Good afternoon. My name is Laney and I will be your conference operator today. At this time, I would like to welcome everyone to the ADC second quarter earnings conference call. (Operator Instructions) Mr. Borman, you may begin your conference.

Thank you. Good afternoon and thank you for joining us on the call today. Bob Switz, ADC's President and CEO, as well as Jim Mathews, ADC’s CFO, are with me today. Before we get started I need to caution you that today’s conference call contains forward-looking statements and that future events and results could differ materially from the forward-looking statements made today. Actual results may be affected by many important factors, including risks and uncertainties identified in our earnings release and in the risk factors included in Item 1A of ADC's annual report on Form 10-K/A for the fiscal year ended October 31, 2006, and as may be updated in Item 1A of ADC's subsequent reports on Form 10-Q or other reports filed with the SEC. This earnings release can be accessed at the investor relations section of ADC's website at www.adc.com/investor. ADC's comments will be on a continuing operations and GAAP basis. Bob will provide an update of ADC's strategic direction. He will then turn the call over to Jim who will cover the financial results and then provide forward-looking financial model guidance. I will now turn the call over to ADC's CEO, Bob Switz. Bob. Robert E. Switz: Thank you, Mark and welcome to all of you on today’s call. I will first start with comments on our second quarter results and fiscal 2007 opportunities and then update you on our long-term plans to grow sales and earnings. First, our second quarter sales and earnings were stronger than expected and built on our out-performance in the first quarter of 2007. This strength occurred while some of our customers’ spending was down due to merger integration, new network build rates, subscribers’ adoption rates of new services, and as well as regulatory reviews and capital allocation decisions. So we are very pleased to have a strong performance with some of these uncertainties still impacting our business. We are particularly pleased with the progress we’ve made in improving profitability through driving manufacturing efficiencies and gaining operating expense leverage. While we acknowledge that timing variables create quarter-to-quarter fluctuations in our results, we are encouraged by a growing number of worldwide opportunities to sell our broad range of communications network infrastructure solutions over a longer term time horizon. As a result, we remain focused on our work to build ADC's long-term value as a leading global network infrastructure company. So let’s review some of our growth opportunities. ADC grows by selling connectivity where networks are changing and evolving. As a result of these changes in evolution, new equipment is being connected to new and old networks in new ways. ADC's comprehensive infrastructure solutions are used from the central office through the outside plant and into the enterprise part of the network. Our strong sequential sales growth in the second quarter was an excellent example of our success in supplying these comprehensive solutions to our customers. Sales of our Global Connectivity business unit in the second quarter of 2007 increased 19% from the first quarter of 2007. Driving this growth were sales of global fiber connectivity products, which increased 31%, primarily from strong demand for central office and FTTX products. Central offices are being upgraded to provide the necessary infrastructure to support FTTX and high-density data center deployments. Global copper connectivity products increased 16%, primarily due to strong demand for wireless data infrastructure and upgrades of cable and telco networks to support video services. We also benefited from some market share gain in the quarter. Enterprise connectivity products increased 7% on growth from data center projects, migration to IP networks, and inroads into blue chip enterprise accounts outside of the United States. We’re seeing a tremendous amount of connectivity opportunities as voice, video and data services converge in the wireline and wireless networks of carriers and in the enterprises. Whether there’s the triple play and now the quad play, ADC connects the equipment to the network. We also see opportunities when networks are interconnected in mergers and consolidations, such as the Verizon/MCI and BSBC/AT&T BellSouth Cingular network integrations. Growth opportunities globally are as follows: certainly in developed countries, video is going to be the big driver of bandwidth in both wireless and wireline networks, particularly as video moves from a broadcast model to a peer-to-peer model. We believe the impact of video on bandwidth will increase bandwidth growth from 30% per year to over 50% per year and drive data centers’ fiber backbones and fiber access for both wireline and wireless networks. In developing countries, we believe wireless subscriber growth, coverage and capacity dominate CapEx in many countries, as well as broadband investment and FTTX and other DSL technologies, which are poised for strong growth off of a low base. Fiber backbones, copper and fiber access, data centers and interconnect facilities are expected to also get a boost. We see other growth opportunities as cable TV companies become dedicated to carrier class transport architectures as they leverage their broadband networks to take market share in business services and defend their strong consumer market as the telcos enter the video market. Additionally, the migration of traffic to deep fiber and IP networks, as well as next generation wireless networks, creates growth opportunities for our comprehensive connectivity solutions. Let’s review our large fiber-to-the-X projects, which I believe are well-known to many, if not most of you. Starting with Verizon, Verizon continues to be on track to pass 9 million homes in 2007. We’ve been supplying Verizon with a broad spectrum of fiber-to-the-prem solutions from the central office through the outside plant for the 6 million homes they have passed already and the 3 million additional homes they expect to pass in 2007. Our first-half sales to Verizon are up 11% year over year. Verizon appears committed to maintaining better control of their inventory this year compared to the last two years. While the business is still somewhat lumpy due to construction cycles and geographical influences, 2007 is progressing much smoother than previous years. AT&T is another large and important customer buying ADC's FTTX infrastructure solutions. Our first-half sales to legacy AT&T, which is the former SBC and AT&T long distance, were up 69% year over year. While legacy SBC spending is on track for 2007, fiber-to-the-X projects at legacy BellSouth have not been at normal pace for this time of year. Our first-half sales to BellSouth are down 29% year over year, and as an aside, our Cingular sales are down 73% for the same period. Given that the merger integration takes time, we are being cautious as to when and at what rate we expect BellSouth and Cingular spending will return to historical levels. When BellSouth and Cingular spending returns to traditional levels, we believe that this will be a positive upside to our outlook. For example, now that Sprint and Nextel have completed their acquisition integration, our first-half 2007 sales with them are up 96% compared to last year. Deutsche