UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

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

For the transition period from to

Commission file number: 000-24597

CARRIER ACCESS CORPORATION

(Exact name of registrant as specified in its charter)


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)*

(303) 218-5455

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

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

CARRIER ACCESS CORPORATION

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 ACCESS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)


	September 30, 2007			December 31, 2006
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	42,119		$	77,948
Investments in marketable securities		38,996			32,824
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		79			64
Deferred income taxes		112			112
Inventory, net		16,899			18,212
Prepaid expenses and other		9,766			10,503

Total current assets		112,372			146,759
Property and equipment, net		9,698			10,471
Goodwill		8,734			7,614
Intangible assets, net		6,900			4,023

Total Assets	$	137,704		$	168,867


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	8,281		$	8,759
Accrued compensation payable		3,260			4,134
Accrued expenses and other liabilities		9,624			9,248
Deferred revenue		592			183

Total current liabilities		21,757			22,324
Deferred income taxes		112			112

Total Liabilities		21,869			22,436

Stockholders’ Equity
Preferred stock, $0.001 par value, 5,000 shares authorized and no shares issued or outstanding at September 30, 2007 and December 31, 2006		—			—
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
Additional paid-in capital		190,857			187,885
Accumulated deficit		(75,063	)		(41,378	)
Accumulated other comprehensive loss		6			(110	)

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.

CARRIER ACCESS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Revenue, net of allowances for sales returns	$	7,353		$	16,083		$	23,656		$	62,897
Cost of sales		8,353			9,862			21,060			34,387

Gross profit (loss)		(1,000	)		6,221			2,596			28,510

Operating expenses
Research and development		5,102			6,953			19,953			19,550
Sales and marketing		3,416			3,855			10,651			10,791
General and administrative		2,481			2,235			7,872			7,677
Bad debt expense (recoveries)		46			25			(42	)		(74	)
Insurance recoveries, net		—			(232	)		(610	)		(232	)
Restructuring charges		363			—			762			—
Intangible asset amortization		492			307			1,352			921

Total operating expenses		11,900			13,143			39,938			38,633

Loss from operations		(12,900	)		(6,922	)		(37,342	)		(10,123	)
Interest income		1,101			1,458			3,643			3,813

Loss before income taxes		(11,799	)		(5,464	)		(33,699	)		(6,310	)

Income tax benefit		(14	)		(18	)		(14	)		(25	)

Net loss	$	(11,785	)	$	(5,446	)	$	(33,685	)	$	(6,285	)

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

Weighted average common shares
Basic and diluted		34,619			34,084			34,458			33,921

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

CARRIER ACCESS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Nine Months Ended September 30,
	2007			2006
Cash flows from operating activities
Net loss	$	(33,685	)	$	(6,285	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense		3,407			2,631
Provisions for inventory obsolescence		4,404			1,212
Stock-based compensation		2,309			1,824
Changes in operating assets and liabilities:
Accounts receivable		2,791			1,117
Inventory		(970	)		1,983
Prepaid expenses and other		(523	)		(247	)
Accounts payable and accrued expenses		181			2,294

Net cash provided by (used in) operating activities		(22,086	)		4,529

Cash flows from investing activities
Purchases of property and equipment		(810	)		(1,328	)
Proceeds from the sale of property and equipment		80			—
Purchases of marketable securities available for sale		(45,611	)		(28,869	)
Sales of marketable securities available for sale		39,800			41,815
Payment for acquisition		(7,868	)		—

Net cash provided by (used in) investing activities		(14,409	)		11,618

Cash flows from financing activities
Proceeds from exercise of stock options		658			1,116

Net cash provided by financing activities		658			1,116

Effect of exchange rate changes on cash and cash equivalents		8			—

Net increase (decrease) in cash and cash equivalents		(35,829	)		17,263
Cash and cash equivalents at beginning of the period		77,948			55,279

Cash and cash equivalents at end of the period	$	42,119		$	72,542

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

CARRIER ACCESS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements for the three and nine month periods ended September 30, 2007 and 2006 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes typically found in the audited consolidated financial statements and footnotes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (the “Form 10-K”) of Carrier Access Corporation, and its subsidiaries (the “Company”). In the opinion of management, all adjustments (consisting of those of a normal recurring nature) necessary for the fair presentation of the accompanying condensed consolidated financial statements have been made.

