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** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended March 31, 2010**

 

**Or**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from                    to                    **

 

**Commission file number: 001-33069**

 

**OCCAMNETWORKS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                    | ** ** | **77-0442752**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer       |
| incorporation or organization)  |       | Identification Number) |

 

| **6868 Cortona Drive**                   | ** ** | ** **  |
|------------------------------------------|------------|-------------|
| **Santa Barbara, California**            | ** ** | **93117**   |
| (Address of principal executive offices) |       | (Zip Code)) |

 

Registrant’s telephone number, including area code: **(805) 692-2900**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes xNo o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12 months(or for such shorter period that the registrant was required to submit and postsuch files).  Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (check one).

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                         |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o No x

 

Asof April 15, 2010, the number of shares outstanding of the registrant’s commonstock was 20,968,509 shares.

 

 

 

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**INDEX**

 
| ** **                             | ** ** | ** **                                                                                  | **Page** |
|----------------------------------------|------------|---------------------------------------------------------------------------------------------|----------|
|                                   |       |                                                                                        |     |
| PART I—FINANCIAL INFORMATION | 1          |
|                                   |       |                                                                                        |     |
| Item 1.                                |       | Financial Statements                                                                        | 1        |
|                                   |       |                                                                                        |     |
| Item 2.                                |       | Management’s  Discussion And Analysis Of Financial Condition And Results Of Operations | 11       |
|                                   |       |                                                                                        |     |
| Item 3.                                |       | Quantitative And Qualitative  Disclosures About Market Risk                                 | 18       |
|                                   |       |                                                                                        |     |
| Item 4.                                |       | Controls And Procedures                                                                     | 18       |
|                                   |       |                                                                                        |     |
| PART II—OTHER  INFORMATION   | 18         |
|                                   |       |                                                                                        |     |
| Item 1.                                |       | Legal Proceedings                                                                           | 18       |
|                                   |       |                                                                                        |     |
| Item 1a.                               |       | Risk Factors                                                                                | 20       |
|                                   |       |                                                                                        |     |
| Item 2.                                |       | Unregistered Sales Of Equity  Securities And Use Of Proceeds                                | 34       |
|                                   |       |                                                                                        |     |
| Item 3.                                |       | Defaults Upon Senior  Securities                                                            | 34       |
|                                   |       |                                                                                        |     |
| Item 4.                                |       | Removed and Reserved                                                                        | 34       |
|                                   |       |                                                                                        |     |
| Item 5.                                |       | Other Information                                                                           | 34       |
|                                   |       |                                                                                        |     |
| Item 6.                                |       | Exhibits                                                                                    | 34       |
|                                        |            |                                                                                             |          |  |

 

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Table of Contents

 

**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.****                       ****FINANCIALSTATEMENTS**

 

**OCCAM NETWORKS, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In thousands, except share data)**

 
| ** **                                                                                                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                              | ** ** | **2010**           | ** ** | **2009 (*)**     | ** ** |
| ** **                                                                                                                                                                                                              | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                              |       |               |       |                  |       |
| Current assets:                                                                                                                                                                                                         |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                               |       | $                  | 43,511     |                  | $          | 39,268 |   |
| Restricted cash                                                                                                                                                                                                         |       | 2,895              |       | 5,721                 |       |
| Accounts receivable, net                                                                                                                                                                                                |       | 9,935              |       | 14,874                |       |
| Inventories                                                                                                                                                                                                             |       | 10,929             |       | 12,927                |       |
| Prepaid and other current assets                                                                                                                                                                                        |       | 1,018              |       | 1,426                 |       |
| Total current assets                                                                                                                                                                                                    |       | 68,288             |       | 74,216                |       |
| Property and equipment, net                                                                                                                                                                                             |       | 8,761              |       | 8,699                 |       |
| Intangibles, net                                                                                                                                                                                                        |       | 133                |       | 156                   |       |
| Other assets                                                                                                                                                                                                            |       | 67                 |       | 91                    |       |
| Total assets                                                                                                                                                                                                            |       | $                  | 77,249     |                  | $          | 83,162 |   |
|                                                                                                                                                                                                                    |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                          |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                                                    |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                                        |       | $                  | 8,480      |                  | $          | 8,274 |   |
| Accrued liabilities                                                                                                                                                                                                     |       | 5,956              |       | 6,999                 |       |
| Deferred revenue                                                                                                                                                                                                        |       | 7,127              |       | 13,035                |       |
| Deferred rent                                                                                                                                                                                                           |       | 361                |       | 361                   |       |
| Capital lease obligations                                                                                                                                                                                               |       | 27                 |       | 26                    |       |
| Total current liabilities                                                                                                                                                                                               |       | 21,951             |       | 28,695                |       |
| Deferred rent, net of current portion                                                                                                                                                                                   |       | 1,512              |       | 1,597                 |       |
| Capital lease obligations, net of current portion                                                                                                                                                                       |       | 13                 |       | 20                    |       |
| Total liabilities                                                                                                                                                                                                       |       | 23,476             |       | 30,312                |       |
| Commitments and contingencies (See Note 5)                                                                                                                                                                              |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                              |       |               |       |                  |       |
| Common stock, $0.001 par value, 250,000,000 shares  authorized; and 20,968,509 shares issued and  outstanding at March 31, 2010 and 20,669,089 shares issued and  outstanding at December 31, 2009. |       | 289                |       | 289                   |       |
| Additional paid-in capital                                                                                                                                                                                              |       | 189,546            |       | 188,013               |       |
| Accumulated deficit                                                                                                                                                                                                     |       | (136,062           | )          | (135,452              | )          |
| Total stockholders’ equity                                                                                                                                                                                         |       | 53,773             |       | 52,850                |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                         |       | $                  | 77,249     |                  | $          | 83,162 |   |

 

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*Derivedfrom audited consolidated financial statements included in the registrant’sAnnual Report on Form 10-K for the year ended December 31, 2009.

