a ~~not~~purported ~~guarantee~~shareholder derivative lawsuit was filed in the Colorado District Court in Boulder County, Colorado against ~~that~~several weof ~~will~~our ~~continue~~officers toand ~~experience~~directors and naming Carrier Access as a nominal defendant. The case is captioned Kenney v. Koenig, et al., Case No. 2007CV423, District Court, County of Boulder, State of Colorado and is based on essentially the same ~~warranty~~allegations ~~return~~as ~~rates~~the orderivative ~~repair~~suit ~~costs~~filed ~~that~~by wethis ~~have~~same plaintiff described earlier in this paragraph. On July 16, 2007, the ~~past~~parties reached an agreement to settle the purported shareholder derivative lawsuits for a payment of $385,000. One Ahalf ~~significant~~of ~~increase~~this inamount ~~products~~will ~~return~~be ~~rates~~funded orby the ~~costs~~proceeds of the Company’s directors and officers’ insurance policy and the other half will be paid by the Company. The parties’ agreement must be submitted to ~~repair~~the ~~our~~court ~~products~~for ~~could~~its approval. ~~have~~The a$193,000 ~~material~~insurance ~~adverse~~recovery ~~impact~~has onbeen ~~our~~reported ~~operating~~in ~~results~~prepaid expenses and other current assets, and the $385,000 settlement liability is reported in accrued expenses and other liabilities as of September 30, 2007.

~~Deferred~~On ~~Maintenance~~August 16, ~~Revenue.~~2007, WeQPSX ~~offer~~Developments ~~maintenance~~5 ~~contracts~~PTY LTD filed a complaint against the Company and several other companies (“the QPSX Complaint”), in United States District Court for ~~sale~~the onEastern ~~all~~District of ~~its~~Texas, ~~products~~Marshall Division. The case is captioned QSPX Developments 5 Pty Ltd v. Ciena Corporation et al., Civil Action No. 2:07-CV-118. The Complaint alleges infringement of U.S. ~~which~~Patent ~~allow~~No. 5,689,499 ~~for~~(“the ~~customers~~‘499 topatent”). ~~receive~~The ~~service~~Complaint also alleges willful infringement and ~~support~~seeks ina ~~addition~~preliminary toand permanent injunction of alleged infringing acts by the Company, orenhanced ~~subsequent~~unspecified todamages, ~~the~~pre and post ~~expiration~~judgment ofinterest, and attorneys’ fees and costs. The QPSX Complaint also names as defendants Ciena Corporation, Ericsson, Inc., UTStarcom, Inc., Zhone Technologies, Inc., Tellabs, Inc., Rad Data Communications, Inc., Nokia Siemens Networks US LLC, and Network Equipment Technologies, Inc. No trial date has been set for this matter. The Company filed an answer and counterclaim to the ~~contractual~~QPSX ~~product~~Complaint ~~warranty~~on October 30. We2007. ~~recognize~~The answer denies infringement of the ~~maintenance~~‘499 ~~revenue~~patent ~~from~~and ~~these~~seeks a ~~contracts~~declaration ~~over~~that the ~~life~~Company does not infringe the ‘499 patent and that the ‘499 patent is invalid. The outcome of this matter and any possible liability, if any, for the ~~service~~Company, ~~contract~~cannot reasonably be determined at this time.

~~Loss~~Litigation ~~Contingencies.~~is ~~We are~~ subject to ~~the~~inherent ~~possibility~~uncertainties, ofand ~~various~~were ~~loss~~an ~~contingencies~~unfavorable ~~arising~~outcome ~~in the~~to ~~ordinary~~occur, ~~course~~it ofcould ~~business.~~have ~~We consider the likelihood of~~ a ~~loss~~material oradverse ~~impairment~~impact ofon ~~an asset or~~ the Company’s ~~incurrence~~financial ofposition aand ~~liability,~~results asof ~~well~~operations asfor ~~our ability to reasonably estimate~~ the ~~amount~~period ofin ~~loss~~which ~~in determining~~such ~~loss~~outcome ~~contingencies~~occurred. AnLegal ~~estimated~~fees ~~loss~~associated ~~contingency~~with iscommitments ~~accrued when it is probable that an asset has been impaired~~ or acontingencies ~~liability~~are ~~has~~expensed ~~been~~as incurred ~~and the amount of loss can be reasonably estimated~~. ~~We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.~~

~~Employee~~ITEM ~~Stock Options~~1A. AsRISK further explained in Note 2(c) in Notes to Condensed Consolidated Financial Statements, stock options are granted to employees, consultants and directors. Upon vesting, an option becomes exercisable; that is, the option holder can purchase a share of our common stock at a price that is equal to the share price on the day of grant. SFAS No. 123, “Accounting for Stock-Based Compensation,” permits companies either to continue accounting for stock options under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” or to adopt a fair-value-based method to measure compensation cost. We currently account for our stock-based compensation plans under the “intrinsic value” recognition and measurement principles of APB No. 25 and provide supplemental information in Notes to Condensed Consolidated Financial Statements as if we used the fair value recognition provisions of SFAS No. 123. Under SFAS No. 123, an option is valued on grant day, and then expensed evenly over its vesting period. We use the Black-Scholes option valuation model to estimate the option’s fair value. The option valuation model requires a number of assumptions, including future stock price volatility and expected option life (the amount of time until the options are exercised or expire). Expected option life is based on actual exercise activity from previous option grants. Volatility is calculated based upon stock price movements over the most recent period equal to the expected option life. Additionally our share price on grant day influences the option value. The higher the share price, the more the option is worth. Changes in the option value after grant day are not reflected in expense. FACTORS

~~Recently~~INVESTORS ~~Issued~~SHOULD ~~Accounting~~CAREFULLY CONSIDER ~~Pronouncements~~THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY RISKS WE FACE. ADDITIONAL RISKS WE ARE NOT PRESENTLY AWARE OF OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. OUR BUSINESS COULD BE HARMED BY ANY OR ALL OF THESE RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE SIGNIFICANTLY DUE TO ANY OF THESE RISKS, AND INVESTORS MAY LOSE ALL OR PART OF THEIR INVESTMENT. IN ASSESSING THESE RISKS, INVESTORS SHOULD ALSO REFER TO OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006 AND THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES.

In23 November 2004, SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4” was issued to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The provisions of this Statement must be adopted for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after the date this Statement is issued. We plan on adopting the Statement effective January 1, 2006. The guidance in SFAS No. 151 is not expected to have a material effect on our results of operations or financial position.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share Based Payment. SFAS No. 123(R) is a revision of FASB Statement No. 123, “Accounting for Stock Based Compensation”, and supercedes APB Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be

Page 21

~~recognized~~We incontinued ~~the~~to ~~income~~experience ~~statement~~large ~~based~~net onoperating ~~their~~losses ~~fair~~and ~~values.~~decreases ~~The~~in ~~amount~~net ofrevenue ~~compensation~~in ~~cost~~the ~~will be~~first ~~measured~~nine ~~based~~months onof ~~the~~2007, as ~~grant~~we ~~date~~had ~~fair~~in ~~value~~2006, of2005, ~~the~~2002 ~~equity~~and or2001, ~~liability~~which ~~instruments~~caused ~~issued. Compensation~~a ~~cost~~significant ~~will~~decline bein ~~recognized over~~ the ~~period~~market ~~that~~price anof ~~employee~~our ~~provides~~common ~~service~~stock, inand ~~exchange for~~we ~~the~~could ~~award.~~experience ~~Pro~~similar ~~forma~~declines ~~disclosure~~in isnet norevenue ~~longer~~in anthe ~~alternative.~~future, ~~The~~which ~~provisions~~could ofnegatively ~~this~~impact ~~statement will~~the ~~become~~market ~~effective~~price ~~for~~of usour ~~beginning January 1, 2006.~~common stock.

~~SFAS~~Our ~~No. 123(R)~~quarterly ~~permits~~and ~~public~~annual ~~companies~~operating results have fluctuated significantly in the past and may continue to ~~adopt~~vary ~~its~~significantly ~~requirements~~in the ~~using~~future. ~~one~~For example, although we were profitable on an annual basis for our fiscal years ended December 31, 1997 through 2000, we incurred significant net losses of ~~two~~$14.9 ~~methods:~~million and $52.7 million in 2001 and 2002, respectively. In addition, our net revenues decreased from $148.1 million in 2000 to $100.7 million and $50.2 million in 2001 and 2002, respectively.

	1.		A “modified prospective” method in which the compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.
	2.		A “modified retrospective” method which includes the requirements of the modified prospective method, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures for either: (a) all prior periods presented or (b) prior interim periods of the year of adoption.

Although our revenues increased from $62.5 million in 2003 to $95.4 million in 2004, our net revenues decreased to $75.4 million and we had a net operating loss of $14.8 million in 2006. Our revenues for the nine months ended September 30, 2007 were $23.7 million, a decrease from the $62.9 million in revenues for the nine months ended September 30, 2006, and we had a net operating loss of $37.3 million in the nine months ended September 30, 2007 compared to $10.1 million for the nine months ended September 30, 2006. We continue to experience large year over year net operating losses and decreases in net revenue and cannot be certain that our annual and quarterly net revenues will not continue to fluctuate significantly in the future.

