EXHIBIT 10.46

ADVANCED FIBRE COMMUNICATIONS, INC.
AUTOMATIC STOCK OPTION AGREEMENT

RECITALS

     A. The Corporation has implemented an automatic option grant program under
the Corporation’s 1996 Stock Incentive Plan pursuant to which eligible
non-employee members of the Corporation’s Board will automatically receive
special option grants at designated intervals over their period of Board service
in order to provide such individuals with a meaningful incentive to continue to
serve as a member of the Board.

     B. Optionee is an eligible non-employee Board member, and this Agreement is
executed pursuant to, and is intended to carry out the purposes of, the Plan in
connection with the automatic grant of a stock option to purchase shares of the
Corporation’s Common Stock under the Plan.

     C. The granted option is intended to be a non-statutory option which does
NOT meet the requirements of Section 422 of the Internal Revenue Code.

     D. All capitalized terms in this Agreement, to the extent not otherwise
defined in the Agreement, shall have the meaning assigned to them in the
attached Appendix.

          NOW, THEREFORE, it is hereby agreed as follows:

          1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of
the Grant Date, a Non-Statutory Option to purchase up to the number of Option
Shares specified in the Grant Notice. The Option Shares shall be purchasable
from time to time during the option term specified in Paragraph 2 at the
Exercise Price.

          2. OPTION TERM. This option shall have a maximum term of ten (10)
years measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5, 6 or 7.

          3. LIMITED TRANSFERABILITY. This option may, in connection with the
Optionee’s estate plan, be assigned in whole or in part during Optionee’s
lifetime to one or more members of the Optionee’s immediate family or to a trust
established for the exclusive benefit of one or more such family members. The
assigned portion shall be exercisable only by the person or persons who acquire
a proprietary interest in the option pursuant to such assignment. The terms
applicable to the assigned portion shall be the same as those in effect for this
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Corporation may deem appropriate. Should
the

 

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Optionee die while holding this option, then this option shall be transferred in
accordance with Optionee’s will or the laws of descent and distribution.

          4. EXERCISABILITY/VESTING.

            (a) This option shall be immediately exercisable for any or all of
the Option Shares, whether or not the Option Shares are vested in accordance
with the Vesting Schedule set forth in the Grant Notice, and shall remain so
exercisable until the Expiration Date or the sooner termination of the option
term under Paragraph 5, 6 or 7.

            (b) Optionee shall, in accordance with the Vesting Schedule set
forth in the Grant Notice, vest in the Option Shares in a series of installments
over his or her period of Board service. Vesting in the Option Shares may be
accelerated pursuant to the provisions of Paragraph 5, 6 or 7. In no event,
however, shall any additional Option Shares vest following Optionee’s cessation
of service as a Board member.

          5. CESSATION OF BOARD SERVICE. Should Optionee’s service as a Board
member cease while this option remains outstanding, then the option term
specified in Paragraph 2 shall terminate (and this option shall cease to be
outstanding) prior to the Expiration Date in accordance with the following
provisions:

            (i) Should Optionee cease to serve as a Board member for any reason
(other than death or Permanent Disability) while holding this option, then the
period for exercising this option shall be reduced to a twelve (12)-month period
commencing with the date of such cessation of Board service, but in no event
shall this option be exercisable at any time after the Expiration Date. During
such limited period of exercisability, this option may not be exercised in the
aggregate for more than the number of Option Shares (if any) in which Optionee
is vested on the date of his or her cessation of Board service. Upon the EARLIER
of (i) the expiration of such twelve (12)-month period or (ii) the specified
Expiration Date, the option shall terminate and cease to be exercisable with
respect to any vested Option Shares for which the option has not been exercised.

            (ii) Should Optionee die during the twelve (12)-month period
following his or her cessation of Board service, then the personal
representative of Optionee’s estate or the person or persons to whom the option
is transferred pursuant to Optionee’s will or in accordance with the laws of
descent and distribution shall have the right to exercise this option for any or
all of the Option Shares in which Optionee is vested at the time of Optionee’s
cessation of Board service (less any Option Shares purchased by Optionee after
such cessation of Board service but prior to death). Such right of exercise
shall terminate, and this option shall accordingly cease to be exercisable for
such vested Option Shares, upon the EARLIER of (i) the expiration of the twelve
(12)-month period measured from the date of

2.

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Optionee’s cessation of Board service or (ii) the specified Expiration Date of
the option term.