Telecom is currently the European leader in FTTX and we are pleased to be a supplier of outside plant solutions, which also include our fiber and copper connectivity. We continue to ship a variety of connectivity products to DT, which was our fifth largest customer in 2006. Due to the large amount of outside cabinets shipped in 2006, our sales to DT are down significantly year over year. Further, while we continue to sell a variety of products to DT, at this time we do not expect to ship any of our ACX automated cross-connect product to DT in 2007. We continue to work on the development of an ACX product that will meet DT's requirements. In light of the uncertainties surrounding the timing and scope of the potential deployment of ACX solutions by DT or other customers, we have not included ACX sales in our current outlook. However, we remain hopeful that we will ultimately be able to sell ACX solutions to DT and other potential customers in 2008 and beyond. Other potential FTTX opportunities in Europe, which may not result in full-scale deployments until after 2007, have been announced by carriers in Austria, Belgium, Denmark, Finland, France, Iceland, Ireland and The Netherlands and Switzerland. This is certainly a pick-up in activity and a very pleasing sign to us that EMEA is getting more serious about deploying FTTX. The Asia-Pacific region, as I’ve mentioned in the past, also has a growing number of opportunities, which we count at approximately 17 for FTTX, based on expressed interest and certainly public announcements by these companies. Many of these opportunities will likely take beyond 2007 to develop into full-scale deployments. They include, as a reference, carriers in Australia, China, Malaysia, the Philippines, Singapore, Taiwan and Thailand, to name a few. Finally, Canada is deregulating its local telecom market to allow incumbents, cable TV and competitive carriers, to compete for residential and business customers. To capture these future growth opportunities, we are continuing to invest in new products for fiber, digital video and wireless networks in global markets. Our more recent announcements include the manufacture of pre-connectorized fiber distribution cables for our customers’ fiber-to-the-prem deployments. To support this initiative efficiently, we have collocated with Prysmian Cable in a manufacturing facility in Lexington, South Carolina. Our FlexWave platform, an all IP radio access network for wireless solutions for GSM and edge services, was recently introduced using standard IP networks for cost-effective backhaul, unified network management and control for residential, enterprise, and outdoor applications. FlexWave allows wireless operators to meet the growing coverage and capacity demands of advanced wireless services while at the same time containing costs through flexible IP backhaul. Third, as the first company to design a UTP cabling system allowing 10-gigabit ethernet to run over 100 meters, we have further reduced the size of our copper 10 augmented category 6 UTP cable by another 22% in cross-sectional area compared to typical augmented category 6 cable. The benefit of implementing a smaller cable gives data center and network managers more flexibility and higher performance for their investment. Finally, ADC's broadcast and entertainment solutions for HD-TV, mobile HD-TV, HD Fiber, IPTV, and IP infrastructure are helping our customers deploy digital video and audio services. We also mentioned in an earlier call that we have launched an initiative with the federal government. ADC is a supplier to a number of federal agencies that use our network infrastructure products and active electronic components in their advanced data and telecommunications networks. We are paying much more attention to this market going forward and have allocated resources to further build out our position in this market. Commenting briefly on our competitive cost transformation efforts, we have many initiatives underway to improve our customers’ experience and shareholder results through improved simplicity, speed, innovation and cost savings. In fiscal 2007, we expect to double the cost savings we achieved in fiscal 2006. Our progress on this multi-year effort includes savings and speed benefits from reducing the complexity of product numbers in our system and our customers, designing products for component standardization and modular assembly, leveraging our global material spend through improved sourcing, increasing manufacturing efficiencies through facilities consolidation, process productivity and increased low-cost country manufacturing, as well as improving efficiencies in our order management process system. We continue to work a strong pipeline of projects that reduce costs and transform ADC for improved competitiveness. To conclude my formal remarks, as our customer base continues to gain size and scale through consolidation, we will continue to drive toward our long-term goal of achieving competitive scale, establishing larger market penetration outside of the United States, particularly in emerging country markets, and a more diversified customer base and product portfolio. This broad-based vision will be achieved through organic growth, geographic expansion, as well as acquisitions. With our highly leverage-able cost structure, increased sales should significantly enhance our profitability, as was demonstrated in our second quarter. I’ll now turn the call over to Jim Mathews, who will comment in more detail on our financial results. James G. Mathews: Thanks, Bob and good afternoon to everyone. It’s my pleasure to share with you the highlights of our strong second quarter results. First of all, I’ll just summarize the highlights and then go into a bit more detail. As reported, quarterly sales of $349 million came in stronger than we expected. Although they were down 2% year over year, sales were up 18% sequentially over Q1 of 2007. This sequential growth was driven primarily by 31% growth in global fiber connectivity solutions, 16% growth in global copper connectivity solutions, and 7% growth in global enterprise connectivity solutions. Increased sales of Digivance wireless systems and professional services also added some growth in the quarter, while our wireless sales were lower, as we expected. Secondly, with respect to gross margins, we had a 2.5% improvement to 34.5% versus the 32% in the first quarter of 2007. Third, we reported better-than-expected GAAP diluted earnings per share of $0.73. This included a one-time gain, which I will describe later, but with that included still -- with that excluded still exceeded our expectations for the quarter. And finally, the total cash provided by operating activities from continuing operations was $43 million during the quarter. Our cash flows have been strong through the past six and 12 months as well. In fact, we generated $74 million and $137 million respectively over the past six and 12 months from operating activities from continuing operations. Let’s talk a little bit more detail regarding consolidated earnings. Our GAAP diluted earnings per share from continuing operations were $0.73 in the quarter compared to $0.08 sequentially and $0.21 in the same quarter last year. This quarter’s $0.73 EPS includes a non-operating gain of $0.43 per share from the sale of Big Band Network stock and this is partially offset by $0.04 of net restructuring and acquisition related charges and $0.01 per share of stock option compensation