 

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**OCCAM NETWORKS, INC. AND SUBSIDIARY**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per share data)**

 
| ** **                                                   | ** ** | **Three Months Ended**   | ** **  |
|--------------------------------------------------------------|------------|--------------------------|-------------|
| ** **                                                   | ** ** | **March 31,  2010** | ** **  | **March 31,  2009 (*)** | ** ** |
| ** **                                                   | ** ** | **(Unaudited)**          | ** **  |
|                                                         |       |                     |        |   |   |
| Revenue                                                      |       | $                        | 22,344      |   | $ |  19,419 |   |
| Cost of revenue                                              |       | 12,511                   |        | 11,245 |   |
| Gross margin                                                 |       | 9,833                    |        | 8,174 |   |
| Operating expenses:                                          |       |                     |        |   |   |
| Research and product-development                             |       | 3,765                    |        | 4,389 |   |
| Sales and marketing                                          |       | 4,604                    |        | 4,581 |   |
| General and administrative                                   |       | 2,066                    |        | 2,366 |   |
| Total operating expenses                                     |       | 10,435                   |        | 11,336 |   |
| Loss from operations                                         |       | (602                     | )           | (3,162 | ) |
| Other income (expense), net                                  |       | —                   |        | — |   |
| Interest income, net                                         |       | 4                        |        | 145 |   |
| Loss before provision for income taxes                       |       | (598                     | )           | (3,017 | ) |
| Provision for income taxes                                   |       | 12                       |        | 13 |   |
| Net loss                                                     |       | $                        |  (610  | ) | $ | (3,030 | ) |
| Net loss per share attributable to common  stockholders:     |       |                     |        |   |   |
| Basic and diluted net loss per share                         |       | $                        |  (0.03 | ) | $ | (0.15 | ) |
|                                                         |       |                     |        |   |   |
| Shares used to compute basic and diluted net loss  per share |       | 20,650                   |        | 20,149 |   |
| Stock-based compensation included in:                        |       |                     |        |   |   |
|                                                         |       |                     |        |   |   |
| Cost of revenue                                              |       | $                        |  87    |   | $ | 89 |   |
| Research and product-development                             |       | 249                      |        | 223 |   |
| Sales and marketing                                          |       | 218                      |        | 197 |   |
| General and administrative                                   |       | 229                      |        | 234 |   |
| Total stock-based compensation                               |       | $                        |  783   |   | $ | 743 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**OCCAM NETWORKS, INC. AND SUBSIDIARY**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

 
| ** **                                                                   | ** ** | **Three Months Ended**   | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                   | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| ** **                                                                   | ** ** | **(Unaudited)**          | ** ** |
| **Operating activities**                                                     |       |                     |       |   |   |
| Net loss                                                                     |       | $                        | (610       | ) | $ | (3,030 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                     |       |   |   |
| Depreciation and amortization                                                |       | 784                      |       | 826 |   |
| Stock-based compensation expense                                             |       | 783                      |       | 743 |   |
| Accounts receivable reserves                                                 |       | (66                      | )          | (79 | ) |
| Inventory reserves                                                           |       | (52                      | )          | (145 | ) |
| Changes in operating assets and liabilities:                                 |       |                     |       |   |   |
| Accounts receivable                                                          |       | 5,005                    |       | 6,817 |   |
| Inventories                                                                  |       | 2,050                    |       | 2,588 |   |
| Prepaid expenses and other assets                                            |       | 432                      |       | 1,012 |   |
| Accounts payable                                                             |       | 206                      |       | (2,627 | ) |
| Accrued expenses                                                             |       | (1,043                   | )          | (1,976 | ) |
| Deferred revenue                                                             |       | (5,908                   | )          | (4,932 | ) |
| Deferred rent                                                                |       | (85                      | )          | (78 | ) |
| Net cash provided by (used in) operating  activities                         |       | 1,496                    |       | (881 | ) |
| **Investing activities**                                                     |       |                     |       |   |   |
| Purchases of property and equipment                                          |       | (823                     | )          | (179 | ) |
| Decrease in restricted cash                                                  |       | 2,826                    |       | 1,145 |   |
| Net cash provided by investing activities                                    |       | 2,003                    |       | 966 |   |
| **Financing activities**                                                     |       |                     |       |   |   |
| Proceeds from the exercise of stock options                                  |       | 675                      |       | — |   |
| Proceeds from employee stock purchase plan                                   |       | 233                      |       | 355 |   |
| Payments of capital lease obligations                                        |       | (6                       | )          | (4 | ) |
| Payment of payroll taxes for vested restricted  stock units                  |       | (158                     | )          | — |   |
| Net cash provided by financing activities                                    |       | 744                      |       | 351 |   |
| Net increase in cash and cash equivalents                                    |       | 4,243                    |       | 436 |   |
| Cash and cash equivalents, beginning of period                               |       | 39,268                   |       | 30,368 |   |
| Cash and cash equivalents, end of period                                     |       | $                        | 43,511     |   | $ | 30,804 |   |
| **Supplemental disclosure of cash  flow information:**                       |       |                     |       |   |   |
| Income taxes paid                                                            |       | $                        | 60         |   | $ | 144 |   |
| Interest paid                                                                |       | $                        | 1          |   | $ | 1 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**OCCAM NETWORKS, INC. AND SUBSIDIARY**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.****   ****Businessand Basis of Presentation**

 

Occam Networks, Inc. (“Occam,” the “Company,” “we”or “us”) develops markets and supports innovative broadband access productsdesigned to enable telecom service providers to offer bundled voice, video andhigh speed internet, or Triple Play, services over both copper and fiber opticnetworks.  The Company’s coreproduct line is the Broadband Loop Carrier (BLC), an integrated hardwareand software platform that uses Internet Protocol (IP) and Ethernettechnologies to increase the capacity of local access networks, enabling the deliveryof advanced Triple Play services.    The Company also offers afamily of Optical Network Terminals (ONTs) for fiber optic networks, remoteterminal cabinets, and professional services.

 

*Basis ofPresentation*

 

The accompanying condensedconsolidated financial statements are unaudited.  The condensed consolidated balance sheet at December 31,2009 is derived from Occam’s audited consolidated financial statements includedin its Annual Report on Form 10-K for the year ended December 31,2009.  These unaudited condensedconsolidated financial statements reflect all material entries, consisting onlyof normal recurring entries, which, in the opinion of management, are necessaryto fairly state our financial position, results of operations and cash flows forthe interim periods.  The results ofoperations for the current interim periods are not necessarily indicative ofresults to be expected for the entire year.

 

The unaudited condensedconsolidated financial statements include management’s estimates and assumptionsthat affect the reported amounts of assets and liabilities as of the date ofthe consolidated financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from those estimates, and material effectson consolidated operating results and consolidated financial position mayresult.

 

The unaudited interimcondensed financial statements have been prepared in accordance with accountingprinciples generally accepted in the United States (“GAAP”) for interimfinancial information and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly,they do not include all of the information and notes required by GAAP forannual financial statements.  Because allof the disclosures required by GAAP are not included, as permitted by the rules ofthe Securities and Exchange Commission, or the SEC, these interim condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and accompanying notes included inthe Company’s Annual Report on Form 10-K for the year ended December 31,2009. In the opinion of management, all adjustments consisting of normal andrecurring entries considered necessary for a fair statement of the results forthe interim periods have been included in the Company’s financial position asof March 31, 2010, the results of its operations for the three monthsended March 31, 2010 and 2009, and its cash flow for the three monthsended March 31, 2010 and 2009.

 

Certain amounts in the priorperiods presented have been reclassified to conform to the current periodfinancial statement presentation. These reclassifications had no effect onpreviously reported net income (loss).

