##### 



Exhibit 10.38

Severance Agreement

This Agreement is entered into as of August 28, 2003 (the Effective
Date), by and between      (the Employee) and Advanced Fibre
Communications, Inc., a Delaware corporation (the Company).

WHEREAS, it is expected that the Company from time to time will consider
the possibility of a Change in Control (as defined below). The Board of
Directors of the Company (the Board) recognizes that such a possibility may
create concerns about job security, impair productivity and be a distraction to
the Employee to consider alternative employment opportunities;

WHEREAS, the Board believes that it is in the best interests of the
Company and its stockholders to provide the Employee with an incentive to
continue employment and to maximize the value of the Company upon a Change in
Control for the benefit of its stockholders; and

WHEREAS, in recognition that the Employees services have been fundamental
to the Companys development and in order to provide the Employee with enhanced
financial security and sufficient incentive to remain with the Company,
notwithstanding the possibility of a Change in Control, the Board believes that
it is imperative to provide the Employee with certain severance benefits upon
the Employees termination of employment in connection with a Change in
Control;

NOW, THEREFORE, in consideration of the mutual covenants herein contained
and the continued employment of the Employee by the Company, the parties agree
as follows:

1. Severance Benefits.

(a) Cash Severance.If, at any time within 18 months after a Change in
Control, either (i) the Company terminates the Employees employment for any
reason other than Cause; or (ii) the Employee resigns all positions with the
Company for Good Reason, then the Company shall immediately make a lump sum
severance payment to the Employee in an amount equal to 200% of the sum of the
following:



| |                                            
| | -------------------------------------------
| | (i) The Employees Annual Base Salary; plus



| |                                  
| | ---------------------------------
| | (ii) The Employees Target Bonus.

(b) Employee Benefits. If Subsection (a) above applies, the Employee and
the Employees dependents shall remain eligible to participate in all of the
Companys group insurance and other employee benefit plans for a period of 24
months, as if the Employee were still actively employed by the Company. If the
Company, after using its best efforts to maintain the Employees coverage,
determines in good faith that coverage under the Companys group insurance and
other employee benefit plans cannot be continued, then the Company, at its own
expense, shall obtain equivalent individual coverage for the Employee and the
Employees dependents. If the Employee becomes eligible for comparable group
insurance coverage in connection with new employment, the coverage under this
Subsection (b) shall terminate (other

- 1 -



---



##### 



than coverage that must be continued under COBRA). The coverage provided
under this Subsection (b) shall run concurrently with and shall be offset
against any continuation coverage under COBRA.

(c) Termination Prior to Change in Control. Notwithstanding the foregoing,
if the Employee is terminated by the Company for any reason other than Cause in
the 12 months preceding a Change in Control and if the Employee can reasonably
demonstrate that such termination either (i) was at the request of a third
party who has taken steps which are reasonably anticipated to result in a
Change in Control; or (ii) otherwise arose in connection with or in
anticipation of a Change in Control, then the Employee will be entitled to the
severance benefits described above.

(d) Release of Claims.As a condition to the receipt of the severance
benefits described above, the Employee shall be required to execute a release
of all claims arising out of the Employees employment or the termination
thereof including, but not limited to, any claim of discrimination under state
or federal law.

(e) No Mitigation.The Employee will not be required to mitigate the
amount of payments under this Agreement (whether by seeking new employment or
in any other manner), nor will any such payment be reduced by any earnings that
the Employee may receive from any other source.

2. Definitions.

(a) Annual Base Salary.For all purposes of this Agreement, Annual Base
Salary shall mean the highest rate of annual base salary in effect at any time
during the 12-month period immediately preceding the Change in Control.

(b) Cause.For all purposes of this Agreement, Cause shall mean that
the Employee has been terminated for cause by majority vote of the Board
(excluding the Employee) as a result of the occurrence of one of the following
events provided that such event is materially or potentially materially
injurious to the operations, financial condition or business reputation of the
Company and that results from a willful act or omission by the Employee:



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) The commission of an act of fraud, embezzlement or dishonesty by
the Employee, directly related to the performance of duties for the
Company;



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | (ii) An unauthorized use or disclosure by the Employee of
confidential information or trade secrets of the Company; or



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | (iii) The Employees conviction of, or plea of guilty or no
contest to, a felony under the laws of the United States or any state
thereof.