expense. As mentioned earlier, gross margins were 34.5%. This improved from the first quarter of 32%, primarily as a result of volume leverage, again based in part on the sales growth of 18% sequentially, as well as an improved mix of connectivity and wireless sales. As Bob stated earlier, we are also getting some early benefits from our competitive cost transformation initiative, which is a multi-year process to achieve cost leadership in our businesses. Selling administration expense was $63 million in the second quarter, down slightly from $64 million in the first quarter of 2007 but this was down from $69 million in the second quarter of last year, which again demonstrates the additional earnings leverage on a comparative basis that we were able to demonstrate. Moving to working capital, days sales outstanding were 45.2 days during the second quarter, again well ahead of our goal of 50 days DSOs, and this is a continued improvement from 46.4 days, which we experienced in the first quarter of 2007 and 47.3 days in the second quarter one year ago. Our second quarter inventory turns were 5.3 times. This is above the 4.8 times that we experienced in the first quarter of this year but not as favorable as the 6.5 turns that we achieved one year ago in the second quarter. We certainly recognize the need to work to improve our working capital efficiency with respect to inventory but we also note that this will be a challenge in the short-term as we continue to move to lower cost operations and lower cost regions which requires that we extend our supply lines temporarily. The strong earnings reported, which were partially offset by a modest increase in working capital, generated $43 million in total cash provided by operating activities from continuing operations in the second quarter. Depreciation and amortization expense was $17 million in each of the second and first quarters, and property, equipment and patent additions net of disposals produced net expenditures of $9 million in each of the second and first quarters. As a result of our strong cash flows and the sale of our shares in Big Band Networks, our total cash, cash equivalents and available for sale securities totaled $676 million as of May 4, 2007. This was up $94 million from the $582 million that we reported at the end of the first quarter of this year. I am now going to provide some annual financial modeling guidance. As in fiscal 2006, our results in the second fiscal quarter of 2007 are likely to represent the peak quarter for the year. In view of our first-half out-performance, we currently expect results of the second-half of fiscal 2007 to be relatively flat to down modestly from the first-half of fiscal 2007. This would be, of course, net of the one-time non-operating gain from the sale of the Big Band stock. However, we do not expect that the quarterly pattern of results in fiscal 2007 will fluctuate as sharply as they did in 2006. We believe that we have significant long-term growth opportunities ahead of us. However, forecasting the timing of these opportunities remains difficult due to several uncertainties. These include: first, how long and to what degree spending by some of our substantial customers will be deferred during the integration of their merger activities; second, rates at which new networks are built and related subscribers adopt the new service deployments; third, when regulatory reviews of some of our customers’ new networks are resolved; and fourth, when capital allocation to new network and service initiatives is decided. These factors, as noted, could shift some sales opportunities from fiscal 2007 into fiscal 2008. At this time, we are raising the low end of our fiscal 2007 sales and earnings guidance ranges, again net of the one-time non-operating gain from the sale of Big Band stock. However, we’re holding unchanged the top end of these ranges until the uncertainties around both the timing and extent of our remaining 2007 growth opportunities have been resolved. If the current timing uncertainties affecting our growth opportunities are resolved favorably, we would expect to see a positive impact on our business in the second-half of fiscal 2007 and fiscal year 2008. Gross profit margins are expected to rise and decline with sales volumes on a quarter-to-quarter basis. For revenues, therefore, on a continuing operations basis we are currently expecting fiscal 2007 sales to be in the range of $1.275 billion to $1.29 billion. Moving then to EPS, based on this sales guidance and subject to sales mix and other factors, GAAP diluted EPS from continuing operations in fiscal 2007 is estimated to be in the range of $1.06 to $1.11. This includes the following estimated EPS charges and benefits, each of which is stated net of tax: first of all, amortization of purchased intangibles at $0.18 per share; stock option compensation expense at $0.05 per share; and a benefit from the non-operating gain on the sale of Big Band network stock of $0.43 per share. This guidance of course excludes potential future restructuring impairment and any incremental acquisition-related charges, and certain non-operating gains and losses, as well as benefits from any reduction of the deferred tax asset valuation reserve, of which the amounts are uncertain at this time. The calculation of our GAAP diluted EPS from continuing operations includes the “if converted” method, which assumes that our convertible notes are converted into common stock if that is diluted to EPS. This EPS calculation is laid out very clearly in our earnings release. Finally, ending with our income tax situation, as of May 4th, the end of our second fiscal quarter, we had a total of $986 million in deferred tax assets that have been offset by a valuation allowance of $941 million. This net asset is primarily in other long-term assets on the balance sheet. Approximately $213 million of these deferred tax assets relate to capital loss carryovers, which can be utilized only against realized capital gains through October 31st of 2009. During the fourth fiscal quarter of 2006, we reduced the valuation allowance by $49 million, attributable to deferred tax assets that are expected to be utilized over the following two-year period. For financial modeling, we expect the effective tax rate to be 10% for each quarter this fiscal year, similar to that rate in fiscal 2006. As we generate pretax income in future periods, we currently expect to record reduced income tax expense until either our deferred tax assets are fully utilized to offset future income tax liabilities, or the value of our deferred tax assets is fully restored on the balance sheet. Excluding the deferred tax assets related to capital loss carryovers, most of the remaining deferred tax assets are not expected to expire until after fiscal 2021. In summary and further reinforcing Bob’s earlier comments, we at ADC remain committed to strategically managing our business for long-term growth and profitability. We are executing a multi-faceted, multi-year approach to growing value for our shareholders in a market with ever-increasing competitive pressures. We intend to continue building ADC into the leading global network infrastructure company. Finally, with respect to our outlook, again if the current timing uncertainties of our sales opportunities are resolved favorably, particularly with respect to BellSouth and Cingular, we would expect to see a positive impact on our outlook. We’ll now open the call for questions. Thank you.