We ~~have~~face ~~not~~a ~~determined~~number ~~the~~of ~~method~~risks wethat ~~will~~could ~~use~~cause ~~upon~~our ~~adoption~~future ofnet ~~SFAS~~revenues ~~No. 123(R).~~and operating results to experience similar fluctuations, including the following:

As• ~~permitted~~The byloss ~~SFAS No. 123~~of, weor ~~currently~~significant ~~account~~reduction ~~for~~in ~~share-based~~purchases ~~payments to employees using the APB No. 25 intrinsic value method and generally recognizes no compensation cost for employee stock options. Accordingly~~by, ~~the~~any ~~adoption~~ of ~~SFAS No. 123(R) will have a significant impact on~~ our ~~results~~ oflarge ~~operations~~customers, ~~although~~which ithas ~~will~~occurred ~~have~~in ~~no impact on~~ the ~~financial~~past, ~~position~~one ~~or cash flows. The impact~~ of ~~the~~whom ~~adoption~~was ofresponsible ~~SFAS~~for ~~No. 123(R)~~approximately ~~cannot~~36% beand ~~predicted~~42% ~~with~~of ~~certainty~~our atnet ~~this~~revenues ~~time because it will depend on the share-based payments granted~~ in the ~~future.~~years ~~SFAS~~ended ~~No. 123(R)~~December ~~also~~31, ~~requires~~2006 ~~the benefits~~and of2005, ~~tax~~respectively, ~~deductions~~and in14% ~~excess~~ of ~~recognized~~our ~~compensation~~net ~~cost~~revenues toin bethe ~~reported~~nine asmonths aended ~~financing cash~~September ~~flow~~30, ~~rather~~2007, ~~than~~ as ancompared ~~operating~~with ~~cash~~42% ~~flow~~during asthe ~~required~~same ~~under~~period ~~current literature. This requirement will reduce net operating cash flows and increase net financing cash flows~~ in ~~periods after the adoption. We have not assessed the impact of this provision on net operating loss carryforwards.~~ 2006;

In• ~~December 2004,~~Overall ~~SFAS~~movement ~~Statement~~toward ~~No. 153,~~industry ~~“Exchanges~~consolidation ofamong ~~Nonmonetary~~both ~~Assets~~our ancompetitors ~~amendment of APB Opinion No. 29” was issued. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets~~ and ~~replaces~~our it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. As we have not entered into nonmonetary exchangescustomers, ~~the~~both ~~Statement~~wireless ~~will~~and ~~not have an impact on our results of operations or financial position.~~ wireline;

In• ~~May~~Reductions ~~of 2005, SFAS Statement No. 154 “Accounting Changes~~ and ~~Error~~slowdowns ~~Corrections~~in acapital ~~replacement of~~spending ~~APB Opinion No. 20 and FASB Statement No. 3” was issued. This Statement provides guidance on the accounting~~ for ~~and~~equipment ~~reporting~~by ~~of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as~~ the ~~required~~telecommunications ~~method~~industry ~~for~~due ~~reporting a change in accounting principle in the absence of explicit transition requirements specific~~ to ~~the~~mergers ~~newly adopted accounting principle. This Statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable~~ and ~~for~~consolidations reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed in this Statement. We are not aware of any error that would have a material impact on our results of operations or ~~financial~~other ~~position.~~ factors;

~~Page~~• 22 Delay in the introduction and market acceptance of new technologies and products and our success in new markets;

•

The transition to a new, single-source third-party manufacturer;

•

Changes in sales and implementation cycles for our products and reduced visibility into our customers’ spending plans and associated revenue;

•

Price and product competition in the communications and networking industries, which can change rapidly due to technological innovation;

•

Costs related to acquisitions of technologies or businesses;

•

The ability of our customers, channel partners, and suppliers to obtain financing or to fund capital expenditures;

•

The timing, size, and mix of orders from customers;

•

Fluctuations in demand for our products and services, especially with respect to Internet businesses and telecommunications carriers, in part due to the changing global economic and regulatory environment;

•

Variations in sales channels, product costs, or mix of products sold;

•

Our ability to achieve targeted cost reductions and to execute on our strategy and operating plans; and

•

Potential difficulties in completing projects associated with in-process research and development.

We may not realize the anticipated benefits from our restructuring efforts.

In April 2007, we announced plans to consolidate facilities, restructure and downsize some of our remote development centers and eliminate contractors to reduce research and development costs. In July 2007, we announced a restructuring plan that included a focus on key customers and product lines, consolidation of management positions and a further and accelerated R&D transition to our Shanghai development center. Our restructuring programs may have a material effect on our financial position as we pay severance and facilities related costs. We may initiate future restructuring actions, which could result in additional expenses that could affect our results of operations or financial position. There can be no assurance that we will realize the benefits we anticipate from our current or future restructuring programs or that such programs will reduce our operating expenses and improve our cost structure.

RISK FACTORS

Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained and incorporated in this Quarterly Report on Form 10-Q, before you decide to invest in our common stock. If any of the following risks actually occur, our business, financial condition and results of operations would likely suffer. In these circumstances, the market price of our common stock could decline and you may lose all or part of your investment.

We have been unable to predict accurately the costs associated with evaluating our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and may continue to be unable to do so in the future.

We have been unable to accurately predict the costs, including the costs of both internal assessments and external auditor assessments, associated with complying with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and in evaluating our internal control over financial reporting. Costs of compliance were significantly larger than originally anticipated in 2004, and costs of compliance in future periods may continue to be unpredictable, which could have an adverse effect on our financial results.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, our business could be harmed and current and potential stockholders could lose confidence in our financial reporting, which could negatively impact the trading price of our stock.

Maintaining an effective system of internal control over financial reporting is necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, areas of our internal control over financial reporting that need improvement including control deficiencies that may constitute material weaknesses. As more fully described in Item 9A of our Annual Report on Form 10-K/A filed on August 2, 2005, and in Item 4 of this report, as of December 31, 2004, our management concluded that we did not maintain effective controls over certain aspects of our review of our statements of cash flow and certain revenue recognition policies. These control deficiencies resulted in a restatement of our previously issued financial statements for the fiscal years ended December 31, 2003 and 2004, and for each of the quarters therein.

A failure to implement and maintain effective internal control over financial reporting, including a failure to implement corrective actions to address the control deficiencies identified above, could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

We face a number of risks that could cause our future net revenue and operating results to experience similar fluctuations, including the following:

• The loss of, or significant reduction in purchases by, any of our large distributor, direct and OEM customers, two of whom were each responsible for more than 10% of our net revenue in the year ended December 31, 2004 and one of whom was responsible for 55% of our net revenue in the three months ended September 30, 2005; • Overall movement toward industry consolidation among both our competitors and our customers, both wireless and wireline; • Reductions in capital spending for equipment by the telecommunications industry and reductions in capital spending for wireless equipment due to mergers and consolidation in the wireless market, a factor that resulted in a large decline in our product sales in year 2003, 2004 and the first nine months of 2005; • Costs related to acquisitions of technologies or businesses; • Fluctuations in demand for our products and services, especially with respect to Internet businesses and communications carriers, in part due to the changing global economic and regulatory environment;

Page 23

• Changes in sales and implementation cycles for our products and reduced visibility into our customers’ spending plans and associated revenue; • Price and product competition in the communications and networking industries, which can change rapidly due to technological innovation; • The timing, size, and mix of orders from customers; • The introduction and market acceptance of new technologies and products and our success in new markets; • Variations in sales channels, product costs, or mix of products sold; • The ability of our customers, channel partners, and suppliers to obtain financing or to fund capital expenditures; • Our ability to achieve targeted cost reductions and to execute on our strategy and operating plans; and • Potential difficulties in completing projects associated with in-process research and development.

The unpredictability of our quarterly results may adversely affect the trading price of our common stock.

Our net revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. Generally, purchases by service providers of telecommunications equipment from manufacturers have been unpredictable and clustered, rather than steady, as the providers build out their networks. Recently, our visibility into our U.S. wireless customer base has decreased because our customers have been evaluating their strategies and plans for optimizing their 2G networks and operationalizing more efficient 3G networks. The primary factors that may affect our net revenues and results include the following:

• Fluctuation in demand for our voice infrastructure products and the timing and size of customer orders; • The cancellation or deferral of existing customer orders or the renegotiation of existing contractual commitments; • The failure of certain of our customers to successfully and timely reorganize their operations, including emerging from bankruptcy; • The length and variability of the sales cycle for our products; and • The timing of revenue recognition and amount of deferred revenues.

~~Deterioration~~• ofThe ~~the~~cancellation ~~wireless~~or ~~infrastructure~~deferral ~~industry~~of ~~could~~existing ~~lead~~customer toorders ~~reductions~~or inthe ~~capital~~renegotiation ~~spending budgets~~of byexisting ~~wireless~~contractual ~~operators and original equipment manufacturers~~commitments, which ~~could~~has ~~adversely~~occurred ~~affect our~~in ~~revenues,~~the ~~gross margins and income.~~ past;

~~Our~~• ~~revenues~~Consolidation and gross margins will depend significantly on the overall demand for wireless infrastructure subsystems products. A reduction in capital spending budgets by wireless operators and OEMs caused by an economic downturn, consolidation within the industry such as the mergers of Cingular and AT&T Wireless, and the mergers of Sprint and Nextel, /or ~~otherwise~~reorganization ~~could lead to a softening in demand or delay procurement~~ of our products and services. Such factors resulted in a decrease in revenues and earnings in the third and fourth quarter of 2004, as well as in the first nine months of 2005, and could result in decreases in revenues and earnings in future periods. customers;

•

The failure of certain of our customers to successfully and timely reorganize their operations, including emerging from bankruptcy or post bankruptcy reorganization;

•

The length and variability of the sales cycle for our products; and

•

The timing of revenue recognition and amount of deferred revenues.

There is no guarantee that we will enter into any strategic transaction with any third party.

In July 2007, we engaged Jefferies Broadview to assist us in evaluating potential strategic alternatives. We cannot guarantee that any such strategic alternatives, including any possible acquisition or merger of Carrier Access, will be available to us on favorable terms, or at all.

We may have difficulty obtaining additional capital, if necessary.

During the first nine months of 2007, we incurred net losses of $33.7 million, and our balance of cash, cash equivalents and short-term investments in marketable securities decreased $29.7 million from $110.8 million as of December 31, 2006 to $81.1 million at September 30, 2007. In the future, we may need to secure additional funding to finance our operations. It may be difficult for us to raise additional capital if and when it is required. If adequate capital is not available to us as required, or if it is not available on favorable terms, our business and financial condition would be adversely affected.

Our industry is highly competitive; if we fail to compete successfully against our competitors, our market share and product sales could be adversely affected, resulting in a decline in our net revenues and deterioration of our operating results.

The market for our products is intensely competitive, with a large number of equipment suppliers providing a variety of products to diverse market segments within the telecommunications industry. Our existing and potential competitors include many large domestic and international companies, including companies that have longer operating histories, greater name recognition, larger customer bases, more established channels of distribution and substantially greater financial, manufacturing, technological, sales and marketing, distribution, and other resources. Our principal competitors include Alcatel-Lucent, Adtran, Inc., Audiocodes, Cisco Systems, Inc., Eastern Research, Inc., Natural Microsystems, RAD, Sycamore Networks, Telco Systems, Inc., Tellabs, Inc., Zhone Technologies, Inc. and other small private companies and independent system integrators. Most of these companies offer products competitive with one or more of our product lines. We expect that our competitors that currently offer products competitive with only one of our products will eventually offer products competitive with all of our products. Due to the rapidly evolving markets in which we compete, additional competitors with significant market presence and financial resources, including large telecommunications equipment manufacturers and computer hardware and software companies, may enter these markets through acquisition, thereby further intensifying competition.