 

The Company warrants itsproducts for periods up to five years and records an estimated warranty accrualwhen shipped.

 

*Use ofEstimates*

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the amounts reported in the consolidated financial statements andthe accompanying notes.  Actual resultscould differ from those estimates and such differences may be material to theconsolidated financial statements.

 

*RevenueRecognition*

 

Occam generally recognizes revenue under SAB 104 in the periodwhen all of the requirements of SAB 104 have been met:

 

·                  persuasive evidence of salesarrangements,

 

·                  delivery has occurred orservices have been rendered,

 

·                  the buyer’s price is fixedor determinable and

 

·                  collection is reasonablyassured.

 

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The Company enters into transactions with value-added resellers wherethe resellers may not have the ability to pay for these sales independent ofpayment to them by the end-user. In these cases, the Company does not recognizerevenue until payment has been received, provided the remaining revenuerecognition criteria are met.

 

The Company sells hardware products that contain embedded operatingsystem software. These tangible products contain software components andnon-software components that function together to deliver the product’sessential functionality. Revenue is recognized for these products underSAB 104. The Company has one minor software network management productwhich is a stand alone product not essential to the functionality of otherproducts that the Company sells. Revenue is recognized for this product inaccordance with FASB Accounting Standard Codification Topic 985, Software. Theamount of sales of this product and the related revenue recognized to date bythe Company have been immaterial.

 

In addition to the aforementioned general policy, the Company entersinto transactions that represent multiple-element arrangements, which mayinclude training and post-sales technical support and maintenance to ourcustomers as needed to assist them in installation or use of our products, andmakes provisions for these costs in the periods of sale. Multiple-elementarrangements are assessed to determine whether they can be separated into morethan one unit of accounting. A multiple-element arrangement is separated into morethan one unit of accounting if all of the following criteria are met:

 

·                  the delivered item(s) hasvalue to the customer on a stand-alone basis;

 

·                  there is objective andreliable evidence of the fair value of the undelivered item(s); and

 

·                  the arrangement includes ageneral right of return relative to the delivered item(s) and delivery orperformance of the undelivered item(s) is considered probable andsubstantially in our control.

 

If these criteria are not met, then revenue is deferred until such criteriaare met or until the period(s) over which the last undelivered element isdelivered. If there is objective and reliable evidence of fair value for allunits of accounting in an arrangement, the arrangement consideration isallocated to the separate units of accounting based on each unit’s relativefair value. When the Company is unable to establish selling price using vendorspecific objective evidence or third party evidence, the Company uses “estimatedselling price” (“ESP”) in its allocation of arrangement consideration. Theobjective of ESP is to determine the price at which the Company would transacta sale if the product or service were sold on a stand-alone basis. ESP isgenerally used for new products, and it applies to a small proportion of theCompany’s arrangements with multiple deliverables. The Company determines ESPfor a product or service by considering multiple factors including, but notlimited to, geographies, market conditions, competitive landscape, internalcosts, gross margin objectives, and pricing practices.

 

Incertain circumstances, the Company enters into arrangements with customers whoreceive financing support in the form of long-term low interest rate loans fromthe United States Department of Agriculture’s Rural Utilities Service, or RUS.The terms of the RUS contracts provide that in certain instances transfer oftitle of the Company’s products does not occur until customer acceptance, TheCompany recognizes revenue on these RUS contracts upon customer acceptance,given the remaining revenue recognition criteria, such as collectability, underSAB 104 have been met.

 

**2.****   ****Fair ValueMeasurements**

 

Effective January 1,2008, the Company adopted the authoritative guidance on fair valuemeasurements. Fair value is defined as an exit price, representing the amountthat would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants.  As such, fair value is a market-basedmeasurement that should be determined based on assumptions that marketparticipants would use in pricing an asset or a liability.  As a basis for considering such assumptions,the guidance establishes a three-tier value hierarchy, which prioritizes theinputs used in the valuation methodologies in measuring fair value:

 

Level 1 - Observable inputsthat reflect quoted prices (unadjusted) for identical assets or liabilities inactive markets.

 

Level 2 - Include otherinputs that are directly or indirectly observable in the marketplace.

 

Level 3 - Unobservable inputswhich are supported by little or no market activity.

 

The fair value hierarchyalso requires an entity to maximize the use of observable inputs and minimizethe use of unobservable inputs when measuring fair value.

 

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In accordance with thisguidance, we measure our cash equivalents at fair value.  Our cash equivalents are classified withinLevel 1.  Cash equivalents are valuedprimarily using quoted market prices utilizing market observable inputs.  At March 31, 2010, cash equivalentsconsisted of money market funds measured at fair value on a recurringbasis.  Fair value of our money marketfunds was $33.8 million at March 31, 2010.

 

Effective January 1, 2009, the Company adopted,the FASB staff position that delayed the guidance on fair value measurementsfor non financial assets and non financial liabilities. The adoption of thisguidance did not have a material impact on the Company’s consolidated financialstatements.

 

**3.****   ****Inventories**

 
| ** **        | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials     |       | $                        | 203        |                        | $          | 274 |   |
| Work-in-process   |       | 30                       |       | 56                          |       |
| Finished goods(1) |       | 10,696                   |       | 12,597                      |       |
| Total inventories |       | $                        | 10,929     |                        | $          | 12,927 |   |

 

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(1)          $3.7 million and$6.2 million of finished goods inventory were shipped to customers as of March 31,2010 and December 31, 2009, respectively.The majority were sent to RUS contractcustomers and value-added resellers. Revenue and related cost of revenue werenot recognized at the time of shipments as defined by the Company’s revenuerecognition policy and therefore were included in inventories. For moreinformation regarding our revenue recognition policy, see Revenue Recognitionunder Note 1 to these unaudited condensed consolidated financialstatements.

 

**4.****   ****Net LossPer Share Attributable to Common Stockholders**

 

The following table sets forth the computation of basic and dilutedloss per share (in thousands, except per share data):

 
| ** **                                                   | ** ** | **Three Months Ended**   | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                   | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| Numerator                                                    | ** ** | ** **               | ** ** | ** ** | ** ** |
| Net loss available to common stockholders                    |       | $                        | (610       | ) | $ | (3,030 | ) |
| Denominator                                                  |       |                     |       |   |   |
| Shares used to compute basic and diluted net loss  per share |       | 20,650                   |       | 20,149 |   |
| Basic and diluted net loss per share                         |       | $                        | (0.03      | ) | $ | (0.15 | ) |

 

Basic and diluted net loss per share are identical because we hadlosses from continuing operations and the impact of common equivalent shareswas anti-dilutive and therefore excluded. The anti-dilutive weighted averageshares that were excluded from the shares used in computing diluted net lossper share for three months ended March 31, 2010 and March 31, 2009,amounted to approximately 0.6 million and 3.0 million shares, respectively.