(Operator Instructions) Your first question comes from the line of Ken Muth with Robert Baird.

On the EPS outlook for the year on the non-GAAP basis, I’m a little bit confused on it’s not going up as much as I would assume, so either two things are happening; the gross margin is coming down a little bit more from the recent results and then the op-ex is probably increasing for the second-half of the year a little bit more? James G. Mathews: I’d say your direction generally is correct. Our guidance is based on, again as we stated earlier, a fair number of items that remain uncertain and at this time, given those uncertainties, we are hesitant to build in optimism toward which we really don’t have visibility at this time. So I think directionally, your statement is correct. Having said that, and as I said a couple of times in the earlier comments, we have tried to be cautious with respect to the things that we really don’t have a line of sight on today, and if some of those uncertainties do resolve themselves favorably, then there should be upside.

And then Jim, could you just give us a little bit more transparency on the 250 basis point improvement in gross margin, where that came from? Was it -- obviously what portion was revenue related or strictly your product mix, and then maybe some of the efficiencies that you guys have going on. James G. Mathews: You just named the three things I was going to name. We obviously -- and we’ve reiterated this in the past, that we feel like we’ve got a very leverage-able cost structure and we saw some of the benefit of that in the top line growth, which I would say drove some of it. We did have a favorable mix of sales. We had an increasing sale of the more highly gross margin products, and as Bob stated earlier, we’re starting to see some of the early benefits of this cost transformation activity kick in. We expect to see continued benefit over the long term from that continued effort, so I’d say the three factors that you cited are indeed the ones that I would point to. Robert E. Switz: Just to tag on to what Jim said, most of the benefits this quarter did come from volume and mix. Cost reductions was a smaller portion. Keep in mind, as we’ve said in the past, we do expect these to continue to kick in on a quarterly basis and our outlook for the benefit of these over an 18 to 24-month period was about a net 150 basis point improvement in margins.

Great. Thank you very much.

Your next question comes from the line of Nikos Theodosopoulos with UBS.

Just a couple of questions, one on the gross margin. You keep referencing mix that helped the gross margin and I’m struggling to see within connectivity what that mix was. I clearly understand the volumes being higher but when I look at copper as a percentage less, so can you elaborate more on the mix that helped gross margin within connectivity? The second question is I just want to be clear on the revenue guidance for the year. What kind of assumptions are you making on BellSouth and Cingular recovering? Are you assuming low recovery rate, no recovery rate? I’m just trying to get a gauge if things turn on there materially or don’t, how to interpret what it -- how your guidance may or may not change. Thank you. Robert E. Switz: Copper was a factor. If you look quarter to quarter, copper was about 16% of connectivity revenue in the previous quarter. It was up to 21% content in this quarter, so that was a chunk of it. Good contributions continuing to come from Access Net, approximately the same percentage as last quarter, and FTTX up obviously from prior quarter. But looking across the product line, most of it -- the real kick came from the significant up-tick, the seven point difference in copper content. The outlook for BellSouth and Cingular, we have not expected or planned for very much recovery in our fiscal year. We are looking at maybe a little bit of that starting to kick in maybe in our fiscal fourth quarter. What we are modeling is the experience that we have had with the previous merger with SBC/AT&T and looking back at other larger carrier combinations that we’ve seen in the past, and with the previous SBC/AT&T, it was probably nine months post close before we started to see a little bit of an up-tick in what I call business as usual spending. Probably 12 to 15 months before we really saw spending take an up-tick and get to something that we would classify as normal spending. And then certainly with that range of 12 to 15 months, we normally start to see what I would call a kicker for a period of time as they spend a little bit of -- a little bit extra on solutions and products to interconnect their networks. So we’ve essentially modeled that same progression for this integration process.

Thank you.

Your next question comes from Simon Leopold with Morgan Keegan.

Thank you. A couple of things I’d like to see if we could touch on; one is just to try to get some context around Cingular and BellSouth as customers. Can you give us an idea of how they’ve behaved in terms of -- let’s say the past two years on a quarterly basis, what’s the biggest contribution you’ve gotten from those two, either as a percent or dollar basis so we have some idea of where they could be? And then I want to follow up on the guidance after you can answer this one. Robert E. Switz: Probably the best way I could characterize BellSouth, BellSouth was probably a top five customer in previous years, in previous quarters. Last year, maybe a number two customer or three customer, pretty high up the list. It’s not on the list right now. It doesn’t make, as a point of reference, it doesn’t make the top 10, so that might give you a little bit of perspective. Cingular was not a top 10 but it was a top I’m guessing, historically a top 20, 25 customer and it’s, best to my knowledge, I don’t think it shows up in that category at the moment.

That’s helpful. Now, just following up on the EPS guidance on a pro forma basis, you upsided this quarter yet you didn’t take the high-end up. So I guess I’m a little bit confused as to what you are really trying to tell us, because you are pretty much maintaining the sales guidance with strength. It sounds like things are weaker than you were anticipating and I’m not sure if that’s your intent. Robert E. Switz: No, we’re not saying anything is weaker because we haven’t changed our guidance. When we put the full year guidance out, we did anticipate variability and uncertainty. As we look at the quarter, I think what we are trying to do is not build the current half’s upside into the full-year outlook. Let me just dimension it a little differently with reference points. We don’t know what’s going to go on with Cingular and BellSouth, so we’re cautious there. We’ve had a good run the first-half of the year out of our copper business and some of that was a little bit unexpected but we have seen continued demand for the applications that I mentioned earlier in the call. We did win a new customer that is now contributing to some of that, and we had some strength in South America and Asia. Because that’s a book-and-ship business, it’s hard for us to extend those trends out over the second-half. So we don’t want to necessarily count on that happening in the second-half. Wireless has had a good performance. As you know, we’ve talked about the quirkiness of our wireless business in the past being somewhat project-based and not a run-rate business yet. So while we could continue to have a strong performance there, it’s a little bit hard to predict at this point in time. We have also obviously modeled in a little bit of a dip for Verizon based on deployment seasonality. So if we’re wrong, obviously on some of these things, then clearly there could be some upside to the current outlook, but just given the uncertainty, the variability and taking into account some of the first-half performances and the lack of predictability around those, we think it’s prudent if good news occurs, then let it occur as upside the outlook. But there’s nothing we’re sitting on right now that has caused us to be less gratified with the year than we were before. I think we are actually have a pretty good performance, given that a couple of major customers really aren’t doing very much for us in the first part of the year.