Many of our current and potential competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements, or to devote greater resources than we can devote to the development, promotion, and sale of their products. In addition, such competitors may enter our existing or future markets with solutions, either developed internally or through acquisition, which may be less costly, provide higher performance or additional features, or be introduced earlier than our solutions. Successful new product introductions or enhancements by our competitors could cause a significant decline in sales or loss of market acceptance of our products. Competitive products may also cause continued intense price competition or render our products or technologies obsolete or non-competitive.

Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross profit margins, and loss of market share, any of which could cause a decline in the price of our common stock.

Deterioration of the wireless infrastructure industry could lead to reductions in capital spending budgets by wireless operators and OEMs, which could adversely affect our net revenues, gross profit margins and income.

Our net revenues and gross profit margins depend significantly on the overall demand for wireless infrastructure subsystems products. A reduction in capital spending budgets by wireless operators and OEMs caused by an economic downturn, customer evaluation of strategies and plans for optimizing their markets, consolidation within the industry, such as the merger of BellSouth and AT&T, and the merger of Sprint and Nextel, among others has led to a softening in demand or delays in procurement of our products and services. Such factors resulted in a decrease in revenues and increase in losses in the nine months ended September 30, 2007, and in the third and fourth quarters of 2004 and during 2005, significantly less than anticipated revenues in the third and fourth quarters of 2006, and could result in decreases in net revenues and earnings in future periods.

If we are unable to develop new or enhanced products that achieve market acceptance, we could experience a reduction in our future product sales, which would cause the market price of our common stock to decline.

The communications industry is characterized by rapidly changing technology, evolving industry standards, changes in end-user requirements, and frequent new product introductions and enhancements, each of which may render our existing products obsolete or unmarketable. Our success depends on our ability to enhance our existing products and to timely and cost-effectively develop new products with features that meet changing end-user requirements and emerging industry standards. The development of new, technologically advanced products is an expensive, complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. We may not be successful in identifying, developing, manufacturing, and marketing product enhancements or new products that will respond to technological change or evolving industry standards. In the recent past, we have experienced delays in the development and shipment of new products and enhancements, which has resulted in distributor and end-user frustration and delay or loss of revenue. It is possible that we will experience similar or other difficulties in the future that could delay or prevent the successful development, production, or shipment of such new products or enhancements, or that our new products and enhancements will not adequately meet the requirements of the marketplace and achieve market acceptance. Announcements of currently planned or other new product offerings by our competitors or us have in the past caused, and may in the future cause, distributors or end-users to defer or cancel the purchase of our existing products. Delays or cancellations of orders may result in excessive, slow moving or obsolete inventory that may necessitate increasing inventory reserves or disposing of unsaleable inventory at significantly reduced prices. Our inability to develop new products or enhancements to existing products on a timely basis, or the failure of such new products or enhancements to achieve market acceptance, could harm our relationships with an increasingly limited number of existing and potential customers and result in a decline in our future product sales and the price of our common stock.

We continue to rely on a limited number of direct customers, the loss of any of which could result in a decline in net revenues and the price of our common stock.

A significant portion of our net revenues has been derived from a limited number of large direct customers, and we believe that this trend will continue in the future. For example, for the nine months ended September 30, 2007, we sold directly to AT&T (formerly known as Cingular), who accounted for approximately 14% of our net revenues, down from approximately 42% in the first nine months of 2006; for the year ended December 31, 2006, AT&T accounted for approximately 36% of our net revenues, down from approximately 42% in the prior year ended December 31, 2005. In addition to AT&T, we had two other customers, including a distributor, who accounted for greater than 10% of our net revenue in the nine months ended September 30, 2007, one of whom represented 16% and 13% of our net revenue for the three and nine month periods ended September 30, 2007, respectively, and the other of whom accounted for 12% and 10% of our net revenue for the same time periods. The majority of our direct customers do not have any obligation to purchase additional products, and, accordingly, they may terminate their purchasing arrangements with us or significantly reduce or delay the amount of our products that they order or forecast without penalty. We have experienced cancellations and delays of orders in the past and significant reductions in product forecasts, most recently during the first nine months of 2007, and in the third and fourth quarters of 2006, and we expect to continue to experience order cancellations and delays from time to time in the future. Any such termination, change, reduction or delay in orders would harm our business. The timing of customer orders and accuracy of customer forecasts and our ability to fulfill these forecasts and orders can cause material fluctuations in our operating results, and we anticipate that such fluctuations will continue in the future.

We rely on a limited number of distributors and OEMs, the loss of any of which could cause a decline in our net revenue and have an adverse effect on our results of operations and the price of our common stock.

A significant portion of the sales of our products are through distributors and OEMs, which generally are responsible for warehousing products, fulfilling product orders, servicing end-users and, in some cases, customizing and integrating our products at ~~end-users’ sites. We rely on a~~ limited number of distributors and OEMs to sell our products. For example, one distributor, Walker & Associates, Inc., accounted for 11% and 7% of our net revenue in 2003 and 2004, respectively. In addition, for the year ended 2004, an OEM customer, Ericsson, accounted for approximately 10% of our revenue. We expect that, in the future, a significant portion of our products will continue to be sold to a small number of distributors and OEMs. Accordingly, if we lose any of our significant distributors and OEMs or experience reduced sales to such distributors and OEMs, our net revenue would decline, which would have an adverse effect on our operating results and could cause a decline in the price of our common stock.

~~Page~~26 24

end-users’ sites. We rely on a limited number of distributors and OEMs to sell our products. For example, one distributor, Walker & Associates, Inc., accounted for approximately 10% of our net revenues in the nine months ended September 30, 2007, and 11%, and 8% of our annual net revenues in the fiscal years 2006 and 2005, respectively. We expect that, in the future, a significant portion of our products will continue to be sold through a small number of distributors and OEMs. Accordingly, if we lose any of our significant distributors and OEMs or experience reduced sales to such distributors and OEMs, our net revenue would decline, which would have an adverse effect on our operating results and could cause a decline in the price of our common stock.

If our distributors are not successful both in terms of operating their own businesses and in selling our products to their customers, we could experience a decline in net revenue, an increase in inventory and bad debt, and deterioration in our operating results.

In the past, some of our distributors have experienced problems with their financial and other resources that have impaired their ability to pay us. ~~For example, in 2002 we incurred bad debt of approximately $1.1 million from one of our distributors when it declared bankruptcy.~~ Although we continually monitor and adjust our reserves for bad ~~debts~~debt, we cannot assure you that any future bad ~~debts~~ debt that we incur will not exceed our reserves. Furthermore, we cannot assure you that the financial instability of one or more of our distributors will not result in decreased net ~~revenue~~ revenues for us and deterioration in our operating results. Distributors have, in the past, reduced planned purchases of our products due to overstocking and such reductions may occur again in the future. Moreover, distributors who have overstocked our products have, in the past, reduced their inventories of our products by selling such products at significantly reduced prices. This may occur again in the future. Any reduction in planned purchases or sales at reduced prices by distributors in the future could harm our business by, among other things, reducing the demand for our products and creating conflicts with other distributors and our direct sales efforts.

Some of our distributors and OEMs have stock rotation, limited return ~~rights~~, on time delivery, ~~and~~ price protection and “most favored customer” rights which could cause a material decrease in the average selling prices and gross profit margins of our products, either of which would have an adverse effect on our operating results and financial condition.

We generally provide our distributors and OEMs with limited stock rotation, rights of return, on time delivery~~, return~~ ~~rights~~ and price protection rights. Three times a year, pursuant to limited stock rotation rights, some of these customers can return on average up to 15% of ~~our~~ unsold products to us in ~~return~~exchange for an equal dollar amount of new products. The returned products generally must have been held in stock by such distributor or OEM and have been purchased within the four-month period prior to the return date. We cannot be certain that we will not experience significant returns of our products, or ensure that our ~~shipment~~shipments in the future will be on time, which orcould ~~that~~result wein ~~will~~a ~~make~~material ~~adequate~~decrease ~~allowances~~in toour ~~offset~~net ~~these~~revenues, ~~returns~~average selling prices, gross margins and ~~late~~operating ~~deliveries~~results.

We also provide certain distributors and OEMs with price protection rights in which we ~~provide some~~are ofrequired ~~these~~to ~~customers~~provide ~~with~~ 60-days’ advance notice of price ~~increases~~decreases. Orders we receive from distributors or OEMs within the 60-day period are filled at the existing, lower product price. In the event of a price decrease, we may be required to credit distributors and OEMs the difference in price for any stock they have in their inventory. In addition, we ~~grant~~continue ~~certain~~to have in force with a limited number of our distributors and OEMs “most favored customer” terms, pursuant to which we have agreed not to knowingly grant another distributor or OEM the right to resell the same products on terms more favorable than those granted to the existing distributor or OEM, without offering the more favorable terms to the existing distributor or OEM. It is possible that these price protection and “most favored customer” clauses could cause a material decrease in the average selling prices and gross profit margins of our products, which could in turn have a material adverse effect on distributor or OEM inventories, our business, net revenues, financial condition, orand ~~results~~operating ~~of operations~~results.

We do not have exclusive agreements with our distributors, who sell other broadband communications equipment that competes with our products. As a result, our distributors may not recommend or continue to use and offer our products or devote sufficient resources to market and support our products, which could result in a reduction in sales of our products.

Our agreements with our distributors generally do not grant exclusivity, prevent the distributor from carrying competing products or require the distributor to purchase any minimum dollar amount of our products. Additionally, our distribution agreements do not attempt to allocate certain territories for our products among our distributors. To the extent that different distributors target the same end-users of our products, distributors may come into conflict with one another, which could damage our relationship with, and sales to, such distributors.