 

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**5.****   ****Commitmentsand Contingencies**

 

The Company leases itsoffice facilities and certain equipment under non-cancelable operating leaseagreements, which expire at various dates through 2015. Operating leasescontain escalation clauses with annual base rent adjustments or a cost ofliving adjustment. Total rent expense was $0.3 million for both the threemonths ended March 31, 2010 and March 31, 2009.

 

Minimum annual lease commitmentsunder non-cancelable operating leases are as follows (in thousands):

 
| **Remainder  of fiscal year,**       | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| 2010                                 |       | $          | 1,088      |   |
| Fiscal year ending December 31, |       |       |       |
| 2011                                 |       | 1,469      |       |
| 2012                                 |       | 1,505      |       |
| 2013                                 |       | 1,543      |       |
| 2014                                 |       | 639        |       |
| 2015                                 |       | 328        |       |
| Total Minimum Lease Payments         |       | $          | 6,572      |   |

 

Royalties

 

From time to time, theCompany may license certain technology for incorporation into its products.Under the terms of these multi-year agreements, royalty payments will be madebased on per-unit sales of certain of the Company’s products. The Companyincurred royalty expense of $54,189 and $41,727 for the three months ended March 31,2010 and March 31, 2009 respectively.

 

*LegalProceedings*

 

*IPOAllocation Litigation*

 

In June 2001, three putative stockholder class action lawsuits werefiled against Accelerated Networks, certain of its then officers and directorsand several investment banks that were underwriters of Accelerated Networks’initial public offering. The cases, which were later consolidated, were filedin the United States District Court for the Southern District of New York, andthe operative Complaint was filed on April 19, 2002. The Complaint wasfiled on behalf of investors who purchased Accelerated Networks’ stock between June 22,2000 and December 6, 2000 and alleged violations of Sections 11 and15 of the 1933 Act and Sections 10(b) and 20(a) and Rule 10b-5of the 1934 Act against one or both of Accelerated Networks and the individualdefendants. The claims were based on allegations that the underwriterdefendants agreed to allocate stock in Accelerated Networks’ initial publicoffering to certain investors in exchange for excessive and undisclosedcommissions and agreements by those investors to make additional purchases inthe aftermarket at pre-determined prices. Plaintiffs alleged that theprospectus for Accelerated Networks’ initial public offering was false andmisleading in violation of the securities laws because it did not disclosethese arrangements.

 

The Company believes that over three hundred other companies have beennamed in over three hundred similar lawsuits that have been coordinated withthe Company’s case. In October 2002, the plaintiffs voluntarily dismissedthe individual defendants without prejudice. On February 1, 2003 a motionto dismiss filed by the issuer defendants was heard and the court dismissed the10(b), 20(a) and rule 10b-5 claims against Occam. On October 13,2004, the Court certified a class in six of the approximately 300 other nearlyidentical actions (the “focus” cases) and noted that the decision was intendedto provide guidance to all parties regarding class certification in theremaining cases. The Second Circuit Court of Appeals vacated the district court’sdecision granting class certification in those six cases on December 5, 2006.Plaintiffs filed a motion for rehearing. On April 6, 2007, the SecondCircuit denied the petition, but noted that Plaintiffs could ask the DistrictCourt to certify a more narrow class than the one that was rejected.

 

The parties in the approximately 300 coordinated cases, including theCompany’s, reached a settlement. On October 5, 2009, the Court approvedthe settlement and certified a settlement class. Six notices of appeal of theSecond Circuit of the Court’s approval of the settlement have been filed. Threeobjectors to the settlement who filed a notice of appeal also filed apermission to file an appeal on the basis that the Court purportedly abused itsdiscretion concerning the class certification on the grounds that it wasbroader than the class rejected by the Second Circuit Appeals Court. Plaintiffsfiled an opposition to the petition. The Court has not yet ruled on thepetition and the briefing on the appeals has not yet commenced. The caseremains open pending the outcome of the court ruling on the appeals.

 

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Due to the inherent uncertainties of litigation, the Company cannotaccurately predict the ultimate outcome of the matter. The Company has notrecorded any accrual related to the settlement because the Company expects anysettlement amounts to be covered by its insurance policies.

 

*IPO ShortSwing Profits Litigation*

 

In late 2007, the Company received a letter from Vanessa Simmonds, aputative shareholder, demanding that the Company investigate and prosecute aclaim for alleged short-swing trading in violation of Section 16(b) ofthe Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), by the underwriterof the Company’s initial public offering (“IPO”) and certain unidentifieddirectors, officers and shareholders of the Company (then known as AcceleratedNetworks). The Company evaluated the demand and declined to prosecute theclaim. On October 12, 2007, the putative shareholder commenced a civillawsuit in the U.S. District Court for the Western District of Washingtonagainst Credit Suisse Group, the lead underwriter of the Company IPO, allegingviolations of Section 16(b). The complaint alleges that the combinednumber of shares of the Company common stock beneficially owned by the leadunderwriter and certain unnamed officers, directors, and principal shareholdersexceeded ten percent of its outstanding common stock from the date of Occam’sIPO on June 23, 2000, through at least June 22, 2001. It furtheralleges that those entities and individuals were thus subject to the reportingrequirements of Section 16(a) and the short-swing trading prohibitionof Section 16(b), and failed to comply with those provisions. Thecomplaint seeks to recover from the lead underwriter any “short-swing profits”obtained by it in violation of Section 16(b). The Company was named as anominal defendant in the action, but has no liability for the asserted claims.None of the directors or officers of the Company are named as defendants inthis action.

 

On October 29, 2007, the case was reassigned to Judge James L.Robart along with fifty-four other Section 16(b) cases seekingrecovery of short-swing profits from underwriters in connection with variousIPOs. The Underwriters and Issuers have filed a motion to dismiss the case andreply briefs have been filed. The Court heard oral argument on January 19,2009 from all parties. On March 12, 2009, the Court dismissed the 16 (b) complaintagainst the issuer defendants including Occam on both jurisdictional andstatute of limitation grounds. On March 31, 2009, the Plaintiffs filed aNotice of Appeal and their opening brief on August 26, 2009. The Issuersincluding Occam and the underwriters filed their responses on October 2,2009. Each party’s reply briefs have been filed as of November 17, 2009.To date the Appellate Court for the Ninth Circuit has not set a date of oralargument.

 

Due to the inherent uncertainties of threatened litigation, the Companycannot accurately predict the ultimate outcome of the matter. The Company hasnot recorded any accruals related to the demand letters or Section 16(b) litigationbecause the Company expects any resulting resolution to be covered by itsinsurance policies.

 

*OtherMatters*

 

From time to time, the Company is subject to threats of litigation oractual litigation in the ordinary course of business, some of which may bematerial. The Company believes that, except as described above, there are nocurrently pending matters that, if determined adversely to us, would have amaterial effect on the Company’s business or that would not be covered by ourexisting liability insurance maintained by the Company.