Point well taken. Deutsche Telecom, just to close out, is their strike an issue for you? Robert E. Switz: No. In fact, our business outside of the cabinet business that we had last year, which we said would not be repeated this year, the balance of our business with DT is actually up a little bit year over year. At this juncture, we haven’t seen any impact from either regulatory or strike-related matters.

Thank you very much.

Your next question comes from the line of Steven O'Brien with JP Morgan. Steven J. O'Brien: Thanks for taking my question. First off, just quickly, what do you expect seasonality to be like in the back-half of the year? The last two years, you saw a weaker fourth quarter than third quarter, down sequential fourth quarter. Does that trend stay or what do you expect the last quarters to look like? Robert E. Switz: You know, within reason I think we could expect something like that. It starts to get pretty granular, given where we are today with the first-half and what our full-year outlook range is. I do expect to see a tapering off. Does it happen in the third quarter? Do we see a dip down and another dip down? Do we see flat and then a dip down? Assuming -- given the things I said earlier about the positive things that could happen, let’s assume that our outlook is correct. I think it’s going to be small variation between the quarters and right now really hard to predict one from the other. I think the one thing I can say is we are certainly not expecting this sharp decline that we saw last year because we do believe there’s less variability in Verizon. We’ve seen that as part of the current purchasing pattern. Also we think some of the problems of last year really related to the frantic over-buying to make sure that people in the field had the inventory they needed to be able to deploy to the extra 1 million homes that were added in 2006. And we have a flat homes passed year to year and we think that takes some of the pressure and has taken some of the pressure off of the buying patterns. Steven J. O'Brien: Touching on that, you said earlier that Verizon’s revenue was up I think it was 11%, correct me if I’m wrong, this quarter. So would you expect Verizon revenue to be up in all your quarters this year? Robert E. Switz: You’re saying up quarter to quarter? Steven J. O'Brien: Up year over year, or first half, first half. Robert E. Switz: I think as we get to the end of the year, as we move into the second-half of the year, we could see a positive comp because of what happened last year. The fact that they really fell off a cliff in the third and particularly the fourth quarter, so it is possible certainly in the fourth quarter, we might have a favorable comp out of Verizon. Steven J. O'Brien: On a different topic, the wireless segment was strong this quarter, up strong sequentially. Could you just touch on what the trends are for that segment and what drove the strength? Does that continue through the rest of the year? Robert E. Switz: That was the comment I made earlier in terms of some degree of uncertainty around that, just because of the project nature of the business. The strength in this quarter came from deployments from a major customer in both Florida and California of Digivance. We’ve had a lot of interest around our wireless business this year, the legacy products as well as some of the newer products. There tends to be longer lead times involved with the sales of those products, but existing customers can turn on anytime they want, quite frankly, and we don’t have good visibility into that. So it does remain a little bit of a wildcard. I wish I could predict it better but I can’t. Steven J. O'Brien: The wireless profitability this quarter, it still seemed to be negative. Is there a threshold there that needs to -- Robert E. Switz: We’re getting close. We’re getting close. It really is a business -- it’s got decent margins and to be fair, we’ve got a fair amount of development going on there so we run healthy R&D costs. So it’s getting close. At that range, it’s getting close to a break-even amount. I’m not sure that we’re going to hit that this year but it is clearly volume sensitive. Because quite frankly, we don’t have to add much more R&D. What we really need to do is get the bookings.

Your next question comes from the line of Tal Liani with Merrill Lynch.

Thank you. Actually, this is Vivek Arya on Tal’s behalf. A couple of questions, actually; first is just the rhythm of gross margins, I think this quarter you probably benefited as Verizon was more success-based, so probably more connectivity rather than lower margin cabinet and I assume Digivance also helped somewhat on the margin side. My question is as a lot of the new project starts that you are hoping for, whether it’s BellSouth, whether it’s European FTTX or -- what’s going to be the impact on gross margins? Will we again go back to the 30%, 32% level? Robert E. Switz: I don’t think so. I don’t think so. I think we certainly have a range I believe of gross margin. It could range from 32-ish to 34-ish at this point, depending on mix. But I wouldn’t overly stress about growth in FTTX relative to margins. I think what happens over time there, and let me back up to something you said -- success-based spending was not as much of a factor in the second quarter. We had a little bit of that in the first. We had mainly FDHs for the most part in the second quarter, but over time I think we are going to see an interesting balance start to occur in FTTX. As we get more hubs out in the various networks with Verizon, as we gain greater penetration and deployment with AT&T, and there was some rumbling recently that there may be some activity on FTTP coming out of BellSouth in the future. As the international projects come on, okay -- so I think we’re going to see an interesting curve over time. FDHs are decent margin. The components that go into them are better. The MSTs in cable are less but over time, as we add customers, for instance, outside the United States, you are going to get the FDHs that go in. There’s going to be some componentry in them which will blend out those margins. Yes, you’ll have some of the other stuff as homes connect, and then like in the U.S., like with Verizon, assuming success on take rates, there will be more success-based spending, which will add more componentry to that mix over time. I think assuming those trends evolve, I think we’ll see over time relatively stable margins in FTTX.

If you look at gross margins for the overall business, assuming all the recovery that you are expecting takes place, do you see gross margins staying at this current 34% level or do you think there is a chance they go up slightly, closer to 35, 36? Robert E. Switz: Just elaborate a little bit on the comment you made about if the recovery -- what recovery are you referring to, BellSouth and so forth?

Yes, but also as in all these new projects that you spoke of. Robert E. Switz: I think I would be comfortable staying I’d like to stay in a range of 32% to 34% until I get greater clarity because some of the BellSouth business will involve fairly high content of services, which is lower margin, as well as hardware and other things and I don’t know how that plays out in terms of the timing of it. So if we think about a given quarter, if you have a lot service content in there, that can put a little heat on the margins to the downside in that particular quarter. I’d like to think longer term -- and then again we don’t know how rapidly our cost reductions play in, so I think a better way of looking at it is just to expect that they will be in a 32% to 34% range. If something unique happens on the positive side, it could drive it a little bit higher than that but at this point in time, I would think of it as a band of 33 to 34. James G. Mathews: And that would fluctuate with our volumes in any particular quarter as well.