Most of our existing distributors also distribute the products of our competitors. Our distributors may not recommend or continue to use and offer our products, or our distributors may recommend competitive products in place of our products and not devote sufficient resources to market and provide the necessary customer support for our products. In addition, it is possible that our distributors will give a higher priority to the marketing and customer support of competitive products or alternative solutions.

~~Our~~27 distributors do not have any obligation to purchase additional products, and accordingly, they may terminate their purchasing arrangements with us, or significantly reduce or delay the amount of our products that they order, without penalty. Any such termination, change, reduction, or delay in orders would harm our business.

We continue to rely on a limited number of direct customers, the loss of one could result in a decline in net revenue and the price of our common stock.

A significant portion of our net revenue has been derived from a limited number of large direct customers, and we believe that this trend will continue in the future. For example, for fiscal year 2004, we sold directly to a wireless customer who accounted for

Page 25

~~approximately~~Our ~~10%~~distributors of our net revenue, and for the three months ended September 30, 2005, we sold directly to another wireless customer who accounted for approximately 55% of our net revenue. The majority of our direct customers do not have any obligation to purchase additional products, and, accordingly, they may terminate their purchasing arrangements with us, or significantly reduce or delay the amount of our products that they order, ~~or forecast~~ without penalty. We have experienced cancellations and delays of orders in the past and significant reductions in product forecasts, and we expect to continue to experience order cancellations and delays from time to time in the future. Any such termination, change, reduction, or delay in orders would harm our business. The timing of customer orders and accuracy of customer forecasts and our ability to fulfill these forecasts and orders can cause material fluctuations in our operating results, and we anticipate that such fluctuations will continue in the future.

If our direct customers do not successfully operate their own businesses, their capital expenditures could be limited, which could result in a delay in payment for, or a decline in the purchase of, our products, which could result in a decrease in our net revenue and a deterioration of our operating results.

In the past, some of our direct customers have experienced problems with their financial and other resources that have impaired or significantly delayed their ability to pay us. For example, in ~~2002,~~2005 one of our direct customers ~~filed~~experienced ~~for~~difficulty ~~bankruptcy~~related ~~protection,~~to ~~and, as~~ a ~~result,~~change ~~we incurred approximately $1.1 million~~ in ~~bad~~their ~~debt.~~order ~~Another~~processing ~~direct customer~~system, which ~~accounted~~delayed ~~for~~payments ~~13.5% of our net revenues in 2002, has experienced financial difficulty and restructured its operations, and it may not be in a position in the future~~ to ~~continue its historic purchase levels~~us. We cannot be certain that any bad ~~debts~~ debt that we incur in connection with direct sales will not exceed our reserves or that the ~~financial~~ financial instability of one or more of our direct customers will not continue to adversely affect future sales of our products or our ability to collect on accounts receivable for current sales of our products.

In addition, we sell a moderate volume of products to competitive carriers. The competitive carrier market iscontinues ~~experiencing~~to experience consolidation and related post-consolidation reorganization. Many of our competitive carrier customers do not have a strong financial position and have limited ability to access the public financial markets for additional funding for growth and operations. ~~Currently~~For example, one of our large customers must rely on funding from its parent to fund operating losses and meet its working capital, capital expenditure, debt service and other obligations.

Neither equity nor debt financing may be available to these companies on favorable terms, if at all. To the extent that these companies are unable to obtain the financing they need, our ability to make future sales to these customers ~~and realize revenue from any such sales~~ could be harmed. In addition, if one or more of these competitive carriers fail, we could face a loss in ~~revenue~~ net revenues and an increased bad debt expense, due to their inability to pay outstanding invoices, as well as a corresponding decrease in our customer base and future ~~revenue~~net revenues. Furthermore, a significant portion of our sales to competitive carriers is made through independent distributors. The failure of of one or more competitive carriers could cause a distributor to experience business failure and/or default on payments to us.

We grant certain of our direct customers “most favored customer” terms, which could cause a material decrease in the average selling prices and gross profit margins of our products, which would have an adverse effect on our operating results and financial condition.

In agreements with direct customers that contain “most favored customer” terms, we have agreed to not knowingly provide another direct customer with similar terms and conditions or a better price than those provided to the existing direct customer for like purchases without offering the more favorable terms, conditions or prices to the existing direct customer. It is possible that these “most favored customer” clauses could cause a material decrease in the average selling prices and gross profit margins of our products, which could, in turn, have an adverse effect on our operating results and financial condition.

A longer than expected sales cycle could cause our net revenues and operating results to vary significantly from quarter to quarter.

Our sales cycle averages approximately four to 24 months but can take longer in the case of incumbent local exchange carriers, or ILECs, and other end-users. This process is often subject to delays because of factors over which we have little or no control, including:

• a distributor’s, OEM’s or direct carrier customer’s budgetary constraints, including the timing of expenditures; ~~• consolidation and merger discussions between wireless and wireline carriers; • outsourcing of inventory management by a distributor or OEM customer;~~

~~Page~~• 26 consolidation and merger discussions between wireless and wireline carriers;

~~Table~~• outsourcing of ~~Contents~~inventory management by a distributor or OEM customer;

• achanges ~~distributor’s,~~to ~~OEM’s~~ or ~~carrier’s~~problems ~~internal~~with ~~acceptance reviews; •~~ a distributor’s, OEM’s or ~~carriers staffing levels and availability of lab time for product testing; • the success and continued internal support and development of a~~ carrier’s ~~product~~internal ~~offerings;~~order •processing ~~the possibility of cancellation or delay of projects by distributors, OEMs or carriers~~systems; ~~and • the possibility of a regulatory investigation of our distributors, OEMs or carriers.~~

•

a distributor’s, OEM’s or carrier’s internal acceptance reviews;

•

a distributor’s, OEM’s or carrier’s staffing levels and availability of lab time for product testing;

•

the success and continued internal support and development of a carrier’s product offerings;

•

the possibility of cancellation or delay of projects by distributors, OEMs or carriers; and

•

the possibility of regulatory investigations of our distributors, OEMs or carriers.

In addition, as carriers have matured and grown larger both through internal growth and acquisitions, their purchase processes have typically become more institutionalized, requiring more of our time and effort to gain the initial acceptance and final adoption of our products by these customers. Although we attempt to develop our products with the goal of facilitating the time to market of our customer’s products, the timing of the commercialization of a new distributor or carrier applications or services based on our products is primarily dependent on the success and timing of a customer’s own internal deployment program. Delays in purchases of our products can also be caused by late deliveries by other vendors, changes in implementation priorities and slower than anticipated growth in demand for our products. A delay in, or a cancellation of, the sale of our products could cause our results of operations to vary significantly from quarter to quarter.

In28 the industry in which we compete, a supplier must first obtain product approval from an ILEC or other carrier to sell its products to them. This process can last from four to 18 months or longer depending on the technology, the service provider, and the demand for the product from the service provider’s subscribers. Consequently, we are involved in a constant process of submitting for approval succeeding generations of products, as well as products that deploy new technology or respond to new technology demand from certain carriers or other end-users. We have been successful in the past in obtaining such approvals. However, we cannot be certain that we will obtain such approvals in the future or that sales of such products will continue to occur. Furthermore, the delay in sales until the completion of the approval process, the length of which is difficult to predict, could result in fluctuations of revenue and uneven operating results from quarter to quarter or year to year.

In the industry in which we compete, a supplier must first obtain product approval from an ILEC or other carrier to sell its products to them. This process can last from four to 18 months or longer depending on the technology, the service provider, and the demand for the product from the service provider’s subscribers. Consequently, we are involved in a constant process of submitting for approval succeeding generations of products, as well as products that deploy new technology or respond to new technology demand from certain carriers or other end-users. We have been successful in the past in obtaining such approvals. However, we cannot be certain that we will obtain such approvals in the future or that sales of such products will continue to occur. Furthermore, the delay in sales until the completion of the approval process, the length of which is difficult to predict, could result in fluctuations of our net revenues and uneven operating results from quarter to quarter or year to year.

Communications carriers face capital constraints which have restricted and may continue to restrict their ability to buy our products, thereby resulting in longer sales cycles, deferral or delay of purchase commitments for our products, and increased price competition.

Our customers consist primarily of communications carriers, including wireless carriers, local exchange carriers, multi-service cable operators, and competitive local and international communications providers. These carriers require substantial capital for the development, construction, and expansion of their networks and the introduction of their services. Although the economy has ~~slightly~~ improved, there is still an oversupply of communications bandwidth that has resulted in a constraint on the availability of capital for these carriers and has had a material adverse effect on many of our customers, ~~with~~who ~~numerous~~have ~~customers~~ substantially ~~reducing~~reduced their capital spending. If our current or potential customers cannot successfully raise necessary funds or if they experience any other adverse effects with respect to their operating results or profitability, their capital spending programs could continue to be adversely impacted. These conditions adversely impacted ~~the sale of~~ our ~~products~~sales and ~~our~~ operating results ~~most~~for ~~severely in~~ the ~~fourth~~first ~~quarter~~nine months of ~~2000~~2007, and ~~they~~during ~~continued~~the tothird ~~have~~and anfourth ~~adverse~~quarters ~~impact~~of ~~throughout 2003~~2006, ~~2004~~ and ~~the~~throughout ~~first~~2005 ~~nine~~and ~~months of 2005~~2004. These conditions may continue to result in longer sales cycles, deferral or delay of purchase commitments for our products, and increased price competition. In addition, to the extent we choose to ~~provide~~extend ~~financing~~trade tocredit to these prospective customers, we will be subject to additional financial risk that could increase our expenses.

IfThe weintroduction ~~are~~of ~~unable to develop~~ new or enhanced products ~~that~~could ~~achieve~~cause ~~market~~disruptions ~~acceptance,~~in weour ~~could experience~~distribution achannels ~~reduction~~and inthe ~~our~~management ~~future~~of ~~product~~our ~~sales~~operations, which ~~would~~could cause ~~the~~us ~~market~~to ~~price~~record oflower net revenues or adversely affect our ~~common~~ ~~stock~~gross toprofit ~~decline~~margins.