 

*Indemnificationsand Guarantees*

 

TheCompany enters into indemnification provisions under its agreements with othercompanies in the ordinary course of business, typically with its contractors,customers, value-added resellers, and landlords. As of March 31, 2010, theCompany did not have any material accrued liabilityrelated to these indemnification agreements.

 

*PurchaseOrders*

 

Under the terms of Occam’scontract manufacturer agreements and original design manufacturer agreements,Occam is required to place orders with its contract manufacturers and originaldesign manufacturers to provide inventory to meet its estimated sales demand.Certain contract manufacturer agreements include production forecast change,lead-time and cancellation provisions. At March 31, 2010, open purchaseorders with contract manufacturers were $20.5 million.

 

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*Warranties*

 

Occam provides standardwarranties with the sale of products for up to five years from date ofshipment. The estimated cost of providing the product warranty is recorded atthe time of shipment. Occam maintains product quality programs and processesincluding actively monitoring and evaluating the quality of its suppliers.Occam quantifies and records an estimate for warranty related costs based onOccam’s actual history, projected return and failure rates and current repairand replacement costs. The following table summarizes changes in Occam’saccrued warranty liability that is included in accrued liabilities (inthousands):

 
| ** **                                  | ** ** | **March 31,** | ** ** | **December  31,** | ** ** |
|---------------------------------------------|------------|--------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **2010**           | ** ** | **2009**                    | ** ** |
| ** **                                  | ** ** | ** **         | ** ** | ** **                  | ** ** |
| Warranty liability at beginning of the year |       | $                  | 4,818      |                        | $          | 4,326 |   |
| Accruals for warranty during the period     |       | 531                |       | 2,830                       |       |
| Warranty utilization                        |       | (1,972             | )          | (2,338                      | )          |
| Warranty liability at end of the period     |       | $                  | 3,377      |                        | $          | 4,818 |   |

 

**6.****   ****AccruedLiabilities**

 

The major components ofaccrued liabilities are (in thousands):

 
| ** **                                  | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Warranty accruals                           |       | $                        | 3,377      |                        | $          | 4,818 |   |
| Payroll, paid time off and related accruals |       | 1,636                    |       | 1,620                       |       |
| Commissions                                 |       | 356                      |       | 234                         |       |
| Other accruals                              |       | 587                      |       | 327                         |       |
| Total                                       |       | $                        | 5,956      |                        | $          | 6,999 |   |

 

**7.****   ****StockOptions, Stock Awards, Employee Stock Purchase Plan, and Stock-BasedCompensation**

 

Stock option activity, underthe Company’s stock option plan for the three months ended March 31, 2010is summarized as below (shares and intrinsic value in thousands):

 
| ** **                          | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------|------------|-------------|------------|---------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at January 1, 2010 |       | 3,923       |       | $                                           | 5.65       |                                                 | 7.18       |                            | $          | 6,379 |   |
| Granted                             |       | 45          |       | 6.86                                        |       |                                                 |       |                            |       |
| Exercised                           |       | (180        | )          | 3.75                                        |       |                                                 |       |                            |       |
| Forfeited or expired                |       | (7          | )          | 5.63                                        |       |                                                 |       |                            |       |
| Outstanding at March 31, 2010  |       | 3,781       |       | $                                           | 5.75       |                                                 | 6.98       |                            | $          | 9,715 |   |
| Exercisable at March 31, 2010  |       | 2,317       |       | $                                           | 7.28       |                                                 | 5.88       |                            | $          | 4,714 |   |

 

The weighted-average fairvalue of options granted to employees on the date of the grant for the threemonths ended March 31, 2010 was $3.30.

 

The 2006 Equity IncentivePlan, or 2006 Plan, provides for automatic annual increases in the number ofshares available for issuance under the 2006 Plan effective as of the first dayof each fiscal year equal to the lesser of (a) 3% of the outstandingshares of the common stock on the first day of the applicable fiscal year; (b) 750,000shares; or (c) such other amount as the Board of Directors or a committeeof the board may determine. On February 23, 2010, the Board of Directorsapproved an increase of 620,073 shares reserved for issuance under the 2006Plan for fiscal 2010. This represented 3% of the outstanding common shares asof January 1, 2010.

 

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***Stock Awards***

 

A summary of the Company’srestricted stock unit activities is as follows (in thousands):

 
| ** **                          | ** ** | **Restricted Stock  Units** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at January 1, 2010 |       | 315                         |       | 1.09                                                 |       | $                               | 1,703      |   |
| Awarded                             |       | 3                           |       |                                                 |       |                            |       |
| Released                            |       | (41                         | )          |                                                 |       |                            |       |
| Forfeited or expired or cancelled   |       | (28                         | )          |                                                 |       |                            |       |
| Outstanding at March 31, 2010  |       | 249                         |       | 1.12                                                 |       | $                               | 1,635      |   |

 

The market value of therestricted stock units on the date of the grant during the three months ended March 31,2010 was $6.63.

 

***Employee Stock Purchase Plan***

 

In March 2008, theBoard of Directors approved an amendment to our 2006 EmployeeStock Purchase Plan or the ESPP. The amendmentincreased the maximum number of shares of the Company’s common stock that aneligible employee may purchase during each offering period from 1,000 shares to5,000 shares. Under the ESPP, 78,320 shares were issued on February 16,2010 at a purchase price per share of $2.97.

 

The ESPP provides for anautomatic annual increases in the number of shares available for issuance underthe ESPP effective as of the first day of each fiscal year equal to the lesserof (a) 300,000 shares of common stock; (b) 1.5% of the outstandingshares of common stock on the first day of the applicable fiscal year; or (c) anamount determined by the Board of Directors. On February 23, 2010, theBoard of Directors approved an increase of 300,000 shares in the number ofshares reserved for issuance under the ESPP.

 

***Stock-Based Compensation***

 

The following tablesummarizes the stock-based compensation expense, for all share-basedawards to employees and directors, including employee stock options, restrictedstock and restricted stock units and employee stock purchase plan based on theestimated fair value on our Consolidated Statements of Operations (inthousands):

 
| ** **                                                             | ** ** | **Three Months Ended**   | ** ** |
|------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                             | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| ** **                                                             | ** ** | ** **               | ** ** | ** ** | ** ** |
| **Employee stock-based  compensation in:**                             |       |                     |       |   |   |
| Cost of revenue                                                        |       | $                        | 87         |   | $ | 89 |   |
| Research and product-development                                       |       | 249                      |       | 223 |   |
| Sales and marketing                                                    |       | 218                      |       | 197 |   |
| General and administrative                                             |       | 229                      |       | 234 |   |
| Total SFAS 123(R) stock-based compensation in  operating expenses |       | 696                      |       | 654 |   |
| Total SFAS 123(R) stock-based compensation                        |       | $                        | 783        |   | $ | 743 |   |

 

As of March 31, 2010,total unamortized stock-based compensation cost related to non-vested stockoptions after accounting for estimated forfeitures was $2.2 million, which theCompany expects to recognize over the remaining vesting period of each grant,up to the next 48 months.