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

The Company disclosed in Note 1 to its consolidated financial statements included in the Form 10-K those accounting policies that it considers to be significant in determining its results of operations and financial position. There have been no material changes to or application of the accounting policies previously identified and described in the Form 10-K. The accounting principles utilized by the Company in preparing its condensed consolidated financial statements conform in all material respects to GAAP. For further information, refer to the consolidated financial statements and footnotes in the Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and judgments relied upon in preparing these financial statements include allowances for doubtful accounts, inventory reserves, expected future cash flows to evaluate the recovery of long lived assets, restructuring and other related charges, assumptions used to determine the fair value of stock based compensation, contingent liabilities and the recoverability of net deferred tax assets and related allowance. Actual results could differ from those estimates. The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The condensed consolidated statement of operations for the three and nine month periods ended September 30, 2007 are not necessarily indicative of results for the full year ended December 31, 2007, or any other period.

Loss per Share

Basic earnings per share is computed by dividing net income or loss from continuing operations by the weighted average number of common shares outstanding during the period. Diluted earnings per share from continuing operations reflects the additional dilution that could occur if rights to acquire common stock were exercised, such as stock issuable pursuant to the exercise of stock options outstanding and shares of common stock subject to repurchase. The treasury stock method is used to compute the dilutive effect of options and similar instruments. Potentially dilutive shares, including shares of common stock that are subject to repurchase, are excluded from the computation of diluted earnings per share from continuing 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):


	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	)

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.

Comprehensive Loss

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


	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.

At September 30, 2007, the remaining accrued 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):


	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

2. Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standard 123(R) “Share-Based Payment” (“SFAS 123(R)”) using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted beginning January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).

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 30, 2007 by $907,000 and $2,309,000, respectively. This expense increased basic and diluted losses per share by $(0.03) and $(0.07), compared to reported basic and diluted losses per share of $(0.34) and $(0.98) for the three and nine month periods ended September 30, 2007, respectively. For the three and nine month periods ended September 30, 2006 the increase in net losses due to stock-based compensation expense was $639,000 and $1,823,000, respectively. This expense increased basic and 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 three and nine month periods ended September 30, 2006, respectively. The Company did not recognize a tax benefit from share-based compensation expense because the Company considers it more likely than not that the related deferred tax assets, which have been reduced in full by a valuation allowance, will not be realized. The following table summarizes stock-based compensation expense recorded under SFAS 123(R) for the three and nine month periods ended September 30, 2007 and 2006, and its allocation within the condensed consolidated statements of operations (in thousands):


	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

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 value of stock options granted during the three and nine month periods ended September 30, 2007 and 2006, and the assumptions used to estimate fair value as of the grant date using the Black-Scholes option pricing model were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Volatility		75	%		95	%		87	%		100	%
Expected option term		4 ¹/2 years			4 ¹/2 years			4 ¹/2 years			4 ¹/2 years
Risk free interest rate		4.6	%		4.8	%		4.6	%		4.9	%
Expected dividend yield		0	%		0	%		0	%		0	%
Weighted average fair value per share	$	2.24		$	4.45		$	2.73		$	3.80

Stock Incentive Plan

The Company’s 1998 Stock Incentive Plan (the “Plan”) provides for five separate components. The Discretionary Option Grant Program, administered by the Compensation Committee appointed by the Company’s Board of Directors, provides for the grant of incentive and non-qualified options to purchase common stock to employees, consultants or directors. The Stock Issuance Program, administered by the 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 tied to the performance of services. The Salaried Investment Option Grant Program, if activated, allows executive officers and other highly compensated employees selected by the Compensation Committee to apply a portion of their base salary towards the acquisition of special below-market stock option grants. The Automatic Option Grant Program provides for automatic option grants at periodic intervals to eligible non-employee Board members to purchase shares of Common Stock at a price equal to their fair market value on the grant date. The Director Fee Option Program, if activated for 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 option grants. All stock options outstanding have been granted under the Discretionary Option Grant Program and the Automatic Option Grant Program. In April 2007, our Board of Directors approved the following: (i) a 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.

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.

In April 2007, the Company issued a grant of 25,000 RSUs pursuant to the Stock Issuance Program under the Plan. Vesting in the RSU award is contingent upon achieving certain performance targets. Of the 25,000 RSUs granted in April 2007, 9,000 RSUs vested in June 2007. During the three and nine month periods ended September 30, 2007, the Company recorded compensation expense related to this RSU award totaling approximately $26,000 and $102,000, respectively. This expense is included in the total stock-based compensation expense that was recorded by the Company during the quarter ended September 30, 2007. The remainder of the restricted stock unit award is expected to vest or be forfeited by December 31, 2007.