~~The~~Our ~~communications~~introduction ~~industry~~of ~~is characterized by rapidly changing technology, evolving industry standards, changes in end-user requirements, and frequent~~ new ~~product~~or ~~introductions~~enhanced ~~and enhancements, each of which may render our existing~~ products ~~obsolete~~will orrequire ~~unmarketable.~~us ~~Our~~to ~~success depends~~manage onthe ~~our~~transition ~~ability~~from toolder ~~enhance our existing~~ products ~~and~~in order to ~~timely~~minimize ~~and~~disruption ~~cost-effectively~~in ~~develops~~customer ~~new~~ordering ~~products~~patterns, ~~with~~avoid ~~features~~excessive ~~that~~levels ~~meet~~of ~~changing~~older ~~end-user~~product ~~requirements~~inventories, and ~~emerging~~ensure ~~industry standards.~~that ~~The~~adequate ~~development~~supplies of new, ~~technologically advanced~~ products iscan anbe ~~expensive,~~delivered ~~complex~~to ~~and uncertain~~meet ~~process~~customer ~~requiring~~demand. ~~high~~We ~~levels~~have ofhistorically ~~innovation,~~reworked ascertain ~~well as the accurate anticipation~~ of ~~technological~~ ~~and~~our ~~market~~products ~~trends. We may not be successful~~ in ~~identifying,~~order ~~developing, manufacturing,~~to ~~and~~add ~~marketing product enhancements or~~ new ~~products~~ features that ~~will~~were ~~respond~~included ~~to technological~~in ~~change~~subsequent orreleases ~~evolving~~of ~~industry standards. In~~ the ~~recent past~~products, wewhich ~~have~~generally ~~experienced~~resulted ~~delays~~ in ~~the~~reduced ~~development~~gross ~~and~~profit ~~shipment~~margins offor ~~new~~those products ~~and~~until ~~enhancements,~~such ~~which~~time ~~has~~as ~~resulted~~production involumes ~~distributor and~~of ~~end-user~~these ~~frustration~~new ~~and~~products ~~delay~~increased. orWe ~~loss~~can ofgive ~~net~~no ~~revenue.~~assurance ~~It is possible~~ that ~~we will experience~~these ~~similar~~historical orpractices ~~other~~will ~~difficulties~~not occur in the future ~~that~~and ~~could~~cause ~~delay~~us orto ~~prevent~~record ~~the~~lower ~~successful~~net ~~development, production,~~revenue or ~~shipment~~negatively ofaffect ~~such new products or enhancements, or that~~ our ~~new~~gross ~~products~~profit ~~and enhancements~~margins. ~~will not adequately meet the~~

~~Page~~We 27rely on the introduction of new or enhanced products to offset the declining sales prices and gross profit margins of our older products, and the failure of our new or enhanced products to achieve market acceptance could result in a decline in our net revenues and operating results.

We believe that average selling prices and gross profit margins for our products will decline as products mature and as competition intensifies. For example, we experienced declines in average selling prices per unit for our Adit 600 and Axxius products in 2006, and our MASTERseries, Navigator and Adit 3000 products in 2005. These decreases were due to general economic conditions and the introduction of competitive products with lower prices. To offset declining selling prices, we believe that, in addition to reducing the costs of production of our existing products, we must introduce and sell new and enhanced products on a timely basis at a low cost or incorporate features in these products that enable them to be sold at higher average selling prices. To the extent that we are unable to reduce costs sufficiently to offset any declining average selling prices or that we are unable to introduce enhanced products with higher selling prices, our gross profit margins will decline and such decline could adversely affect our operating results and the price of our common stock.

Product obsolescence and excess inventory can negatively affect our results from operations.

The telecommunications equipment market is characterized by intense competition, rapid technological advances and long sales cycles. The introduction of new products or technologicial changes can cause existing inventory to become obsolete. In addition, some components necessary to build our products have long lead times requiring us to order or build inventory well in advance of the time of anticipated sales. Excess inventory and obsolescence may require write-downs in inventory when it is determined that the recorded value of existing inventory is greater than its fair market value. We experienced such a write-down in the carrying value of certain products and product configurations in the third quarter of 2007 due to lower sales volumes, changing market conditions, continued poor visibility into future sales opportunities and reductions in our international sales staff associated with our July 2007

~~requirements~~ restructuring ~~of the marketplace and achieve market acceptance~~plan. ~~Announcements~~This ofwrite-down ~~currently~~resulted ~~planned or~~in ~~other~~an ~~new~~additional ~~product~~charge ~~offerings~~to bycost ~~our~~of ~~competitors~~sales orof usapproximately ~~have~~$2.8 million in the ~~past~~three ~~caused,~~months ~~and may in the~~ended ~~future cause~~September 30, ~~distributors~~2007. orFor ~~end-users~~all ~~to defer or cancel the purchase~~ of our ~~existing~~ products~~. Our inability to develop new products or enhancements to existing products on a timely basis~~, or the ~~failure~~potential ofexists ~~such~~for new ~~products~~product introductions or ~~enhancements~~lower tothan ~~achieve~~forecasted ~~market~~sales ~~acceptance,~~volumes ~~could~~resulting ~~result~~from inchanging ~~a decline~~market inconditions ~~our~~to ~~future~~render existing product ~~sales~~inventories ~~and~~obsolete ~~the~~or ~~price~~cause ofexcess product ~~our~~inventory ~~common stock~~levels.

The introduction of new or enhanced products could cause disruptions in our distribution channels and the management of our operations, which could cause us to record lower net revenue or adversely affect our gross margins.

Our introduction of new or enhanced products will require us to manage the transition from older products in order to minimize disruption in customer ordering patterns, avoid excessive levels of older product inventories, and ensure that adequate supplies of new products can be delivered to meet customer demand. We have historically reworked certain of our products in order to add new features that were included in subsequent releases of the products, which generally resulted in reduced gross margins for those products until such time as production volumes of these new products increase. We can give no assurance that these historical practices will not occur in the future and cause us to record lower net revenue or negatively affect our gross margins.

We rely on the introduction of new or enhanced products to offset the declining sales prices and gross margins of our older products, and the failure of our new or enhanced products to achieve market acceptance could result in a decline in our net revenue and operating results.

We believe that average selling prices and gross margins for our products will decline as such products mature and as competition intensifies. For example, the average selling price for our Wide Bank products and Adit products has decreased substantially in the past. These decreases were due to general economic conditions and the introduction of competitive products with lowers prices. To offset declining selling prices, we believe that, in addition to reducing the costs of production of our existing products, we must introduce and sell new and enhanced products on a timely basis at a low cost or incorporate features in these products that enable them to be sold at higher average selling prices. To the extent that we are unable to reduce costs sufficiently to offset any declining average selling prices or that we are unable to introduce enhanced products with higher selling prices, our gross margins would decline and such decline could adversely affect our operating results and the price of our common stock.

To develop new products or enhancements to our existing products, we will need to continue to invest in research and development, which could adversely affect our financial condition and operating results, especially if we need to increase the amount of our investment to successfully respond to developing industry standards.

As standards and technologies evolve, we will be required to modify our products or develop and support new versions of our products. Our research and development expenses have increased ~~65%~~significantly since 2005 and we plan to ~~$18.2 million~~ incontinue ~~2004~~to ~~from~~invest ~~$11.0 million~~significant resources in ~~2003~~research and development. As a result, we may experience periods of limited profitability due to the resources needed to develop new and enhanced products to remain competitive. The failure of our products to comply, or delays in achieving compliance, with the various existing and evolving technological changes and industry standards could harm sales of our current products or delay introduction of our future products.

The market for our products is intensely competitive, with a large number of equipment suppliers providing a variety of products to diverse market segments within the telecommunications industry. Our existing and potential competitors include many large domestic and international companies, including companies that have longer operating histories, greater name recognition, larger customer bases and substantially greater financial, manufacturing, technological, sales and marketing, distribution, and other resources. Our principal competitors include Adtran, Inc., Audiocodes, Cisco Systems, Inc., Eastern Research, Inc., Lucent Technologies, Inc., Natural Microsystems, Telco Systems, Inc., Tellabs, Inc., Verilink Corporation, Zhone Technologies, Inc. and other small independent systems integrators and private and public companies. Most of these companies offer products competitive with one or more of our product lines. We expect that our competitors that currently offer products competitive with only one of our products will eventually offer products competitive with all of our products. Due to the rapidly evolving markets in which we compete, additional competitors with significant market presence and financial resources, including large telecommunications equipment manufacturers and computer hardware and software companies, may enter these markets through acquisition, thereby further intensifying competition.

Many of our current and potential competitors are substantially larger than we are and have significantly greater financial, sales and marketing, technical, manufacturing, and other resources and more established channels of distribution. As a result, such

Page 28

competitors may be able to respond more rapidly to new or emerging technologies and changes in customer requirements, or to devote greater resources than we can devote to the development, promotion, and sale of their products. In addition, such competitors may enter our existing or future markets with solutions, either developed internally or through acquisition, that may be less costly, provide higher performance or additional features, or be introduced earlier than our solutions. Successful new product introductions or enhancements by our competitors could cause a significant decline in sales or loss of market acceptance of our products. Competitive products may also cause continued intense price competition or render our products or technologies obsolete or noncompetitive.

To be competitive, we must continue to invest significant resources in research and development and sales and marketing. We may not have sufficient resources to make such investments or be able to make the technological advances necessary to be competitive. In addition, our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced gross margins, and loss of market share, any of which could cause a decline in the price of our common stock.

Our customers are subject to heavy government regulation in the telecommunications industry, and regulatory changes could adversely affect our customers’ capital expenditure budgets and result in reduced sales of our products and significant fluctuations in the price of our common stock.

Competitive local exchange carriers, or CLECs, are allowed to compete with ILECs, in the provisioning of local exchange services primarily as a result of the adoption of regulations under the Telecommunications Act of 1996, ~~or the~~ (“1996 Act,”) that imposed new duties on ILECs to open their local telephone markets to competition. Although the FCC and federal district courts in various rulings in 2004 rejected efforts of several state regulators to subject certain VoIP services to intrastate telecommunications regulation, there are still uncertainties regarding other regulatory, economic, and political factors, particularly as VoIP service providers increase competitive pressures on the traditional carriers. Any changes to the 1996 Act or the regulations adopted ~~there under~~thereunder, the adoption or repeal of new regulations by federal or state regulatory authorities apart from or under the 1996 Act, including the E911 FCC mandate or any legal challenges to the 1996 Act could have a material adverse impact upon the market for our products.