 

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Upon adoption of the FASBAccounting Standard Codification Topic 718, stock-based compensation, weselected the Black-Scholes option pricing model as the most appropriate modelfor determining the estimated fair value for stock-based awards. The use of theBlack-Scholes model requires the use of extensive actual employee exercisebehavior data and the use of a number of complex assumptions including expectedvolatility, risk-free interest rate, forfeitures, and expected dividends. Theassumptions used to value options granted are as follows:

 
| ** **              | ** ** | **Three Months Ended**   | ** ** |
|-------------------------|------------|--------------------------|------------|
| ** **              | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| Risk-free interest rate |       | 2.4                      | %          | 1.9 | % |
| Expected term (years)   |       | 4.8                      |       | 5.0 |   |
| Dividend yield          |       | 0                        | %          | 0 | % |
| Expected volatility     |       | 54.4                     | %          | 58.2 | % |

 

The risk-free interest rateis based on the U.S. Treasury yield curve in effect at the time of grant. We donot anticipate declaring dividends in the foreseeable future. Expectedvolatility is based on the annualized weekly historical volatility of our stockprice and we believe it is indicative of future volatility. We estimate theexpected life of options granted based on historical exercise and post-vestingcancellation patterns with consideration of our industry peers of similar sizewith similar option vesting periods. Our analysis of stock price volatility andoption lives involves management’s best estimates at the time of determination.FASB Accounting Standard Codification Topic 718, stock-based compensation, alsorequires that we recognize compensation expense for only the portion of optionsor stock units that are expected to vest. Therefore, we apply an estimatedforfeiture rate that is derived from historical employee termination behavior.If the actual number of forfeitures differs from that estimated by management,additional adjustments to compensation expense may be required in futureperiods.

 

**8.****             ****IncomeTaxes —Final Outcome of Section 382 Analysis**

 

Asof December 31, 2009, the Company had net operating loss carry forwards ofapproximately $109.1 million and $72.1 million to offset federal andstate future taxable income, respectively.   These amounts have beenreduced due to an ownership change which occurred, as defined by Sections 382of the Internal Revenue Code,resulting in the forfeiture of a portion of theCompany’s net operating loss carryforwards.  Gross deferred tax assets andrelated valuation allowance have been reduced by $2.8 million to $54.0 millionto reflect the conclusions of this analysis.

 

**ITEM 2.****                            ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

You should read thefollowing discussion and analysis in conjunction with our condensedconsolidated financial statements and the related notes thereto included inthis Quarterly Report on Form 10-Q and with Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontained in the Company’s Annual Report on Form 10-K for the year ended December 31,2009. The following discussion contains both historical information andforward-looking statements within the meaning of Section 21E of theExchange Act. A number of factors affect our operating results and could causeour actual future results to differ materially from any forward-looking resultsdiscussed below. In some cases, you can identify forward-looking statements byterminology such as “anticipates,” “appears,” “believes,” “continue,” “could,” “estimates,”“expects,” “feels,” “goal,” “hope,” “intends,” “may,” “our future successdepends,” “plans,” “potential,” “predicts,” “projects,” “reasonably,” “seek tocontinue,” “should,” “thinks,” “will” or the negative of these terms or othercomparable terminology. These statements are only predictions. Actual events orresults may differ materially. In addition, historical information should notbe considered an indicator of future performance. Factors that could cause orcontribute to these differences include, but are not limited to, the risksdiscussed in this Report in Part II, Item 1A under the caption “Risk Factors.”These factors may cause our actual results to differ materially from anyforward-looking statements.

 

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Although we believe that theexpectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements. Moreover, we are under no duty to update any of theforward-looking statements after the date of this Quarterly Report on Form 10-Qto conform these statements to actual results. These forward-looking statementsare made in reliance upon the safe harbor provision of The Private SecuritiesLitigation Reform Act of 1995.

 

**Overview**

 

Wedevelop, market and support innovative broadband access products designed toenable telecom service providers to offer bundled voice, video and high speedinternet, or Triple Play, services over both copper and fiber optic networks.  Our Broadband Loop Carrier, or BLC, is anintegrated hardware and software platform that uses Internet Protocol, or IP,and Ethernet technologies to increase the capacity of local access networks,enabling our customers to deliver advanced services, including voice-over-IP,or VoIP, IP-based television, or IPTV, video-on-demand, or VoD, andhigh-definition television, or HDTV.  Ourplatform simultaneously supports traditional voice and data services, enablingour customers to leverage their existing networks and migrate to IP withoutdisruption.  In addition to providing ourcustomers with increased bandwidth, our products provide incremental value byoffering software-based features to improve the quality, resiliency andsecurity of network service offerings. We market our products through a combination of direct and indirectchannels.  Our direct sales efforts arefocused on the North American independent operating company, or IOC, segment ofthe telecom service provider market. As of March 31, 2010,we had shipped our BLC platform to over 350 telecommunications customers.

 

Fromour inception through March 31, 2010, we have incurred cumulative netlosses of approximately $136.1 million. We realized income from operations and were profitable on a net incomebasis during the quarters ended December 31, 2008, December 31, 2006and September 24, 2006, and for the year ended December 31,2006.  Previously, we had not beenprofitable on a quarterly or annual basis, excluding the quarter ended December 25,2005, in which we realized modest operating income of $3,000.  We experienced operating and net losses inthe first, second, third and fourth quarters of fiscal 2009 and for fiscal 2009as a whole.  In the first quarter of2010, we experienced an increase in our booking activity level which resultedin increased shipments.  In the shortterm, we expect that booking activity may vary depending on our customers’ability to make capital investments using their own funds, and their access tocredit facilities or other loan program funds. We expect however that anycontinuation of current macroeconomic conditions may have an adverse impact onour business in 2010, in particular as carriers continue to evaluate capitalspending budgets in a difficult economic environment and in light of theindustry transition from copper wire to fiber. We believe IOCs will continue tocarefully evaluate their spending decisions in 2010 although governmentbroadband funding initiatives could have a favorable impact on capital spendingtrends among telecommunications carriers.

 

**CriticalAccounting Policies and Estimates**

 

Management’s Discussion andAnalysis of Financial Condition and Results of Operations discusses ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these consolidated financial statements requires us to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and the reported amounts of revenueand expenses during the reporting period. On an ongoing basis, we evaluate ourestimates and judgments, including those related to revenue recognition,inventories, accounts receivable reserves, sales return reserves, litigation,warranty reserve, stock-based compensation, and valuation of deferred incometax assets. We base our estimates and judgments on historical experience and onvarious other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources.