            (iii) Should Optionee cease service as a Board member by reason of
death or Permanent Disability, then all Option Shares at the time subject to
this option but not otherwise vested shall immediately vest in full so that
Optionee (or the personal representative of Optionee’s estate or the person or
persons to whom the option is transferred upon Optionee’s death) shall have the
right to exercise this option for any or all of the Option Shares as
fully-vested shares of Common Stock at any time prior to the EARLIER of (i) the
expiration of the twelve (12)-month period measured from the date of Optionee’s
cessation of Board service or (ii) the specified Expiration Date.

            (iv) Upon Optionee’s cessation of Board service for any reason other
than death or Permanent Disability, this option shall immediately terminate and
cease to be outstanding with respect to any and all Option Shares in which
Optionee is not otherwise at that time vested in accordance with the normal
Vesting Schedule set forth in the Grant Notice or the special vesting
acceleration provisions of Paragraph 6 or 7 below.

          6. CORPORATE TRANSACTION.

            (a) In the event of a Corporate Transaction, all Option Shares at
the time subject to this option but not otherwise vested shall automatically
vest so that this option shall, immediately prior to the specified effective
date for the Corporate Transaction, become fully exercisable for all of the
Option Shares at the time subject to this option and may be exercised for all or
any portion of such shares as fully-vested shares of Common Stock. Immediately
following the consummation of the Corporate Transaction, this option shall
terminate and cease to be outstanding except to the extent assumed by the
successor corporation or its parent company.

            (b) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, PROVIDED the aggregate Exercise Price shall remain the same.

          7. CHANGE IN CONTROL/HOSTILE TAKE-OVER.

            (a) All Option Shares subject to this option at the time of a Change
in Control but not otherwise vested shall automatically vest so that this option
shall, immediately prior to the effective date of such Change in Control, become
fully exercisable

3.

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for all of the Option Shares at the time subject to this option and may be
exercised for all or any portion of such shares as fully-vested shares of Common
Stock. This option shall remain exercisable for such fully-vested Option Shares
until the EARLIEST to occur of (i) the specified Expiration Date, (ii) the
sooner termination of this option in accordance with Paragraph 5 or 6 or (iii)
the surrender of this option under Paragraph 7(b).

            (b) Optionee shall have an unconditional right (exercisable during
the thirty (30)-day period immediately following the consummation of a Hostile
Take-Over) to surrender this option to the Corporation in exchange for a cash
distribution from the Corporation in an amount equal to the excess of (i) the
Take-Over Price of the Option Shares at the time subject to the surrendered
option (whether or not those Option Shares are otherwise at the time vested)
over (ii) the aggregate Exercise Price payable for such shares. This Paragraph
7(b) limited stock appreciation right shall in all events terminate upon the
expiration or sooner termination of the option term and may not be assigned or
transferred by Optionee.

            (c) To exercise the Paragraph 7(b) limited stock appreciation right,
Optionee must, during the applicable thirty (30)-day exercise period, provide
the Corporation with written notice of the option surrender in which there is
specified the number of Option Shares as to which the option is being
surrendered. Such notice must be accompanied by the return of Optionee’s copy of
this Agreement, together with any written amendments to such Agreement. The cash
distribution shall be paid to Optionee within five (5) days following such
delivery date, and neither the approval of the Plan Administrator nor the
consent of the Board shall be required in connection with such option surrender
and cash distribution. Upon receipt of such cash distribution, this option shall
be cancelled with respect to the shares subject to the surrendered option (or
the surrendered portion), and Optionee shall cease to have any further right to
acquire those Option Shares under this Agreement. The option shall, however,
remain outstanding for the balance of the Option Shares (if any) in accordance
with the terms and provisions of this Agreement, and the Corporation shall
accordingly issue a new stock option agreement (substantially in the same form
as this Agreement) for those remaining Option Shares.

          8. ADJUSTMENT IN OPTION SHARES. Should any change be made to the
Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation’s receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder; provided, however, that the aggregate Exercise Price shall
remain the same.

          9. STOCKHOLDER RIGHTS. The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.

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          10. MANNER OF EXERCISING OPTION.

            (a) In order to exercise this option for all or any part of the
Option Shares for which the option is at the time exercisable, Optionee or, in
the case of exercise after Optionee’s death, Optionee’s executor, administrator,
heir or legatee, as the case may be, must take the following actions:

                (i) To the extent the option is exercised for vested Option
Shares, the Secretary of the Corporation shall be provided with written notice
of the option exercise (the “Exercise Notice”) in substantially the form of
Exhibit I attached hereto, in which there is specified the number of vested
Option Shares to be purchased under the exercised option. To the extent that the
option is exercised for one or more unvested Option Shares, Optionee (or other
person exercising the option) shall deliver to the Secretary of the Corporation
a Purchase Agreement for those unvested Option Shares.