Any update on your M&A strategy? I think in the last call you mentioned you were looking at opportunities to grow business. I assume it was in the Asia-Pacific region. Any update? Robert E. Switz: We’ve been very active screening and going through the normal processes that we do and applying all the care and diligence that we normally apply. I can say there is certainly a reasonable universe of targets. I can’t say that we’re going to announce something tomorrow, obviously, but I’m at least pleased with the range of possible opportunities. The art of this always is you have to have a buyer and a seller that like the terms and conditions of an acquisition. It is not a process that you can control the timing of very well. What we are controlling are the things that I think are most important to us and to shareholders. We’re being patient. We’re being diligent and we’re trying to make sure that whoever we engage with will deliver the type of value that we’re looking for.

Just a last follow-up on that, Bob; the last time you attempted to do an acquisition, things didn’t work out the way it was planned. What safeguards and what metrics do you have in mind when you look at potential acquisitions in terms of EPS dilution versus staying neutral and the mix of stock and cash? What safeguards and metrics do you have in mind? Robert E. Switz: I hate to use the Andrew failure as a reference point to something that we didn’t do well because that’s truly not the case. We did a lot of diligence there and I can tell you a lot of people have come to us after the fact and even in recent times suggesting we go back and do it again, so the Monday morning quarterbacking has extended a year. But we really -- we did not anticipate things quite frankly that were completely out of our control and their shareholders not liking the value of the deal and there’s no way to control that these days. Everybody has their own view of expectations. We could not control the fact that Verizon stumbled and AT&T and BellSouth went into merger and froze their spending and we had to readjust our numbers, which took the value of that deal down. So when I look at that, I don’t think there was anything in the normal process of due diligence that we missed. Those things were not things that we could really foresee. But to address your question, we will do what we think is right for the company and right for the shareholders. We will use cash for certain types of transactions. We will use a combination of cash and stock, if that’s what it took to get an important transaction completed. For the right transaction, we would certainly consider equity. We would make -- we are certainly willing to leverage the company and make use of debt. We’re open to the full range of possibilities and the mix that creates the most value and can get an appropriate transaction done. We are not interested in taking a lot of dilution. In fact, we’ve said we would like to take none. We would like these transactions to be accretive within a year or within the year, if that were possible. So we’re trying to make them rapidly accretive. Clearly we want to stay close to our core strategy where we can leverage a lot of the things that we have today further. I don’t think a lot has changed in the model. We’re not doing anything radically different and to the extent that we could foresee shareholders views on an offer that we might make, we would certainly try to take that into account and mitigate that as best as possible. But we are certainly not going to go out and overpay for something just because somebody thinks they deserve more money.

I see. Great. Thank you so much.

Your next question comes from the line of Eric Buck with Brean Murray. Eric, your line is now open. Your next question comes from the line of Paul Silverstein with Credit Suisse.

Good evening. A couple of questions, if I might. Bob, could you tell us what the impact of Big Band was in terms of revenue, in terms of dollars in the other line item? Robert E. Switz: I think Jim has that on the tip of his tongue. James G. Mathews: It’s $57 million, and that was all reported as a gain because our basis was essentially zero for book purposes and that equated to $0.43 a share.

Thank you. Secondly, Bob, I just want to make sure I understood your comment on the Deutsche Telecom ACX product. I thought I heard you say that you are making improvements on the product in order to get it in there. I just want to understand what’s going on. Is it a regulatory issue that’s holding up the deployment by DT, or is there a product issue that you suggested and DT is in fact going forward and you participate, subject to changes in the product? Robert E. Switz: There is no regulatory issue. We are making some modifications to the product as a result of some requirements that showed up late in the development phase. Remember, this is a type of product that can be deployed at any time, okay? So they can go ahead with their deployment and use their services labor force to go out and turn up service and do all of those things that the ACX would automatically do, and so they are capable of moving forward on their deployment and when we are ready to deploy the ACX, we can just go in and do that at any time. And then that obviates the need for their, for them spending op-ex on services. But quite frankly, that’s the way -- if there were non ACX, that’s the way they would have done it anyhow. So we are modifying the product to make it even more capable and more specific to the certain needs that they have.

In the meantime, is there any other competing product that’s in there that’s sharing that business with you that could take share while you make modifications, or is this yours and it’s just a timing issue? Robert E. Switz: At this point in time, it’s ours. There were people out there with product when this original business came up. Their products were viewed as not technically capable. To my knowledge, none of them have got into an extended trial. They were weeded out before that. What the status of those products are today, I can’t tell you but DT has told us we are still the one in terms of having the most capable product and the lead around this particular solution. So I can never say never but there’s no sign at this point that there’s anybody with a product superior to ours.

What’s the timing on the modifications? When do you think you’ll have it ready and done to ship to DT? Robert E. Switz: We’re still evaluating that, Paul, so -- clearly some time in ’08.

Okay, and one last, if I might. I apologize, I know you’ve answered this before but I just want to make sure I understand, your gross margin outlook relative to what you put up this quarter, and I understand volume was the bulk of it but first off, can you possibly quantify or give us a better fix in terms of how much of the benefit was volume as opposed to mix in the quarter? Secondly, and more importantly, on your outlook for the year and going forward, I know you mentioned about 150 basis point improvement but I wasn’t clear if that was from here or if you were referencing the historical 32, 32.5 level. Robert E. Switz: That’s a good question. Our starting point when we gave that 150 basis point improvement went back to the lower gross margin number, and it was a forward-looking number that covered about a 24-month period, so I guess starting from the beginning of this fiscal year is a fair starting point on that. Maybe Jim is able to give you the answer on volume versus mix. Do you have that, Jim, or is that not readily available? James G. Mathews: Is your question relative to sequential improvement or year over year?