 

Weincluded in our Annual Report on Form 10-K for the year ended December 31,2009 a discussion of our most critical accounting policies, which are thosethat are most important to the portrayal of our financial condition and resultsof operations and require management’s most difficult, subjective and complexjudgments, often as a result of the need to make estimates about the effect ofmatters that are inherently uncertain.

 

We warrant our products forperiods up to five years and record an estimated warranty accrual when shipped.We provide a standard warranty with the sale of our products for up to fiveyears from the date of shipment. The estimated cost of providing the productwarranty is recorded at the time of shipment. We maintain product qualityprograms and processes, including actively monitoring and evaluating thequality of our suppliers. We quantify and record an estimate forwarranty-related costs based on a variety of factors including but not limitedto our actual history, projected return and failure rates and current repaircosts. Our estimates are primarily based on an estimate of products that may bereturned for warranty repair, estimated costs of repair, including

 

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parts and labor, dependingon the type of service required. These estimates require us to examine past andcurrent warranty issues and consider their continuing impact in the future. Ouraccrual is based on consideration of all these factors which are known as ofthe preparation of our consolidated financial statements. Our estimates offuture warranty liability are based on prediction of future events, conditions andother complicated factors that are difficult to predict.   The actual costs we incur may differmaterially from our estimates.

 

**Results ofOperations**

 

*Three-monthsended March 31, 2010 and 2009*

 

*Revenue(in thousands)*

 
| ** ** | ** ** | **Three Months Ended**   | ** ** |
|------------|------------|--------------------------|------------|
| ** ** | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| ** ** | ** ** | ** **               | ** ** | ** ** | ** ** |
| Revenue    |       | $                        | 22,344     |   | $ | 19,419 |   |
|            |            |                          |            |  |  |  |  |

 

Ourrevenue is principally comprised of our BLC 6000 series system product line,Optical Network Terminals, cabinets and related accessories.  Revenue increased by $2.9 million or 15% to$22.3 million for the three months ended March 31, 2010 as compared torevenue of $19.4 million for the three months ended March 31, 2009. Theincrease in revenue is primarily due to increased booking activity level whichresulted in increased shipments.  We believethis increase is primarily due to a slight improvement in economic conditions.

 

Weexpect however that any continuation of current macroeconomic conditions may havean adverse impact on our business in 2010, in particular as carriers continueto evaluate capital spending budgets in a difficult economic environment and inlight of the industry transition from copper wire to fiber. We believe IOCswill continue to carefully evaluate their spending decisions in 2010 althoughgovernment broadband funding initiatives could have a favorable impact oncapital spending trends among telecommunications carriers.

 

Inthe short term, we expect that booking activity may vary depending on ourcustomers’ ability to make capital investments using their own funds, and theiraccess to credit facilities or other loan program funds which could impact thetiming and the amounts of shipments. We believe that this timing was a primaryreason for the decrease in deferred revenue during the quarter ended March 31,2010.

 

*Cost of revenue and gross margin (in thousands,except percentages)*

 
| ** **              | ** ** | **Three Months Ended**   | ** ** |
|-------------------------|------------|--------------------------|------------|
| ** **              | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| ** **              | ** ** | ** **               | ** ** | ** ** | ** ** |
| Cost of revenue         |       | $                        | 12,511     |   | $ | 11,245 |   |
| Gross margin            |       | $                        | 9,833      |   | $ | 8,174 |   |
| Gross margin percentage |       | 44                       | %          | 42 | % |

 

Costof revenue includes the cost of products shipped for which revenue wasrecognized, warranty costs, costs of any manufacturing yield problems, re-workcosts, manufacturing overhead, provisions for obsolete inventory and the costof post-sales support.  The increase incost of revenue during the three months ended March 31, 2010 from thesimilar period during the prior year was primarily attributable to increasedrevenue shipments.

 

Grossmargin was 44% of revenue for the three months ended March 31, 2010 and42% of revenue for the three months ended March 31, 2009.  The increase in gross margin was attributableto product mix and higher than average margin on BLC shipments.

 

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Weexpect that our gross margin will vary from quarter-to-quarter due in part toproduct mix, average selling price changes and manufacturing cost changes.  To the extent that ONTs and other lower marginproducts represent an increased percentage of our total revenue in any period,it will tend to reduce our gross margin. Additionally, as we introduce new products into the market, weanticipate our gross margin may fluctuate as a function of our product mix.

 

*Researchand product-development expenses (in thousands, except percentages)*

 
| ** **                                                   | ** ** | **Three Months Ended**   | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                   | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| ** **                                                   | ** ** | ** **               | ** ** | ** ** | ** ** |
| Research and product-development                             |       | $                        | 3,765      |   | $ | 4,389 |   |
| Research and product-development as a percentage  of revenue |       | 17                       | %          | 23 | % |
|                                                              |            |                          |            |  |  |  |  |

 

Research andproduct-development expenses consist primarily of salaries and otherpersonnel-related costs, prototype component and assembly costs, third-partydesign services and consulting costs, and other costs related to the design,development, and testing of our products. Research and product-development costs are expensed as incurred, exceptfor capital expenditures, which are capitalized and depreciated over theirestimated useful lives, generally two to three years.  Research and development expenses decreasedby $0.6 million or 14% to $3.8 million for the three months ended March 31,2010 as compared to $4.4 million for the three months ended March 31,2009. The decrease in research and product-development expenses was primarilyattributable to lower personnel related costs related to reduction in force anddecreased development expenses.

 

We currently expect researchand product-development expenses in future periods to be largely consistentwith current expense levels.

 

*Sales andmarketing expenses (in thousands, except percentages)*

 
| ** **            | ** ** | **Three Months Ended**   | ** ** |
|-----------------------|------------|--------------------------|------------|
| ** **            | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| ** **            | ** ** | ** **               | ** ** | ** ** | ** ** |
| Sales and marketing   |       | $                        | 4,604      |   | $ | 4,581 |   |
| Percentage of revenue |       | 21                       | %          | 24 | % |
|                       |            |                          |            |  |  |  |  |

 

Sales and marketing expensesconsist primarily of salaries, sales commissions, and other personnel-relatedcosts, development and distribution of promotional materials, and other costsrelated to generating sales and conducting corporate marketing activities.  Sales and marketing expenses increased by$23,000 to $4.6 million for the three months ended March 31, 2010 from$4.6 million for the same period in 2009. This net increase wasprimarily due to higher sales commissions, offset by lower personnel relatedcosts.

 

We currently expect salesand marketing expenses in future periods to be consistent with current expenselevels but may vary with the level of customer bookings.