We are aware of certain litigation challenging the validity of the 1996 Act and local telephone competition rules adopted by the FCC for the purpose of implementing the 1996 Act. Furthermore, Congress has indicated that it may hold hearings to gauge the competitive impact of the 1996 Act, and it is possible that Congress will propose changes to the 1996 Act. This litigation and potential regulatory change may delay further implementation of the 1996 Act, which could negatively impact demand for our products. Our distributors or carrier customers may require that we modify our products to address actual or anticipated changes in the regulatory environment, or we may voluntarily decide to make such modifications. In addition, the increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for such products, generally following extensive investigation and deliberation over competing technologies. In the past, the delays inherent in this governmental approval process have caused, and may in the future cause, the cancellation or postponement of the deployment of new technologies. These delays could have a material adverse effect on our net revenues, gross profit margins and ~~income~~ operating results.

Our inability to modify our products in a timely manner or address such regulatory changes could cause a reduction in demand for our products, a loss of existing customers or the failure to attract new customers, which would result in lower than expected net ~~revenue~~revenues and a decline in the price of our common stock.

Telecommunication industry carriers are currently experiencing a period of consolidation that may impact the timing of future capital expenditures, which could adversely affect the demand for our products.

We are experiencing rapid consolidation in our customer base. During the past 2 several years a number of large mergers in the telecommunications industry have been completed or announced, including the following: ~~Cingular~~ ~~Wireless~~BellSouth and AT&T ~~Wireless~~, Sprint and Nextel, SBC and AT&T, and Alltel and Western Wireless~~, and Verizon~~. The integration of the operations of the entities involved in these mergers and acquisitions may take a long time, and this has in the past and could in the future cause delays in new capital expenditures until the merged entities budget for additions for their asset base. The effects of a consolidation involving any of our customers has in the past and could in the future result in postponed orders, decreased orders, or ~~canceled~~cancelled orders. For instance, ~~in the third and fourth quarters of 2004,~~ market consolidation in the wireless industry relating to to the merger of ~~Cingular~~BellSouth and AT&T, ~~Wireless~~ and T-Mobile’s purchase of spectrum from Cingular, resulted in reduced sales to our wireless customers and OEMs in the third and fourth quarters of 2006 and 2004, respectively. In addition, industry consolidation may result in sole-source vendors by our customers, which in turn could have a material adverse effect on our business, operating results, and financial condition. In particular, consolidation in the telecommunication industry carriers will lead to fewer customers in that market and the loss of a major customer could have a material impact on results not anticipated in a customer marketplace composed of a larger number of participants.

~~Page~~30 29

We have limited supply sources for some key parts and components of our products, and our operations could be harmed by supply interruptions, component defects or unavailability of these parts and components.

Many of our key parts and components are purchased from ~~sole source~~ suppliers for which alternative sources of supply are not currently available. Lead times for materials and components vary significantly and depend on many factors, some of which are beyond our control, such as specific supplier performance, contract terms and general market demand for components. If product orders vary significantly from forecasts, we may not have enough inventories of certain materials and components to fill orders. In addition, many companies utilize the same materials and supplies as we do in the production of their products. Companies with more resources than our own may have a competitive advantage in obtaining materials and supplies due to greater buying power. These factors can result in reduced supply, higher prices of certain materials, and delays in the receipt of certain of our key components, which in turn may ~~generate~~result in increased costs, ~~lower margins, and~~ delays in product delivery, lower net revenues and lower profit margins. We attempt to manage these risks through ~~developing~~development of alternative supply sources, through engineering efforts designed to ~~obviate~~remove the necessity offor certain components, and by building long-term relationships and maintaining close personal contact with each of ~~our~~ our suppliers. However, we have experienced delays in or failures of deliveries of key components in the past, either to us or to our contract manufacturers, and ~~consequent~~ delays in product deliveries, have occurred and may occur in the future.

We currently do not have long-term supply contracts for many of our key components. Our suppliers may enter into exclusive arrangements with our competitors, be acquired by our competitors, stop selling their products or components to us at commercially reasonable prices, refuse to sell their products or components to us at any price, or be unable to obtain or have difficulty obtaining components for their products from their suppliers.

Our distributors, OEMs and direct customers frequently require rapid delivery after placing an order. Our inability to obtain sufficient quantities of the components needed to ~~fulfill~~fulfil such orders has in the past resulted in, and may in the future result in, delays or reductions in product shipments, which could have an adverse effect on ~~sales~~our net revenues and customer relationships, our business, financial condition, or results of operations. In the event of a reduction or interruption of supply, it could take upseveral ~~to nine~~ months ~~or more~~ for us to begin receiving adequate supplies from alternative suppliers. Furthermore, we may not be able to engage an alternative ~~supplier~~ ~~who~~suppliers ~~could be in a position~~ to satisfy our production requirements on a timely basis, if at all. Delays in shipments by one of our suppliers have led to lost or delayed ~~sales~~net ~~and~~revenues ~~sales~~and sales opportunities in the past and may do so again in the future. ~~For example, in the third quarter of 2004, we were not able to fulfill all of our open purchase orders of our Adit and BROADway products due to unforecasted demand and a lack of availability of parts.~~

In addition, the manufacturing process for certain single or sole source components is extremely complex. Our reliance on suppliers for these components, especially for newly designed components, exposes us to potential production difficulties and quality variations that the suppliers experience. In the past, this reliance on outside suppliers for these components has negatively impacted cost, ~~and~~ the timely delivery of our products to our customers and consequently our net revenues and operating results.

Our dependence on third-party manufacturers could result in product delivery delays, which would adversely affect our ability to successfully sell and market our products and could result in ~~a decline~~declines in our net ~~revenue~~revenues and operating results.

We currently use several third-party manufacturers to provide certain components, printed circuit boards, chassis, and subassemblies, and are currently consolidating this work into a single-source third party manufacturer. Our reliance on third-party manufacturers involves a number of risks, including the potential for inadequate capacity, the unavailability of, or interruptions in, access to certain process technologies, transportation interruptions, ~~and~~ reduced control over procurement of critical components, product quality delivery schedules, ~~manufacturing~~ manufacturing yields, and costs of manufacture. Some of our manufacturers are undercapitalized and may be unable in the future to continue to provide manufacturing services to us. IfIn ~~these~~addition, disruptions to our supply chain, including transportation interruptions, delays in product delivery schedules and inability to manufacture our components in required volumes, may occur during the transition from our current third-party manufacturers ~~are~~to our new, single-source third-party manufacturer. If our new, single-source third-party manufacturer is unable to manufacture our components in required volumes, we will have to identify and qualify acceptable additional or alternative manufacturers, which could take inseveral ~~excess of twelve~~ months. We cannot assure you that any such source would become available to us or that any such source would be in a position to satisfy our production requirements on a timely basis. Any significant interruption in our supply of these components would result in delays, the payment of damages for such delays, or reallocation of products to customers, all of which could have a material adverse effect on our ability to successfully sell and market our products and could result in adeclines ~~decline~~ in our net ~~revenue~~revenues and operating results. ~~Moreover~~In addition, for a period of time as we transition from our current third-party manufacturers to our new, single-source third-party manufacturer, we will incur fixed and variable costs at multiple locations. Moreover, since a significant portion of our final assembly and test operations are performed in one location, any fire or other disaster at our assembly facility could also have an adverse effect on our net ~~revenue~~revenues and operating results.

~~Our~~31 executive officers and certain key personnel are critical to our business, and any failure to retain these employees could adversely affect our ability to manage our operations and develop new products or enhancements to current products.

Page 30

~~affect~~If ~~our~~we ~~ability~~fail to ~~manage~~maintain ~~our~~an ~~operations.~~effective Wesystem ~~believe~~of ~~that~~internal ~~our~~control ~~future~~over ~~success~~financial ~~will~~reporting, ~~depend~~we ~~in large~~may ~~part~~not ~~upon~~be ~~our~~able ~~ability~~ to ~~attract and retain highly skilled managerial, sales, customer~~ ~~support~~accurately ~~and~~report ~~product~~our ~~development~~financial ~~personnel~~results. WeAs doa ~~not~~result, ~~have employment contracts with any of~~ our ~~key personnel.~~business ~~The~~could ~~loss~~be ofharmed ~~the~~and ~~services~~current ofand ~~any~~potential ~~such~~stockholders ~~persons,~~could ~~the~~lose ~~inability~~confidence ~~to attract or retain qualified personnel~~ in ~~the~~our ~~future,~~financial ~~or delays in hiring required personnel~~reporting, ~~particularly~~which ~~engineering personnel and qualified sales personnel,~~ could ~~adversely~~negatively ~~affect~~impact ~~our~~the ~~ability~~trading toprice ~~manage~~of our ~~operations~~ ~~and develop new products or enhancements to current products~~stock.

Maintaining an effective system of internal control over financial reporting is necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, areas of our internal control over financial reporting that need improvement, including control deficiencies that may constitute material weaknesses. For example, in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, our management concluded that we did not maintain effective controls over certain aspects of our review of our statements of cash flows and certain revenue recognition policies. These control deficiencies resulted in a restatement of our previously issued financial statements for the fiscal years ended December 31, 2003 and 2004.

A failure to implement and maintain effective internal control over financial reporting, including a failure to implement corrective actions to address a control deficiency, could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

Our executive officers and certain key personnel are critical to our business, and any failure to retain these employees could adversely affect our ability to manage our operations and develop new products or enhancements to current products.

Our success depends to a significant degree upon the continued contributions of our Chief Executive Officer and key management, sales, engineering, finance, customer support, and product development personnel, many of whom would be difficult to replace. The loss of any such key personnel could adversely affect our ability to manage our operations. We believe that our future success will depend in large part upon our ability to attract and retain highly skilled managerial, sales, finance, customer support and product development personnel. We do not have employment contracts for a specified term with any of our key personnel. The loss of the services of any key person, the inability to attract or retain qualified personnel in the future, or delays in hiring required personnel, particularly engineering personnel and qualified sales personnel, could adversely affect our ability to manage our operations and develop new products or enhancements to current products.

Our customers are subject to numerous and changing regulations, interoperability requirements and industry standards. If the products they purchase from us do not meet these regulations or are not compatible with these standards or interoperate with the equipment solution selected by our customers, our ability to continue to sell our products could be seriously harmed.