                (ii) The Exercise Price for the purchased shares shall be paid
in one or more of the following alternative forms:

                - cash or check made payable to the Corporation’s order; or

                - shares of Common Stock held by Optionee (or any other person
or persons exercising the option) for the requisite period necessary to avoid a
charge to the Corporation’s earnings for financial reporting purposes and valued
at Fair Market Value on the Exercise Date; or

                - to the extent the option is exercised for vested Option
Shares, through a special sale and remittance procedure pursuant to which
Optionee shall provide irrevocable written instructions (A) to a
Corporation-designated brokerage firm to effect the immediate sale of the vested
shares purchased under the option and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate Exercise Price payable for those shares plus the applicable Federal,
state and local income taxes required to be withheld by the Corporation by
reason of such exercise and (B) to the Corporation to deliver the certificates
for the purchased shares directly to such brokerage firm in order to complete
the sale.

5.

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                (iii) Appropriate documentation evidencing the right to exercise
this option shall be furnished the Corporation if the
person or persons exercising the option is other than Optionee.

                (iv) Appropriate arrangement must be made with the Corporation
for the satisfaction of all Federal, state and local income tax
withholding requirements applicable to the option exercise.

            (b) Except to the extent the sale and remittance procedure specified
above is utilized in connection with the exercise of the option for vested
Option Shares, payment of the Exercise Price for the purchased shares must
accompany the Exercise Notice or Purchase Agreement delivered to the Corporation
in connection with the option exercise.

            (c) As soon as practical after the Exercise Date, the Corporation
shall issue to or on behalf of Optionee (or any other person or persons
exercising this option) a certificate or certificates representing the purchased
Option Shares. To the extent any such Option Shares are unvested, the
certificates for those Option Shares shall be endorsed with an appropriate
legend evidencing the Corporation’s repurchase rights and may be held in escrow
with the Corporation until such shares vest.

            (d) In no event may this option be exercised for fractional shares.

          11. NO IMPAIRMENT OF RIGHTS. This Agreement shall not in any way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise make changes in its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets. Nor shall this Agreement in any way be construed or
interpreted so as to affect adversely or otherwise impair the right of the
Corporation or the stockholders to remove Optionee from the Board at any time in
accordance with the provisions of applicable law.

          12. COMPLIANCE WITH LAWS AND REGULATIONS.

            (a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.

            (b) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
However, the Corporation shall use its best efforts to obtain all such
applicable approvals.

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          13. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in
Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the Corporation and its successors and assigns and
Optionee, Optionee’s assigns and the legal representatives, heirs and legatees
of Optionee’s estate.

          14. CONSTRUCTION/GOVERNING LAW. This Agreement and the option
evidenced hereby are made and granted pursuant to the automatic option grant
program in effect under the Plan and are in all respects limited by and subject
to the express terms and provisions of that program. The interpretation,
performance, and enforcement of this Agreement shall be governed by the laws of
the State of Delaware without resort to that State’s conflict-of-laws rules.

          15. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee’s signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.

7.

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EXHIBIT I

NOTICE OF EXERCISE

     I hereby notify Advanced Fibre Communications, Inc. (the “Corporation”)
that I elect to purchase            shares of the Corporation’s Common Stock
(the “Purchased Shares”) at the option exercise price of $ per share (the
“Exercise Price”) pursuant to that certain option (the “Option”) granted to me
pursuant to the automatic option grant program under the Corporation’s 1996
Stock Incentive Plan on      , 199 .

     Concurrently with the delivery of this Exercise Notice to the Secretary of
the Corporation, I shall hereby pay to the Corporation the Exercise Price for
the Purchased Shares in accordance with the provisions of my agreement with the
Corporation evidencing the Option and shall deliver whatever additional
documents may be required by such agreement as a condition for exercise.
Alternatively, I may utilize the special broker/dealer sale and remittance
procedure specified in my agreement to effect payment of the Exercise Price for
any Purchased Shares in which I am vested at the time of exercise.