Jim, I would take it both ways. James G. Mathews: You generally attribute most of it to the growths. Simply taking year over year, revenues this quarter were down 2% relative to the second quarter of last year. Margins were up 0.5% this year, relative to that same quarter. So I would say if you just take those numbers, you can see that we’ve got some of the same benefit from top line last year. Now relative then to the first quarter of this year, you then have to say probably a 1.5% to 2% is driven by volume.

Okay, I appreciate that. I’ll pass it on.

Your next question comes from the line of Brian Coyne with Friedman Billings.

Thanks a lot for taking my call. I just have one quick one, really. Bob, I think you mentioned earlier in the conversation a little bit about launching an initiative with the federal government and some agencies for network infrastructure work, and allocating more resources toward that. I was wondering if you could perhaps just give us a view as toward what you see as the opportunity there and again, relative to the cost transformation efforts, how much more allocation of additional resources might you undertake? Thanks. Robert E. Switz: Good question. We’ve already allocated the resources. It’s built into our outlook so at this point, we’re not adding more. We added it at the beginning -- I should say, near the end of last year and it’s mainly in go-to-market. We’ve added some go-to-market professionals that have a background and experience, many, many years of experience serving that market and so it’s come in the form of go-to-market resources. We don’t need to do anything with products. We have the products. Almost our entire suite of products is conducive to many of the needs of that market. Historically, we just hadn’t paid a lot of attention to it in terms of go-to-market and over a period of time, I don’t know -- I’d say starting maybe back in ’01, it was de-emphasized while other things were prioritized. So recognizing that it represents a very nice growth opportunity for us with a little bit of investment in go-to-market, we’ve started at the beginning of this year paying a lot more attention to it but don’t expect a big slug more of resources to be thrown at it over the course of the year.

That’s very helpful. And then, just quickly on the magnitude of the size of this thing, I’d see over the next 12 or 24 months? Robert E. Switz: You know, it’s really hard to say. It’s a small piece of our business today but it does represent, off a small base, high growth potential and, of course, it brings with it decent margins. So it’s not the biggest initiative we have going on but it’s one that by not paying attention to it, we’re really missing an easy opportunity.

That’s great. That’s all I had. Thanks so much.

Your next question comes from Christian Schwab with Craig-Hallum Capital Group.

Great. Good quarter, guys. On the BellSouth, could you just give us any type of help on the quantification of that? So if BellSouth, just maybe the numbers that you gave, since obviously you gave the percentages and you have them in front of you, BellSouth in the first-half was off 29%. Could you quantify that? Robert E. Switz: Somebody here probably can. I don’t have the absolute number at the tip of my finger but -- let’s see. Let’s call it $16 million, $17 million maybe.

$16 million to $17 million down? Robert E. Switz: Yes.

Okay, great. Could you help us out on the Cingular number then as well? Robert E. Switz: Cingular is probably in the $12 million to $13 million range.

Down $12 million to $13 million in the first-half of the year? Robert E. Switz: Yes.

Fabulous. Thanks, guys.

Your next question comes from the line of George Notter with Jefferies.

Thanks very much, guys. Two quick questions, first on 10% customers; I didn’t hear any comment on those. Did you have any in the quarter? Who might they have been? How big where they? And then, as a second question, in the past you guys have talked about a 14% long-term operating margin target, certainly coming from both organic and inorganic activities, but is that still the target? I didn’t hear you mention it on the call today. With what timeframe do you think you could reach that? Thanks. Robert E. Switz: George, if nothing else, I’m consistent. I apologize that I didn’t mention it but yes, that’s the target. I have not given up on that target at all. I think that’s a very doable target. We can achieve that -- essentially, we see ourselves achieving that mostly through revenue. We will get cost reductions as part of that program as well but it really comes from driving the highly leverageable cost structure. So to the extent whether it comes from acquisition or organic, and organic in the form of either developing market growth or product, it is really from my perspective more of a revenue growth game than anything else and so I do see that -- that’s not an unrealistic target and it does remain the target. You had another question that I’m just losing -- oh, the top 10 customer, yes. We had two top 10% customers, as you might guess, Verizon and AT&T.

And then as just a follow-up to the 14% commentary, what do you think the timeframe is? I think you guys have been making that comment for a couple of years now, on the target, I mean -- Robert E. Switz: It’s going to be variable and let me put it to you this way -- if it comes solely through organic, it will take longer. So it will be around the three-year timeframe, three years plus. If it’s a combination of organic and acquisition, it will come a lot faster. So I could think of a scenario where we have that clearly within three. Depending on the acquisition and how well executed, we could have it in one-and-a-half or one.

Thanks very much.

Your next question comes from Marcus Kupferschmidt with Lehman Brothers.

I just wanted to ask about two topics, op-ex and the margin outlook. In terms of op-ex, basically flat sequentially it looks like on a pro forma basis, excluding stock option, despite a very big increase in the revenues. I think that’s a function of the way you are allocating expenses over the year but if you could just quickly tell us if that’s true and how -- will this be flat in dollars going forward from here on out? How do we think about that? James G. Mathews: I would say generally, directionally you’re correct, though probably a modest increase in op-ex looking into Q3 and Q4. So a little more than flat, if you would. At least in our own modeling internally, we are viewing op-ex as rising just slightly in the second-half.

And that’s despite revenues coming down sequentially? James G. Mathews: That’s correct.

So the increase would be driven by what, please? James G. Mathews: It’s actually -- some of it is timing issues. We’ve -- in some areas, we’ve had some product development, for example, that we were expecting to spend on a flat basis throughout the year and due to other activities have pushed some of that back in the second-half, but we still think it is valuable in terms of rolling out new product and obviously don’t want to forego that, so we would probably see that push up R&D just a bit in the second-half. That would be a contributor.