During the three months ended September 30, 2007, the Company issued grants of 907,500 RSUs to certain employees pursuant to the Stock Issuance Program under the Plan, 400,000 of which are performance based and 507,500 of which are time based. The performance based RSUs 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 the first anniversary of the grant date and an additional 50% vesting on the second anniversary of the grant date, assuming achievement of the performance targets. The time based RSUs vest in either two or three equal annual installments from the date of grant. Vesting for both performance based and time based grants is accelerated in the event of a change in control. The Company recorded compensation expense related to these RSU 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.

Restricted stock unit activity for the nine months ended September 30, 2007 is summarized as follows:


	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

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.

During the three month period ended September 30, 2006, the Company granted options to non-employee directors to purchase 30,000 shares of common stock at an exercise price of $6.92 under the Automatic Option Grant Program. No options were granted to non-employee directors during the three month period ended September 30, 2007.

The following table summarizes stock options outstanding and changes during the three and nine month periods ended September 30, 2007:


	Outstanding Options
	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
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

The total intrinsic value, or the difference between the exercise price and the market price on the date of exercise, of all options exercised during the three and nine month periods ended September 30, 2007 was approximately $547,600 and $1,234,500, respectively. Cash received from stock options exercised during the three and nine month periods ended September 30, 2007 was approximately $218,000 and $658,000, respectively. The Company did not realize any tax deductions related to the exercise of stock options during the quarter. As discussed in Note 6 – Income Taxes, the Company will record such deductions to additional paid-in capital when realized. Shares available for grant under the Plan as of September 30, 2007 were approximately 1,945,709.

Stock options outstanding and currently exercisable at September 30, 2007 are as follows:


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

Total estimated unrecognized compensation cost from unvested stock options as of September 30, 2007 was approximately $2,381,100, which is expected to be recognized over a weighted average period of approximately 1.39 years.

3. Investments

The Company has investments in marketable securities, all of which were classified as available for sale, as follows (in thousands):


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


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

The following table summarizes the fair value and gross unrealized losses on our investments in marketable securities with unrealized losses, aggregated by the type of investment instrument and length of time that the individual securities have been in a continuous unrealized loss position as of September 30, 2007 and December 31, 2006 (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	)


December 31, 2006	Less than 12 Months				12 Months or Greater					Total
December 31, 2006	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
US government securities	$	—	$	—	$	8,389	$	(109	)	$	8,389	$	(109	)
State and local governments		—		—		—		—			—		—
Corporate debt securities		3,001		—		3,866		(9	)		6,867		(9	)

Total Investments	$	3,001	$	—	$	12,255	$	(118	)	$	15,256	$	(118	)

The Company’s investments include U.S., State and municipal 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.

As of September 30, 2007 and December 31, 2006, all of the 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 the reporting date. If these investments are sold at a loss or experience a decline in value that is not temporary, the loss is recognized in the condensed consolidated statement of operations for that period. Unrealized gains or losses that are considered temporary in nature are recorded as a separate component of cumulative other comprehensive income (loss) in stockholders’ equity. Subsequent recoveries in the fair value, if any, are not recognized in the condensed consolidated statement of operations, but as a component of cumulative other comprehensive income (loss). The specific identification method is used to determine the cost of securities disposed of, with realized gains and losses recorded in interest income, net. During the three and nine month periods ended September 30, 2007 and 2006, the Company did not incur significant realized gains or losses on disposals of marketable securities. The unrealized loss balances on U.S. Government and Corporate debt securities resulted primarily from interest rate increases. Because the Company has the ability and intent to hold these securities until a recovery of fair value, which may be at maturity, the Company does not consider these securities to be other than temporarily impaired at September 30, 2007.

The Company’s investment policy limits the concentration of its investments in any single instrument to a maximum of $3.0 million or 10%, whichever is less, other than U.S. Government or Agencies securities, which do not have limitations. All of the Company’s securities must be readily marketable and have high quality debt ratings from either Moody’s, Fitch or Standard & Poors. Investments may not have maturities in excess of three years, and the average portfolio maturity is maintained at 18 months or less. The weighted average portfolio days to maturity for marketable securities available for sale was approximately 136 days at September 30, 2007.