     
       , 199   
   
Date
   

 
                                                                                

  Optionee
 
   

  Address:

 
                                                                                
 
   

 
                                                                                
 
   
Print name in exact manner
   
it is to appear on the
   
stock certificate:
 
                                                                                
 
   
Address to which certificate
   
is to be sent, if different
   
from address above:
 
                                                                                
 
   

 
                                                                                
 
   
Social Security Number:
   

 
                                                                                

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APPENDIX

     The following definitions shall be in effect under the Agreement:

     A. AGREEMENT shall mean this Automatic Stock Option Agreement.

     B. BOARD shall mean the Corporation’s Board of Directors.

     C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:

     (i) the acquisition, directly or indirectly, by any person or related group
of persons (other than the Corporation or a person that directly or indirectly
controls, is controlled by, or is under common control with, the Corporation) of
beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing more than fifty percent (50%) of the total combined voting
power of the Corporation’s outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation’s stockholders which the Board
does not recommend such stockholders to accept, or

     (ii) a change in the composition of the Board over a period of thirty-six
(36) consecutive months or less such that a majority of the Board members
ceases, by reason of one or more contested elections for Board membership, to be
comprised of individuals who either (A) have been Board members continuously
since the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of the Board
members described in clause (A) who were still in office at the time the Board
approved such election or nomination.

     D. CODE shall mean the Internal Revenue Code of 1986, as amended.

     E. COMMON STOCK shall mean the Corporation’s common stock.

     F. CORPORATE TRANSACTION shall mean either of the following stockholder-
approved transactions to which the Corporation is a party:

     (i) a merger or consolidation in which securities possessing more than
fifty percent (50%) of the total combined voting power of the Corporation’s
outstanding securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such transaction, or

A-1.

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     (ii) the sale, transfer or other disposition of all or substantially all of
the Corporation’s assets in complete liquidation
or dissolution of the Corporation.

     G. CORPORATION shall mean Advanced Fibre Communications, Inc., a Delaware
corporation.

     H. EXERCISE DATE shall mean the date on which the option shall have been
exercised in accordance with Paragraph 10 of the Agreement.

     I. EXERCISE PRICE shall mean the exercise price payable per share as
specified in the Grant Notice.

     J. EXPIRATION DATE shall mean the date on which the option term expires as
specified in the Grant Notice.

     K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

     (i) If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value shall be the closing selling price per share
of Common Stock on the date in question, as the price is reported by the
National Association of Securities Dealers on the Nasdaq National Market or any
successor system. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.

     (ii) If the Common Stock is at the time listed on any Stock Exchange, then
the Fair Market Value shall be the closing selling price per share of Common
Stock on the date in question on the Stock Exchange determined by the Plan
Administrator to be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.

     L. GRANT DATE shall mean the date of grant of the option as specified in
the Grant Notice.

     M. GRANT NOTICE shall mean the Notice of Grant of Automatic Stock Option
accompanying this Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.

A-2.

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     N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly, by
any person or related group of persons (other than the Corporation or a person
that directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning of
Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation’s outstanding
securities pursuant to a tender or exchange offer made directly to the
Corporation’s stockholders which the Board does not recommend such stockholders
to accept.

     O. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

     P. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.

     Q. OPTION SHARES shall mean the number of shares of Common Stock subject to
the option.

     R. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.

     S. PERMANENT DISABILITY shall mean the inability of Optionee to perform his
or her usual duties as a Board member by reason of any medically determinable
physical or mental impairment which is expected to result in death or has lasted
or can be expected to last for a continuous period of twelve (12) months or
more.

     T. PLAN shall mean the Corporation’s 1996 Stock Incentive Plan.

     U. PURCHASE AGREEMENT shall mean the stock purchase agreement (in form and
substance satisfactory to the Corporation) which must be executed at the time
the option is exercised for unvested Option Shares and which will accordingly
(i) grant the Corporation the right to repurchase, at the Exercise Price, any
and all of those Option Shares in which Optionee is not otherwise vested at the
time of his or her cessation of service as a Board member and (ii) preclude the
sale, transfer or other disposition of any of the Option Shares purchased under
such agreement while those Option Shares remain subject to the repurchase right.

     V. STOCK EXCHANGE shall mean the American Stock Exchange or the New York
Stock Exchange.

     W. TAKE-OVER PRICE shall mean the GREATER of (i) the Fair Market Value per
share of Common Stock on the date the option is surrendered to the Corporation
in connection with a Hostile Take-Over or (ii) the highest reported price per
share of Common Stock paid by the tender offeror in effecting the Hostile
Take-Over.

A-3.

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     X. VESTING SCHEDULE shall mean the vesting schedule specified in the Grant
Notice, pursuant to which Optionee will vest in the Option Shares in one or more
installments over his or her period of Board service, subject to acceleration in
accordance with the provisions of the Agreement.

A-4.