Our products must comply with a significant number of voice and data regulations and standards, which vary between U.S. and international markets, and may also vary within specific foreign markets. We also need to ensure that our products are easily integrated with various telecommunications systems. Standards for new services continue to evolve, requiring us to continuously modify our products or develop new versions to meet new standards. Testing to ensure compliance and interoperability requires significant investments of time and money. Our VoIP ~~products~~ products currently interoperate with approximately 11eleven different product solutions and we ~~are required to~~ continually update our products based on our partners’ new releases of software for these products. If our systems fail to timely comply with evolving standards in U.S. and international markets, if we fail to obtain compliance on new features or if we fail to maintain interoperability with equipment from other companies, our ability to sell our products would be significantly impaired. We could thereby experience, among other things, customer contract penalties, delayed or lost customer orders, ~~and~~ decreased net revenues and operating results.

We have maintained compliance with ISO 9001:2000 since we were first certified in May 2000, with Telcordia OSMINE ~~when~~since we were first certified in the fourth quarter of 2001, and with Network Equipment Building Standards Level 3 since we were first certified in April 1998. ISO 9001:2000 is a set of comprehensive standards that provide quality assurance requirements and quality management guidance. These standards act as a model for quality assurance for companies involved with the design, testing, manufacture, delivery and service of products. ~~Telcordia~~Telecordia, formerly known as Bellcore, developed the ~~Osmine~~OSMINE program, which is a process designed to ensure that all of the network equipment used by Regional Bell Operating Companies, or RBOCs, can be managed by the same software programs. NEBS, or Network Equipment Building Standards, are a set of performance, quality and safety requirements — which were developed internally at Bell Labs and later at Telcordia — for network switches. RBOCs and local exchange carriers rely on NEBS-compliant hardware for their central office telephone switching. We cannot assure that we will maintain these certifications. The failure to maintain any of these certifications may adversely impair the competitiveness of our products.

Our products may suffer from defects or errors that may subject us to product returns and product liability claims, which could adversely affect our reputation and seriously harm our results of operations.

Our products have contained in the past, and may contain in the future, undetected or unresolved errors when first introduced or when new versions are released. Despite our extensive testing, errors, defects, or failures are possible in our current or future products or enhancements. If such defects occur, we may be subject to:

• delays in or losses of market acceptance and sales; • penalties for network outages in our installed network base; • product returns; • diversion of development resources resulting in new product development delay; • injury to our reputation; or • increased service and warranty costs.

~~Delays~~32 in meeting deadlines for announced product introductions, or enhancements or performance problems with such products, could undermine customer confidence in our products, which would harm our customer relationships.

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~~may~~• bepenalties ~~inadequate to cover any potential product liability claim. Although we have not experienced any product liability claims to date, the sale~~ and/or ~~support~~liquidating ofdamages ~~our~~for ~~products~~network ~~entails~~outages ~~the risk of such claims, and it is possible that we will be subject to such claims~~ in ~~the~~our ~~future.~~customers’ ~~Product~~installed ~~liability claims~~network ~~brought against us could harm our business.~~ base;

•

product returns;

•

diversion of development resources resulting in new product development delay;

•

injury to our reputation; or

•

increased service and warranty costs.

Delays in meeting deadlines for announced product introductions, or enhancements or performance problems with such products, could undermine customer confidence in our products, which would harm our customer relationships.

Our agreements with our distributors, OEMs and direct customers typically contain provisions designed to limit our exposure to potential product liability claims. However, it is possible that the limitation of liability provisions contained in our agreements may not be effective or adequate under the laws of certain jurisdictions. It is also possible that our errors and omissions insurance may be inadequate to cover any potential product liability claim. Although we have not experienced any product liability claims to date, the sale and support of our products entails the risk of such claims, and it is possible that we will be subject to such claims in the future. Product liability claims brought against us could harm our business.

Difficulties in integrating past or future acquisitions could adversely affect our operating results and result in a decline in the price of our common stock.

We have spent and may continue to spend significant resources identifying businesses to be acquired by us. For example, in October 2006, we acquired Carrier Access Networks (Shanghai), Ltd. to expand our international presence and certain research and development activities, and in March 2007, we acquired the optically-fed IP transport integration products of Mangrove Systems, Inc. The efficient and effective integration of any businesses we acquire into our organization is critical to our growth. Acquisitions involve numerous risks including difficulties in integrating the operations, technologies and products of the acquired companies, the diversion of our management’s attention from other business concerns and the potential loss of key employees of the acquired companies. Failure to achieve the anticipated benefits of these and any future acquisitions or to successfully integrate the operations of the companies we acquire could also harm our business, results of operations and cash flows. Additionally, we cannot assure you that we will not incur material charges in future quarters to reflect additional costs associated with our future acquisitions., or that we will not incur significant intangible related expenses that could significantly impact our operating results.

If we have insufficient proprietary rights or if we fail to protect those rights we have, third parties could develop and market products that are equivalent to our own, which would harm our sales efforts and could result in a decrease in our net ~~revenue~~revenues and the price of our common stock.

We rely primarily on a combination of patent, copyright, trademark, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights. As of September 30, ~~2005~~2007, we held a total of 23twenty-one issued U.S. patents and had ~~approximately~~ 5one pending U.S. patent ~~applications~~application. We have ~~one~~four U.S. trademark ~~application~~applications pending and have thirteen 15 registered trademarks. We cannot assure you that our pending patent or trademark applications will be granted or, if granted, will be sufficient to protect our rights. We have entered into confidentiality agreements with our employees and consultants, and non-disclosure agreements with our suppliers, partners, customers, and distributors in order to limit access to and disclosure of our proprietary information. However, such measures may not be adequate to deter and ~~prevent~~ prevent misappropriation of our technologies or independent third-party development of similar technologies. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our products or obtain and use trade secrets or other information that we regard as proprietary. Furthermore, we may be subject to additional risks as we enter into transactions in foreign countries where intellectual property laws do not protect our proprietary rights as fully as the laws of the U.S. Based on the effort and cost associated with enforcing foreign intellectual property protections as compared with the comparative value of such protections, we ~~suspended~~placed ~~our activities~~a ~~related~~lower toemphasis on obtaining international trademark and patent registrations in the first quarter of 2003, although we will pursue such protections when considered appropriate. We cannot assure that our competitors will not independently develop similar or superior technologies or duplicate any technology that we have. Any such events could harm our ability to sell and market our products, which could result in a decrease in net revenue and the price of our common stock.

We may face intellectual property infringement claims that could result in significant expense to us, divert the efforts of our technical and management personnel, or cause product shipment delays.

The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants in our markets increases and the functionality of our products is enhanced and overlaps with the products of other companies, we may become subject to claims of infringement or misappropriation of ~~the~~ the intellectual property rights of others. From time to time, third parties may assert patent, copyright, trademark, and other intellectual property rights to technologies that are important to us. Any future third-party claims, whether or not such ~~claims are determined adversely to us, could~~ result in significant expense, divert the efforts of our technical and management personnel, or cause product shipment delays. In the event of an adverse ruling in any litigation, we might be required to discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology, or obtain licenses from third parties. In addition, any public announcements related to litigation or interference proceedings initiated or threatened against us, even if such claims are ~~without merit, could cause our stock price to decline.~~

In33 our customer agreements, we agree to indemnify our customers for any expenses or liabilities resulting from claimed infringements of our product patents, trademarks, or copyrights of third parties. In certain limited instances, the amount of such indemnities may be greater than the net revenue we may have received from our customer.

Increased sales volume in international markets could result in increased costs or loss of revenue due to factors inherent in these markets.

We are in the process of expanding into international markets, and we anticipate increased sales from these markets. A number of factors inherent to these markets expose us to significantly more risk than domestic business, including:

Page 32

• determined ~~local~~adversely ~~economic~~to ~~and~~us, ~~market~~could ~~conditions;~~result •in ~~exposure~~significant toexpense, ~~unknown~~divert ~~customs~~the efforts of our technical and ~~practices;~~management •personnel, ~~legal~~or ~~regulations~~cause ~~and~~product ~~requirements~~shipment delays. inIn ~~foreign~~the ~~countries;~~event •of ~~potential~~an ~~political~~adverse ~~unrest;~~ruling •in ~~foreign~~any ~~exchange~~litigation, ~~exposure;~~we •might ~~unexpected~~be ~~changes~~required into ordiscontinue ~~impositions~~the use and sale of ~~legislative~~infringing orproducts, ~~regulatory~~expend ~~requirements;~~significant •resources ~~less~~to ~~regulation~~develop ofnon-infringing ~~patents~~technology, or ~~other~~obtain ~~safeguards~~licenses offrom ~~intellectual~~third ~~property;~~parties. ~~and~~In addition, •any ~~difficulties~~public inannouncements ~~collecting~~related ~~receivables~~to ~~and~~litigation ~~inability~~or tointerference ~~rely~~proceedings oninitiated ~~local~~or ~~government~~threatened ~~aid~~against tous, ~~enforce~~even ~~standard~~if ~~business~~such ~~practices~~claims are without merit, could cause our stock price to decline.

~~Any~~In ofour ~~these~~customer ~~factors~~agreements, we agree to indemnify our customers for any expenses or ~~others~~liabilities resulting from claimed infringements of our product patents, trademarks, or copyrights of ~~which~~third weparties. ~~are~~In ~~not~~certain ~~currently~~limited ~~aware~~instances, ~~could~~the ~~result~~amount ~~in increased~~of ~~operating~~such ~~costs~~indemnities ormay ~~loss~~be ofgreater than the net ~~revenue~~revenues we may have received from such customers.

Increased sales volume and research and development activities in diverse international markets and geographic locations could result in increased costs or loss of revenue due to factors inherent in these markets.

We are in the process of expanding into international markets, and we anticipate increased sales from these markets. In addition, we are expanding certain of our research and development activities into diverse international geographic locations. For example, as noted above, in October 2006, we acquired Carrier Access Networks (Shanghai), Ltd. to expand our international presence and certain research and development activities, and in March 2007, we acquired the optically-fed IP transport integration products of Mangrove Systems, Inc.