4. Inventory

Inventories are valued at the lower of cost or market, with cost computed using standard costs that approximate average purchase costs. Consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value. Inventories consist of the following (in thousands):


	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 strategic alternatives, revenue for the fourth quarter of 2007, future sales of our products to our customers, expectations regarding 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 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, are subject to risks and uncertainties, including but not limited to the factors set forth under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. All forward looking statements and reasons why results may differ included in this 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 Quarterly Report on Form 10-Q.

Outlook

In fiscal 2007, we are focused on accelerating development of new product platforms and service cards to expand our existing Wireless radio access network solutions and Converged Access Voice over IP solutions.

In Wireless, our strategy is to leverage our large installed customer base with new scalable and upgradeable hardware and software solutions that enable our global wireless customers to grow and expand their networks and deliver web, video and entertainment services, without requiring our customers 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.

Effective August 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.

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., and the Axxius products in June 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 approximately 11%, 12% and 29%, respectively, in the nine month period 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.

Historically, most of the sales of our products have been through 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 revenue for fiscal year 2006. Recently, however, an increasing proportion of our product sales have been made directly to telecommunications carriers and OEMs. For the three and nine months ended September 30, 2007, direct sales to AT&T (formerly known as Cingular) accounted for approximately 16% and 14%, respectively, of our net revenue, down from 20% and 42% of net revenue during each of the three and nine month periods ended September 30, 2006. This significant decline in sales has had a material adverse effect on our operating results since the third quarter of 2006. In addition to AT&T and Walker & Associates, we had one other customer who accounted for 16% and 13% of our net revenue for the three and nine month periods ended September 30, 2007, respectively. We expect that our product sales will continue to be made to an increasingly concentrated number of distributors, OEMs, and direct customers. As a result, the loss of, or reduction in sales to, any of our significant customers would have a material adverse effect on our business. International net revenues, or net revenues for products shipped outside of the United States, accounted for approximately 7% and 10% of our total net revenues for the nine month periods ended September 30, 2007 and 2006, respectively.

Our objective has been to focus on cost controls while continuing to invest in the development of new and enhanced products, which we believe will position us to take advantage of sales opportunities as our customers develop and upgrade their networks and telecom infrastructure to incorporate technological improvements which improve the value they provide to their customers. However, we believe current economic conditions and industry consolidation has resulted in a significant reduction in our sales since the third quarter of 2006, and may continue to cause our customers and potential customers to defer and reduce capital spending.

Our net revenues 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.

Presentation

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.

Results of Operations for the Three and Nine Month Periods Ended September 30, 2007 and 2006


	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	)%

The decreases in net revenues for the three and nine months ended September 30, 2007, compared to the same periods in 2006, were primarily due to a decrease in the number of MASTERseries, Adit 600, Broadmore and Axxius units sold. The decreases in 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.

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.

Gross Profit


$ 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	)%

The decreases in gross profit for the three and nine months ended September 30, 2007, compared to the same periods in 2006, were partially due to inventory write downs. During the third quarter of fiscal 2007, we concluded that our recent price reductions and sales incentive plans were not adequately reducing inventory related to certain products and product configurations. Lower sales volumes, market conditions, continued poor visibility into future sales opportunities and reductions in our international sales staff associated with our July 2007 restructuring plan resulted in our reduction of the carrying value of this inventory. As a result, we recorded an additional charge to cost of sales of approximately $2.8 million in the three month period ended September 30, 2007. We regularly evaluate our inventory for potential excess based on forecasted demand, economic trends and technological obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory write-downs could be required and would be reflected in our cost of sales in the period the revision is made.

In addition to the inventory impairment charge, the decreases in 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.

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.

We include direct and indirect materials and labor, certain warehousing and other allocable fixed manufacturing overhead costs, including depreciation, in our calculation of cost of sales.

Research and Development Expense


$ in thousands	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
$ in thousands	2007			2006			Change			2007			2006			Change
Research & development expense	$	5,102		$	6,953		$	(1,851	)	$	19,953		$	19,550		$	403
% of Net Revenues		69	%		43	%		(27	)%		84	%		31	%		2	%

Research and development expense for the quarter ended September 30, 2007, compared to the same period in 2006, decreased $1.9 million. During the third quarter of 2007, we continued to invest in the development of new and enhanced products, including our FLEXengine release 2.0 and VoicePage voice over IP software solution. At the same time, we were focused on cost controls, including the transition of our research and development work to our Shanghai development center, the closing of our research and development facilities in Bethel, CT and Tulsa, OK and a restructuring plan announced in July 2007 to better align expenses with current revenue. These cost controls resulted in reduced employee costs of approximately $1.9 million and a reduction in consulting expense of approximately $1.5 million in the third quarter of 2007. These reductions were offset by increased employee compensation and other costs of approximately $1.9 million as a result of our acquisitions of Carrier Access Networks (Shanghai) Ltd. and Mangrove Systems, Inc. in the fourth quarter of 2006 and first quarter of 2007, respectively.