Great, and then just clarify the margin commentary from before. You know, I think about the April quarter outperforming on the earnings by a noticeable amount, but we’re just tightening the old prior guidance, so we’re kind of saying earnings in the back-half potentially aren’t as much in pennies as we would have thought. I guess what I’m wondering is why would you be a little -- not as optimistic about the margins, the operating margins or the earnings power in the back-half than you were a quarter ago, before you had a better-than-expected April quarter? James G. Mathews: Again, I think we had some things that we know -- the main answer to your question is the things we don’t know. What we do know about the first-half, as we mentioned, is that we had a favorable mix, margin driven some by volume, a favorable mix and we don’t know how that’s going to play out in the second quarter. If you take copper, for example, and Bob talked to the strength of copper in the first-half of the year, we are obviously hesitant to forecast that will stay as strong as it has been in the first-half, so I would say in general overall mix not as favorable as we saw in the first-half. That’s one component.

Marcus, I just looked at the consensus before the call for gross margins and they were at 32.9% in the third quarter to 32.8% in the fourth quarter, when you roll up all the models. If you take our guidance, you are generally thinking about gross margins around that 33 area for the third and the fourth quarter as well.

I understand. That makes a lot of sense. I’m just kind of thinking, given the top line is the same as --

But the third and fourth quarter sales will be lower than they were in the second quarter, so the gross margins will naturally fall on that basis.

Okay. Thank you.

Your next question comes from the line of Tim Daubenspeck with Pacific Crest Securities.

Thanks. The question is really, we haven’t talked much about some of the efforts in cost reductions, especially some of the stuff you’ve rolled off to Eastern Europe or some of the efforts in China. The commentary around revenue being a real driver to margins, does that indicate that we’ve kind of hit a wall here in terms of some of the cost-down efforts and really everything going forward is going to be almost 100% revenue driven in terms of improvements around margins? Robert E. Switz: No, certainly not. We’ve characterized a little bit earlier a net 150 basis point improvement that we expect to come from some of those cost reduction efforts, and that would incorporate -- and that’s net of price declines, et cetera, et cetera, materials price increases and so on. So there’s a fair amount of effort and achievement associated with the cost reduction program. But keep in mind its current size and scale. There’s only so much that you’re going to get out of that element of your P&L. But we feel we’ve made and will make very, very good progress there. I think the simple point to be made is with the growth of the business and the fact that we can grow the business through multiple means, and drive a significant amount to the bottom line, that’s more the point. So it will not come just from revenue but chunks of revenue can have a nice accelerator effect on our operating margin improvement.

Okay. Thank you very much.

Your next question comes from Scott Coleman with Morgan Stanley.

Thanks, guys, but my question’s been answered.

Your next question is from Eric Buck with Brean Murray.

This will be our last question.

Can you hear me this time? Robert E. Switz: Yes, Eric, how are you?

I don’t know what happened last time. I was talking away, as I normally am. You had mentioned Verizon and AT&T as 10% customers, but you didn’t actually give percentage numbers. Can you provide that? Robert E. Switz: Between the two of them, it is probably in the 25% range.

Okay, and then you gave the components of AT&T in terms of year-over-year comparisons for the first-half, but obviously those are, the percentage changes are off of very different bases. Can you kind of aggregate that and tell us what AT&T was in the aggregate? Robert E. Switz: Let me back up on the quarter. I gave you the wrong number for the top two. It’s more like 35%, not 25%. But anyway, your second question was around BellSouth? Are you there, Eric?

It sounds like he dropped. If you’re talking away, we’re not hearing away. Laney?

Eric, your line is open.

Can you not hear? Robert E. Switz: We couldn’t hear you, but we can hear you now. I corrected the percentage I gave you for the top two. It was more like 35%, and then you had a question I’m trying to -- around BellSouth.

No, it was on AT&T. You gave before that BellSouth was up, or Cingular was down 73%, BellSouth -- Robert E. Switz: Yes, yes.

-- and SBC up, I wanted you to kind of aggregate that as AT&T in total, since you are working off of very different sized bases there around those percentages, so can you give us a sense of what --

The numbers for AT&T that Bob gave you include BellSouth since the acquisition and Cingular since the acquisition, and SBC as well as AT&T long distance, so -- we aggregate everything since the acquisition. Robert E. Switz: I think he’s looking for the net effect of all of AT&T.

Correct, the total AT&T.

The net effect without BellSouth and Cingular?

No, all together. Robert E. Switz: All together, the legacy,

Okay, I got it. If you aggregate all four pieces, it would be down 8% for the first six months this year versus the first six months last year.

Great, and then just finally, again a clarification on the operating expenses. You had revenues up fairly significantly, your employee count was up 1,000 employees, granted mostly temporary manufacturing but what did you do to actually bring down operating expenses and offset what would have normally been the upward bias by those two factors? Robert E. Switz: I’ll let Jim tackle a piece of it, but on the direct labor, that’s direct labor in Mexico to support the higher volumes and you’re correct, it is seasonal and it goes into the standard cost of product, so there is no overage there. It goes in at standard and the additional volume takes that out, so there’s no increment of spending associated with that. No labor variances, negative labor variances associated with that piece. James G. Mathews: Just to give a little bit more flavor on the op-ex, a couple of things. One, on a year-over-year basis, the decline was due to some items that are non-recurring. We had some retention payments for our FONS employees that were in our numbers last year. Also, stock-based compensation expense was higher in that period last year than this. So that’s the significant year-over-year number. I probably should add one comment to the earlier guidance on the op-ex looking ahead. The main thing that I forgot to mention was the fact that as the dollar has declined in value, we’ve seen just the natural progression upward from principally Euro exposure on our op-ex line. Now obviously on a net basis, that’s not impacting us because we get it on a top line but when you look at op-ex on an isolated basis, that’s driving a fair portion of any increase that we would see in the next couple of quarters.

Okay, thanks.

All right, that concludes our call. Thank you for being with us today.

This concludes today’s conference call. You may now disconnect.