No act, or failure to act, by the Employee shall be considered willful
unless committed without good faith and without a reasonable belief that the
act or omission was in the Companys best interest.

- 2 -



---



##### 



(c) Change in Control.For all purposes of this Agreement, a Change in
Control shall have occurred:



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Upon consummation of a reorganization, merger or consolidation
(a Business Combination), in each case, unless, following such Business
Combination:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (A) the individuals and entities who were the beneficial
owners, respectively, of the then outstanding shares of Common
Stock of the Company (the Outstanding Common Stock) and the then
outstanding voting securities of the Company entitled to vote
generally in the election of directors (the Outstanding Voting
Securities) immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as
a result of such transaction owns the Company either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business
Combination, of the Outstanding Common Stock and Outstanding Voting
Securities, as the case may be; and



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (B) no Person (as defined in subparagraph (iii) below)
(excluding any corporation resulting from such Business Combination
or any employee benefit plan (or related trust) sponsored or
maintained by the Company or such other corporation resulting from
such Business Combination) beneficially owns, directly or
indirectly, 30% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then
outstanding voting securities of such corporation, except to the
extent that such ownership of Outstanding Common Stock or
Outstanding Voting Securities existed prior to the Business
Combination; and



| |                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (C) at least a majority of the members of the board of
directors of the corporation resulting from such Business
Combination were members of the Board at the time of the execution
of the initial agreement, or of the action of the Board, providing
for such Business Combination; or



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) If individuals who, as of the Effective Date, constitute the
Board (the Incumbent Board) cease for any reason to constitute at least
a majority of the Board; provided, however, that any individual becoming
a director subsequent to the date hereof whose election, or nomination
for election by the Companys stockholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of (A) an actual or
threatened election contest with respect to the election or removal of
directors; (B) an actual or threatened solicitation of proxies or

- 3 -



---



##### 





| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | consents; or (C) any other actual or threatened action by, or on
behalf of, any Person other than the Board; or



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (iii) Upon the acquisition after the Effective Date by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
Exchange Act)) (a Person) of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either (A) the then Outstanding Common Stock or (B) the combined voting
power of the Outstanding Voting Securities; provided, however, that the
following acquisitions shall not be deemed to be covered by this
subparagraph (iii): (x) any acquisition of Outstanding Common Stock or
Outstanding Voting Securities by the Company, (y) any acquisition of
Outstanding Common Stock or Outstanding Voting Securities by any employee
benefit plan (or related trust) sponsored or maintained by the Company or
(z) any acquisition of Outstanding Common Stock or Outstanding Voting
Securities by any corporation pursuant to a transaction which complies
with clauses (A), (B) and (C) of subparagraph (i) above; or



| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (iv) The consummation of the sale of all or substantially all of the
assets of the Company or approval by the stockholders of the Company of a
complete liquidation or dissolution of the Company.

(d) Good Reason.For all purposes of this Agreement, Good Reason shall
mean that the Employee has not been terminated for Cause and elects to resign
after one or more of the following events:



| |                                                                       
| | ----------------------------------------------------------------------
| | (i) A reduction of the Employees Annual Base Salary by more than
10%;



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) A reduction in the Employees level of compensation (including
Annual Base Salary, Target Bonus, fringe benefits and participation in
any corporate-performance based bonus or incentive programs) by more than
10%;



| |                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (iii) The failure to provide the Employee with employee benefit
plans, programs and practices (including equity compensation plans) that
are at least substantially similar in the aggregate (in terms of benefit
levels and reward opportunities) to the employee benefit plans, programs,
policies and practices in effect immediately prior to the Change in
Control;



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | (iv) The diminution or reduction of the Employees title, authority,
position, duties or responsibilities;



| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (v) The Employee, at any time after the Company has been subject to
a Change in Control, is required to report to another officer or designee
of the Board who is less senior than the officer to whom the Employee
reported prior to the Change in Control;



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | (vi) The relocation by the Company of the Employees principal place
of employment resulting in an increase of a minimum of an additional 50
miles in the

- 4 -



---



##### 





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Employees commute from his or her residence (immediately before the
Change in Control) to the Employees principal place of employment (with
such commuting distance calculated based on the shortest distance using
commonly traveled routes), provided that a requirement that the Employee
work at a location or locations other than the Employees principal place
of employment shall not be deemed a relocation of the Employees
principal place of employment unless the Employee is permanently required
to work at such other location or locations for more than 10 days per
month and, provided further, that in no event shall there be deemed to be
a relocation of the Employees principal place of employment as a result
of required business travel to an extent substantially consistent with
the Employees business travel obligations prior to the Change in
Control; or



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | (vii) The failure of the Company to obtain the assumption of this
Agreement by any successors contemplated in Section 4(a) below.