Research and 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.

Sales and Marketing Expense


$ in thousands	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
$ in thousands	2007			2006			Change			2007			2006			Change
Sales & marketing expense	$	3,416		$	3,855		$	(439	)	$	10,651		$	10,791		$	(140	)
% of Net Revenues		46	%		24	%		(11	)%		45	%		17	%		(1	)%

Sales and marketing expense for the quarter ended September 30, 2007, compared to the same period in 2006, decreased $439,000 primarily due to lower sales commission expense associated with lower net revenues. Sales and marketing expense for the nine months ended September 30, 2007, compared to the same period in 2006, decreased $140,000 primarily due to lower sales commission expense, offset by higher salary expense related to the reorganization of our sales force. Because commission expense does not constitute a major component of our sales and marketing expense, the decline in sales and marketing expense for the three and nine month periods ended September 30, 2007, compared to the same period in 2006, does not correspond directly with the decline in revenues we experienced. We have devoted the majority of our sales and marketing resources to developing new sales opportunities and supporting existing customers. We believe this will position us to take advantage of sales opportunities as our customers develop and upgrade their networks and telecom infrastructure to incorporate technological improvements which improve the value they provide to their customers, however, we can provide no assurance that we will be able to make such sales.

General and Administrative Expenses, Bad Debt Recoveries, Insurance Recoveries, Restructuring Charges and Intangible Amortization


$ 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	%

General 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.

Restructuring charges of $363,000 and $762,000 for the three and nine months ended September 30, 2007, consist primarily of employee termination costs. Substantially all of these costs have been expensed and paid by the end of the third quarter of 2007. From December 31, 2006 until September 30, 2007, our headcount has decreased from 304 employees to 271 employees. This includes a decrease in North America of 75 employees due to our restructuring plans as well as natural attrition, offset by an increased headcount in our Shanghai development center of 42 employees.

Interest 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

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 cash 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 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.

Cash Flows

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.

Cash used in investing activities for the nine months ended September 30, 2007 was $14.4 million compared to cash provided by investing activities of $11.6 million for the nine months ended September 30, 2006. For the nine months ended September 30, 2007, cash used in investing activities included $5.8 million in net purchases of marketable securities, compared to cash provided by net sales of marketable 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 provided by financing activities for the nine months ended September 30, 2007 was $658,000 compared to $1.1 million for the nine months ended September 30, 2006, resulting from cash receipts from the exercise of stock options.

Contractual Obligations and Commercial Commitments

Except as described below, our 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, we 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 and 2008. These orders are generally placed up to 4 months in advance based on the lead-time of the inventory.

Off-Balance Sheet Arrangements

As of September 30, 2007, we do not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

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

There have been no significant changes to our critical accounting policies during the nine month period ended September 30, 2007 as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

ITEM 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.

As a result, our exposure to market risk for changes in interest rates relates primarily to our investments in marketable securities. The investment portfolio is comprised primarily of readily marketable, high-quality securities diversified and structured to minimize market risks while providing a reasonable return on invested funds. We target our average portfolio maturity at 18 months or less. Nevertheless, the securities held in our investments portfolio are subject to changes in fair market value in response to changes in interest rates. A significant change in market interest rates could have a material impact on interest income earned from our investment portfolio.

Given the current balance of $81.1 million of investments classified as “cash and cash equivalents” and “marketable securities available for sale,” a theoretical 1% change in average interest rates would impact our interest income positively or negatively by approximately $811,000 per year.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as such term is defined 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 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 assessment of the effectiveness of our disclosure controls and procedures is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

Changes in Internal Control over Disclosure and Reporting

There were no changes in our internal control over financial reporting that occurred during the quarterly period ended September 30, 2007 that have materially effected, or are reasonably likely to materially effect, our internal control over financial reporting.

PART II

ITEM 1.

LEGAL PROCEEDINGS

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.

ITEM 1A.

RISK FACTORS

INVESTORS SHOULD CAREFULLY CONSIDER 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.