A number of factors inherent to these markets expose us to significantly more risk than U.S. based business, including:

•

difficulties associated with expanding sales presence and individuals in these markets;

•

local economic and market conditions;

•

exposure to unknown customs and practices;

•

legal regulations and requirements in foreign countries;

•

potential political unrest;

•

foreign currency exchange exposure, and governmental restrictions on our ability to invest and repatriate funds from these locations;

•

increased difficulty in effectively managing the activities of a geographically dispersed organization;

•

unexpected changes in or impositions of legislative or regulatory requirements;

•

less regulation of patents or other safeguards of intellectual property; and

•

difficulties in collecting receivables and inability to rely on local government aid to enforce standard business practices.

Any of these factors, or others, of which we are not currently aware, could result in increased operating costs or loss of net revenues.

A small number of shareholders can exert significant influence on the outcome of matters requiring the approval of a majority of the outstanding shares of our common stock.

As of ~~September~~October 3031, ~~2005~~2007, our directors and executive officers, together with members of their families and entities that may be deemed affiliates of, or related to, such persons or entities, beneficially owned approximately 3938% of our outstanding shares of common stock. In particular, Mr. Koenig, aour ~~director~~Chairman of the Board of Directors and until August 1, 2007, our President and Chief Executive Officer, and Ms. Pierce, a director and ~~our~~ ~~Secretary~~until August 1, ~~former~~2007, ~~CFO~~our ~~and~~ Corporate Development Officer, are married. As of ~~September~~July 3031, ~~2005~~2007, Mr. Koenig and Ms. Pierce together beneficially owned approximately 38% of our outstanding shares of common stock. Accordingly, these two stockholders can exert significant influence over the election of members of our Board of Directors and the outcome of all corporate actions requiring ~~stockholder~~ stockholder approval of a majority of the voting power held by our stockholders, such as mergers and acquisitions. This level of ownership by such persons and entities may delay, defer, or prevent a change in control and may harm the voting and other rights of other holders of our common stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the financial position, results of operations, or cash flows due to adverse changes in financial and commodity market prices and rates. Historically, and as of September 30, 2005, we have had little or no exposure to market risk in the area of changes in foreign currency exchange rates as measured against the United States dollar.

As part of our cash management strategy, at September 30, 2005, we had cash, cash equivalents and investments in marketable securities of approximately $106.3 million mainly in the form of bank demand deposits, money markets and government securities. We have completed a market risk sensitivity analysis of these cash and cash equivalents based on an assumed 100 basis point change in interest rates. A hypothetical increase or decrease in market rates of 100 basis points would increase or decrease interest income on an annualized basis by approximately $1.0 million.

ITEM 4. CONTROLS AND PROCEDURES

a) Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q because we have not yet completed the remediation of the material weaknesses discussed in our Annual Report on Form 10-K/A for the year ended December 31, 2004 (“2004 Form 10-K/A”).

(b) Changes in internal control over financial reporting. We made a number of changes in our internal control over financial reporting during and subsequent to the three months ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as discussed in Item 4(c) below.

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(c) Remediation of weaknesses in internal control over financial reporting. As discussed in more detail in our 2004 Form 10-K/A, as of December 31, 2004, we did not maintain effective controls over (i) review of our consolidated statement of cash flows, (ii) evaluation of customer arrangements for the appropriate application of revenue recognition criteria, (iii) accounting for our inventory reserves and (iv) identification and accounting for complex transactions. During and subsequent to the three months ended September 30, 2005, we have implemented, or plan to implement, the specific measures described below to remediate the material weaknesses described above.

Statement of Cash Flows

We have required the Chief Financial Officer to monitor compliance with our established policy, which provides for a detailed review of the statement of cash flows by a technically competent individual.

Revenue Recognition

We are in the process of establishing controls to remediate the material weakness in internal controls relating to accounting for revenue recognition. A review by a technically qualified person will be performed on all customer arrangements for the purpose of evaluating the appropriate application of the revenue recognition criteria as contemplated by generally accepted accounting principles in the U.S.

Inventory Reserves

We have designed an additional policy, which requires a review of reserve activity by a qualified individual.

Lack of Depth of Personnel with adequate Technical Knowledge

We are in the process of addressing the material weakness related to the lack of depth of personnel with sufficient technical accounting expertise. In this regard, in June 2005, we hired a new Chief Financial Officer and have established a formal process for the periodic technical training of the financial and sales personnel.

The aforementioned material weaknesses will not be considered remediated until new processes are fully implemented, operate for a period of time, are tested and we conclude that they are operating effectively. We are fully committed to remediating our material weaknesses in internal control over financial reporting, and we believe we are taking the appropriate steps to properly address these issues during 2005. However, the remediation of the design of the deficient controls and the associated testing efforts are not complete, and may require further remediation.

We are also taking action to correct other control deficiencies (some of which are significant deficiencies) identified during the audit of our internal control over financial reporting as of December 31, 2004 and to correct gaps identified in 2005 in the documentation and design of internal control over financial reporting. If there is insufficient time for testing or such corrections fail the testing these deficiencies will not be considered remediated and may, therefore, become material weaknesses.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Beginning on June 3, 2005, three purported shareholder class action lawsuits were filed in the United States District Court for the District of Colorado against Carrier Access Corporation and certain of our officers and directors. The cases, captioned Croker v. Carrier Access Corporation, et al., Case No. 05-cv-1011-LTB; Chisman v. Carrier Access Corporation, et al., Case No. 05-cv-1078-REB, and Sved v. Carrier Access Corporation, et al, Case No. 05-cv-1280-EWN, have been consolidated by stipulation and are purportedly brought on the behalf of those who purchased our publicly traded securities between October 21, 2003 and May 20, 2005. Plaintiffs allege that defendants made false and misleading statements, purport to assert claims for violations of the federal securities laws, and seek unspecified compensatory damages and other relief. The complaints are based upon allegations of wrongdoing in connection with our announcement of our intention to restate previously issued financial statements for the year ended December 31, 2004 and certain interim periods in each of the years ended December 31, 2004 and 2003.

Beginning on June 13, 2005, three purported shareholder derivative lawsuits were filed in the United States District Court for the District of Colorado, against various of our officers and directors and naming Carrier Access as a nominal defendant. The cases are captioned Kenney v. Koenig, et al., Case No. 05-cv-1074-PSF, Chaitman v. Koenig, et al., Case No. 05-cv-1095-LTB and West Coast Management and Capital, LLC v. Koening [sic], et al. Case No. 05-cv-1134-RPM. These actions were consolidated on August 11, 2005. The complaints include claims for breach of fiduciary duty, abuse of control, waste of corporate assets, mismanagement and unjust enrichment; seek compensatory damages, disgorgement, and other relief; and are based on essentially the same allegations as the class actions described in the preceding paragraph. On October 12, 2005, we moved to dismiss for failure to plead demand futility, and the individual defendants moved to dismiss for failure to state a cause of action for breach of fiduciary duty, waste, and all of the other counts.

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On September 12, 2005, a purported shareholder derivative lawsuit was filed in the Boulder County, Colorado District Court against various of our officers and directors and naming Carrier Access as a nominal defendant. This case is captioned Dietz v. Koenig, et al. On September 28, 2005 a purported shareholder derivative lawsuit was filed in the 20th District in the State of Colorado, Boulder County District Court, against various of our officers and directors and naming Carrier Access as a nominal defendant. This case is captioned Novak v. Koenig, et al. On October 24, 2005, we removed the Novak action to federal court and the parties have stayed the Dietz matter pending the above filed motions. The Dietz and Novak complaints include claims for breach of fiduciary duty, violation of by-laws and other relief; and are based on essentially the same allegations as the class actions described in the preceding paragraphs.

Management believes that the claims in the class action are without merit. Because these lawsuits are at a very preliminary stage, management cannot at this time determine the probability or reasonably estimate a range of loss, if any. Were an unfavorable outcome to occur, it could have a material adverse impact on our financial position and results of operations for the period in which such outcome occurred.

In addition, Carrier Access is involved in legal proceedings from time to time arising from the normal course of business activities including claims of alleged infringement of intellectual property rights, commercial, employment and other matters. In the Company’s opinion, resolution of pending matters is not expected to have a material adverse impact on its consolidated results of operations, cash flows or its financial position, However, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially affect our future results of operations, cash flows or financial position in a particular period.

We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products. We evaluate estimated losses for such indemnifications under SFAS 5, Accounting for Contingencies, as interpreted by FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered material costs as a result of such obligations, and have not accrued any liabilities related to such indemnifications in its financial statements.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~None~~Not applicable.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

~~None~~Not applicable.

~~ITEM~~34 ~~4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~

NoTable matters were submitted to a vote of security holders during the third quarter of 2005. Contents

ITEM 4.

SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS

Not applicable.

ITEM 5.

OTHER INFORMATION

~~None~~Not applicable.

ITEM 6.

EXHIBITS

	31.1		Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(c) and 15d-14(a).
ExhibitNumber		Description of Document
	31.2		Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(c) and 15d-14(a).
3.1		Registrant’s Bylaws, as amended
	32.1		Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
10.1		Change of Control Severance Agreement, dated July 31, 2007, by and between Registrant and Allen Snyder (incorporated by reference to Item 10.1 of the Registrant’s Current Report of Form 8-K filed August 6, 2007).
10.2		Change of Control Severance Agreement, dated July 31, 2007, by and between Registrant and Gary Gatchell (incorporated by reference to Item 10.2 of the Registrant’s Current Report of Form 8-K filed August 6, 2007).
10.3		Change of Control Severance Agreement, dated July 31, 2007, by and between Registrant and Dave Whalen
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~Page~~ 35

~~Signature~~ SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the ~~registrant~~Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boulder, State of Colorado, on this 6th day of November 2007.

	CARRIER ACCESS CORPORATION (Registrant)
November 9, 2005	By:	/s/ Gary Gatchell
		Gary Gatchell
		Executive Vice President and Chief Financial Officer
		(Principal Accounting Officer and Authorized Signatory)


CARRIER ACCESS CORPORATION

By:		/s/ GARY GATCHELL
		Gary Gatchell
		Executive Vice President and Chief Financial Officer Principal Accounting Officer and Authorized Signatory

~~Page~~ 36

EXHIBIT INDEX

Exhibit
Number		Description of Document
31.1*		Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(c) and 15d-14(a).
31.2*		Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(c) and 15d-14(a).
32.1*		Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

Filing Compare · CARRIER ACCESS CORP