(e) Target Bonus.For all purposes of this Agreement, Target Bonus
shall mean the Employees target bonus under the Companys annual bonus
program, or any comparable bonus under any predecessor or successor plan for
the year prior to the year in which the Change in Control occurs.

3. Limitation on Parachute Payments

(a) Application of this Section. In the event that payments and other
benefits under this Agreement (the Agreement Payments) and payments and
benefits otherwise provided to the Employee under any other plan or arrangement
(Total Payments) would constitute parachute payments within the meaning of
section 280G of the Internal Revenue Code of 1986, as amended (the Code) and
would be subject to the excise tax imposed by section 4999 of the Code (the
Excise Tax), then the Agreement Payments shall be either:



| |                          
| | -------------------------
| | (i) delivered in full; or



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) delivered to the extent that maximizes the value of the
Agreement Payments without causing any portion of the Total Payments to
be subject to the Excise Tax (the Reduced Amount),

whichever of the foregoing amounts, taking into account the effect of all
federal, state and local income taxes, employment taxes and excise taxes
applicable to the Employee (including the Excise Tax), results in the receipt
by the Employee, on an after-tax basis, of the greatest amount of Agreement
Payments. The foregoing determination shall be made by the independent auditors
most recently selected by the Board (the Auditors).

(b) Reduction of Payments. If the Auditors determine that the Reduced
Amount results in the greatest amount of Agreement Payments to the Employee
under Subsection (a) above, then the Company shall promptly give the Employee
notice to that effect and a copy of the detailed calculation thereof and of the
Reduced Amount, and the Employee may then elect which and how much of the
Agreement Payments shall be reduced and shall advise the Company in writing of
the election within 10 days of receipt of notice. If no such election is made
by the Employee within such 10-day period, then the Company may elect which

- 5 -



---



##### 



and how much of the Agreement Payments shall be reduced and shall notify
the Employee promptly of such election. All determinations made by the Auditors
under this Section 3 shall be binding upon the Company and the Employee and
shall be made within 60 days of the date when a Payment becomes payable or
transferable. As promptly as practicable following such determination and the
elections hereunder, the Company shall pay or transfer to or for the benefit of
the Employee such Agreement Payments as are then due to the Employee and shall
promptly pay or transfer to or for the benefit of the Employee in the future
such Agreement Payments as become due to the Employee.

(c) Overpayments and Underpayments.As a result of uncertainty in the
application of section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Agreement Payments will have
been made by the Company which should not have been made (an Overpayment) or
that additional Agreement Payments which will not have been made by the Company
could have been made (an Underpayment), consistent in each case with the
calculation of the Reduced Amount hereunder. In the event that the Auditors,
based upon the assertion of a deficiency by the Internal Revenue Service
against the Company or the Employee that the Auditors believe has a high
probability of success, determine that an Overpayment has been made, such
Overpayment shall be treated for all purposes as a loan to the Employee that
the Employee shall repay to the Company, together with interest at the
applicable federal rate provided in section 7872(f)(2) of the Code; provided,
however, that no amount shall be payable by the Employee to the Company if and
to the extent that such payment would not reduce the amount that is subject to
taxation under section 4999 of the Code. In the event that the Auditors
determine that an Underpayment has occurred, such Underpayment shall promptly
be paid or transferred by the Company to or for the benefit of the Employee,
together with interest at the applicable federal rate provided in section
7872(f)(2) of the Code.

4. Successors.

(a) Companys Successors. Any successor to the Company (whether direct or
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Companys business and/or assets
shall assume the Companys obligations under this Agreement and agree to
expressly perform the Companys obligations under this Agreement in the same
manner and to the same extent as the Company would be required to perform such
obligations in the absence of a succession. For all purposes under this
Agreement, the term Company shall include any successor to the Companys
business and/or assets which executes and delivers the assumption agreement
described in this Subsection (a) or which becomes bound by the terms of this
Agreement by operation of law.

(b) Employees Successors. This Agreement and all rights of the Employee
hereunder shall inure to the benefit of, and be enforceable by, the Employees
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees.