We continued to experience large net operating losses and decreases in net revenue in the first nine months of 2007, as we had in 2006, 2005, 2002 and 2001, which caused a significant decline in the market price of our common stock, and we could experience similar declines in net revenue in the future, which could negatively impact the market price of our common stock.

Our quarterly and annual operating results have fluctuated significantly in the past and may continue to vary significantly in the future. 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 $14.9 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.

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

•

The loss of, or significant reduction in purchases by, any of our large customers, which has occurred in the past, one of whom was responsible for approximately 36% and 42% of our net revenues in the years ended December 31, 2006 and 2005, respectively, and 14% of our net revenues in the nine months ended September 30, 2007, as compared with 42% during the same period in 2006;

•

Overall movement toward industry consolidation among both our competitors and our customers, both wireless and wireline;

•

Reductions and slowdowns in capital spending for equipment by the telecommunications industry due to mergers and consolidations or other factors;

•

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.

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, which has occurred in the past;

•

Consolidation and/or reorganization of our 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.

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 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 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. Although we continually monitor and adjust our reserves for bad debt, we cannot assure you that any future bad 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 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, on time delivery, 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 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 unsold products to us in 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 shipments in the future will be on time, which could result in a material decrease in our net revenues, average selling prices, gross margins and operating results.

We also provide certain distributors and OEMs with price protection rights in which we are required to provide 60-days’ advance notice of price 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 continue 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, and operating 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 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.

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 2005 one of our direct customers experienced difficulty related to a change in their order processing system, which delayed payments to us. We cannot be certain that any bad debt that we incur in connection with direct sales will not exceed our reserves or that the 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 continues 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. 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 could be harmed. In addition, if one or more of these competitive carriers fail, we could face a loss in 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 net revenues. Furthermore, a significant portion of our sales to competitive carriers is made through independent distributors. The failure 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;

•

changes to or problems with a distributor’s, OEM’s or carrier’s internal order processing systems;

•

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.

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 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, who have substantially 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 our sales and operating results for the first nine months of 2007, and during the third and fourth quarters of 2006, and throughout 2005 and 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 extend trade credit to these prospective customers, we will be subject to additional financial risk that could increase our expenses.

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 revenues or adversely affect our gross profit 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 profit margins for those products until such time as production volumes of these new products increased. 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 profit margins.

We rely 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

restructuring plan. This write-down resulted in an additional charge to cost of sales of approximately $2.8 million in the three months ended September 30, 2007. For all of our products, the potential exists for new product introductions or lower than forecasted sales volumes resulting from changing market conditions to render existing product inventories obsolete or cause excess product inventory levels.

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 significantly since 2005 and we plan to continue to invest significant resources in 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.

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, (“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 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 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 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 several years a number of large mergers in the telecommunications industry have been completed or announced, including the following: BellSouth and AT&T, Sprint and Nextel, SBC and AT&T, and Alltel and Western Wireless. 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 cancelled orders. For instance, market consolidation in the wireless industry relating to the merger of BellSouth and AT&T, 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.

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 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 result in increased costs, delays in product delivery, lower net revenues and lower profit margins. We attempt to manage these risks through development of alternative supply sources, through engineering efforts designed to remove the necessity for certain components, and by building long-term relationships and maintaining close personal contact with each of 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 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 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 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 several months for us to begin receiving adequate supplies from alternative suppliers. Furthermore, we may not be able to engage alternative suppliers 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 net revenues and sales opportunities in the past and may do so again in the future.

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, 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 declines in our net 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, reduced control over procurement of critical components, product quality delivery schedules, 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. In 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 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 several 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 declines in our net revenues and operating results. 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 revenues and operating 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. 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 currently interoperate with approximately eleven different product solutions and we 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, 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 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. Telecordia, formerly known as Bellcore, developed the 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 and/or liquidating damages for network outages in our customers’ 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 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 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, 2007, we held a total of twenty-one issued U.S. patents and had one pending U.S. patent application. We have four U.S. trademark applications pending and have thirteen 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 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 placed a lower emphasis 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 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.

In 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 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 October 31, 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 38% of our outstanding shares of common stock. In particular, Mr. Koenig, our Chairman of the Board of Directors and until August 1, 2007, our President and Chief Executive Officer, and Ms. Pierce, a director and until August 1, 2007, our Corporate Development Officer, are married. As of July 31, 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 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 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM 6.

EXHIBITS


Exhibit Number		Description of Document
3.1		Registrant’s Bylaws, as amended

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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the 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

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

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

CARRIER ACCESS CORP 10-Q