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In this paper, we address the design and management issues in routing a mixture of OC-192 and OC-768 streams in wavelength-routed optical networks. We assume that fiber links in the network are heterogeneous with respect to their transmission capability (i.e., links are designed to handle a given maximum bit-rate imposed by regenerator spacing).We investigate the issues of routing connection demands of various bit-rate requirements in such heterogeneous networks. In this environment, we introduce the routing of multirate traffic (RMT) problem. The RMT problem is informally defined as the process of finding the best routing which maximizes the total bandwidth carried in the network, for a set of sessions, within a given TDM equipment budget. We propose a two-phase optimization scheme (two-phase RMT). This scheme first obtains a basis solution used in routing 40-Gb/s traffic only on OC-768 capable links without the use of TDM equipment. In the second phase, an iterative routing, rerouting, and resource allocation step is used to optimize the total bandwidth carried in the network, while allowing 40-Gb/s traffic to be routed on OC-768 incapable links by the proper installation of TDM multiplexors and demultiplexers at some strategic locations in the network. Numerical results reveal the following:. 1) the two-phase RMT optimization algorithm provides substantial savings in terms of both the total TDM equipment installed and number of wavelengths used; 2) noticeable enhancements of the bandwidth utilization and the TDM budget are observed when the route-optimization takes into account the transmission quality of the links; and 3) the use of intermediate TDM multiplexing/demultiplexing functions provides substantial savings, in terms of the total number of channels, over the source-splitting scheme.