5. Arbitration.

(a) Scope of Arbitration Requirement. The parties hereby waive their
rights to a trial before a judge or jury and agree to arbitrate before a
neutral arbitrator any and all

- 6 -



---



##### 



claims or disputes arising out of this Agreement and any and all claims
arising from or relating to the Employees employment, including (but not
limited to) claims against any current or former employee, director or agent of
the Company, claims of wrongful termination, retaliation, discrimination,
harassment, breach of contract, breach of the covenant of good faith and fair
dealing, defamation, invasion of privacy, fraud, misrepresentation,
constructive discharge or failure to provide a leave of absence, or claims
regarding commissions, stock options or bonuses, infliction of emotional
distress or unfair business practices.

(b) Procedure. The arbitrators decision shall be written and shall
include the findings of fact and law that support the decision. The
arbitrators decision shall be final and binding on both parties, except to the
extent applicable law allows for judicial review of arbitration awards. The
arbitrator may award any remedies that would otherwise be available to the
parties if they were to bring the dispute in court. The arbitration shall be
conducted in accordance with the National Rules for the Resolution of
Employment Disputes of the American Arbitration Association; provided, however
that the arbitrator shall allow the discovery authorized by the California
Arbitration Act or the discovery that the arbitrator deems necessary for the
parties to vindicate their respective claims or defenses. The arbitration
shall take place in Petaluma, California, or, at the Employees option, the
county in which the Employee primarily worked with the Company at the time when
the arbitrable dispute or claim first arose.

(c) Costs. The Company shall bear all costs of arbitration, including the
arbitrators fees.

(d) Applicability. This Section 5 shall not apply to (i) workers
compensation or unemployment insurance claims or (ii) claims concerning the
validity, infringement or enforceability of any trade secret, patent right,
copyright or any other trade secret or intellectual property held or sought by
either the Employee or the Company.

6. Miscellaneous Provisions.

(a) No Set-off.There shall be no right of setoff or counterclaim, with
respect to any claim, debt or obligation, against payments to the Employee
under this Agreement.

(b) Legal Fees.The Company agrees to pay as incurred, to the full extent
permitted by law, all legal fees and expenses which the Employee may reasonably
incur as a result of any contest (regardless of the outcome thereof) by the
Company, the Employee or others of the validity or enforceability of, or
liability under, any provision of this Agreement or any guarantee of
performance thereof (including as a result of any contest by the Employee about
the amount of any payment pursuant to this Agreement), plus in each case
interest on any delayed payment at the applicable Federal rate provided for in
section 7872(f)(2)(A) of the Code.

(c) Notices.Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to the Employee at the home address that the
Employee most recently communicated to the Company in writing.

- 7 -



---



##### 



In the case of the Company, mailed notices shall be addressed to its
corporate headquarters, and all notices shall be directed to the attention of
its Secretary.

(d) Modifications and Waivers. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.

(e) Whole Agreement.No other agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.

(f) Withholding Taxes.All payments made under this Agreement shall be
subject to reduction to reflect taxes or other charges required to be withheld
by law.

(g) Choice of Law and Severability.This Agreement shall be interpreted
in accordance with the laws of the State of California (except their provisions
governing the choice of law). If any provision of this Agreement becomes or is
deemed invalid, illegal or unenforceable in any applicable jurisdiction by
reason of the scope, extent or duration of its coverage, then such provision
shall be deemed amended to the minimum extent necessary to conform to
applicable law so as to be valid and enforceable or, if such provision cannot
be so amended without materially altering the intention of the parties, then
such provision shall be stricken and the remainder of this Agreement shall
continue in full force and effect. If any provision of this Agreement is
rendered illegal by any present or future statute, law, ordinance or regulation
(collectively the Law), then such provision shall be curtailed or limited
only to the minimum extent necessary to bring such provision into compliance
with the Law. All the other terms and provisions of this Agreement shall
continue in full force and effect without impairment or limitation.

(h) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

IN WITNESS WHEREOF,each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.

| |  |                                    
| |  | -----------------------------------
| |  | Employee                           
| |  |                                    
| |  |                                    
| |  | Advanced Fibre Communications, Inc.

- 8 -



---



##### 



| |  |    
| |  | ---
| |  | By 
| |  |    
| |  | Its
| |  |    

- 9 -