 

*Generaland administrative expenses (in thousands, except percentages)*

 
| ** **                 | ** ** | **Three  Months Ended**  | ** ** |
|----------------------------|------------|--------------------------|------------|
| ** **                 | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| ** **                 | ** ** | ** **               | ** ** | ** ** | ** ** |
| General and administrative |       | $                        | 2,066      |   | $ | 2,366 |   |
| Percentage of sales        |       | 9                        | %          | 12 | % |
|                            |            |                          |            |  |  |  |  |

 

General and administrativeexpenses consist primarily of salaries and other personnel-related costs forexecutive, finance, human resources, and administrative personnel.Additionally, general and administrative expenses include professional fees,liability insurance and other general corporate costs such as rent, legal,utilities and accounting expenses. General and administrativeexpenses decreased by $0.3 million or 13% to $2.1 million for the three monthsended March 31, 2010 as compared to $2.4 million for the three monthsended March 31, 2009. General and administrative expenses decreasedprimarily due to lower professional fees, lower legal fees and lower personnelrelated costs.

 

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We currently expect generaland administrative expenses to be consistent with current expense levels butmay vary depending on the timing and amount of legal fees incurred andinsurance reimbursements.

 

*Stock-based compensation (in thousands)*

 
| ** **                     | ** ** | **Three Months Ended**   | ** ** |
|--------------------------------|------------|--------------------------|------------|
| ** **                     | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| ** **                     | ** ** | ** **               | ** ** | ** ** | ** ** |
| Cost of sales                  |       | $                        | 87         |   | $ | 89 |   |
| Research and development       |       | 249                      |       | 223 |   |
| Sales and marketing            |       | 218                      |       | 197 |   |
| General and administrative     |       | 229                      |       | 234 |   |
| Total stock-based compensation |       | $                        | 783        |   | $ | 743 |   |

 

Stock-based compensationexpense increased by approximately $40,000 or 5% to $0.8 million for the threemonths ended March 31, 2010 as compared to approximately $0.7 million forthe three months ended March 31, 2009. This increase is primarilyattributable to additional grants of options and awards.

 

We anticipate that thestock-based compensation expense calculated under FASB Accounting StandardsCodification Topic 718 will continue to have a material effect on ourconsolidated statement of operations.

 

*Interestincome (expense), net (in thousands)*

* *
| ** **                        | ** ** | **Three Months Ended**   | ** ** |
|-----------------------------------|------------|--------------------------|------------|
| ** **                        | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| ** **                        | ** ** | ** **               | ** ** | ** ** | ** ** |
| Interest income                   |       | $                        | 5          |   | $ | 146 |   |
| Interest expense                  |       | (1                       | )          | (1 | ) |
| Total other income (expense), net |       | $                        | 4          |   | $ | 145 |   |

 

Interest income, netdecreased by $141,000 or 97% to $4,000 for the three months ended March 31,2010, as compared to $145,000 for the three months ended March 31, 2009.The decrease is attributable to lower average restricted cash balances earninginterest and lower interest rates.

 

*Provisionfor income taxes (in thousands)*

 

For income tax purposes, we consider our projectedannual income and the utilization of our net operating loss carry forwardsamong other factors. For the three months ended March 31, 2010 and March 31,2009, we provided for $12,000 and $13,000, respectively, for federal and stateincome taxes.

 

As of December 31, 2009, we had net operatingloss carryforwards of approximately $109.1 million and $72.1 millionto offset federal and state future taxable income, respectively. These amountshave been reduced due to an ownership change which occurred, as defined bySections 382 of the Internal Revenue Code, resulting in the forfeiture of aportion of our net operating loss carryforwards.  Gross deferred taxassets and related valuation allowance have been reduced by $2.8 million to$54.0 million to reflect the conclusions of this analysis.

 

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**Liquidityand Capital Resources**

 

As of March 31, 2010,we had cash and cash equivalents of $43.5 million, restricted cash of $2.9million, stockholders’ equity of $53.8 million, and working capital of $46.3million, compared with cash and cash equivalents of $39.3 million, restrictedcash of $5.7 million, stockholders’ equity of $52.9 million, and workingcapital of $45.5 million as of December 31, 2009.  The increase in our cash and cash equivalentsis primarily related to a decrease in restricted cash.

 

Netcash provided by operating activities for the three months ended March 31,2010, was $1.5 million compared to net cash used in operating activities of$0.9 million during the same period ended 2009. The sum of our net loss and certain non-cash expenses, such asstock-based compensation, depreciation and amortization, accounts receivable reservesand inventory reserves resulted in an inflow of $0.8 million during the threemonths ended March 31, 2010, compared to an outflow of $1.7 million duringthe three months ended March 31, 2009. The overall impact of change incertain operating assets and liabilities on total operating cash flows resultedin a cash inflow of $0.7 million in the three months ended March 31,2010 as compared to the cash inflow of $0.8 million in the three monthsended March 31, 2009.

 

Net cash provided byinvesting activities for the three months ended March 31, 2010, was $2.0million compared to $1.0 million provided by investing activities, during thesame period ended March 31, 2009. Cash provided by investing activitiesfor the three months ended March 31, 2010, was primarily due to a decreaseof $2.8 million in restricted cash required for performance bonds in connectionwith our RUS contracts offset by $0.8 million for purchases of property andequipment, as compared to a decrease in $1.1 million in restricted cash, offsetby $0.2 million for purchases of property and equipment in the three monthsended March 31, 2009.

 

Net cash provided byfinancing activities for the three months ended March 31, 2010 was $0.7million compared to $0.4 million for the same period in 2009.  Cash provided by financing activities for thethree months ended March 31, 2010, was mainly due to proceeds from theexercise of stock options of $0.7 million and sale of common stock under theESPP of $0.2 million partially offset by payment of payroll taxes for vestedrestricted stock units of $0.2 million, as compared to proceeds ofapproximately $0.4 million related to the exercise of stock options, which wasoffset by the payment of approximately $4,000 for capital lease obligations forthe three months ended March 31, 2009.

 

**Working Capital**

 

Working capital increased to$46.3 million as of March 31, 2010 as compared to $45.5 million as of December 31,2009.  The increase in the workingcapital is primarily attributable to a decrease in deferred revenue and accruedliabilities partially offset by a decrease in inventories and accountsreceivable balances.

 

Our future liquidity andcapital requirements will depend on numerous factors, including the:

 

·                  amount andtiming of revenue;

 

·                  collectabilityof accounts receivable;

 

·                  extent to whichour existing and new products gain market acceptance;

 

·                   cost and timingof product development efforts and the success of these development efforts;

 

·                  cost and timingof marketing and selling activities;

 

·                  extent to which funds arerestricted due to performance bonds required in connection with our RUScontracts; and

 

·                  availability ofborrowing arrangements and the availability of other means of financing.

 

We believe that our cash andcash equivalents will be sufficient to finance our operations over the next 12months.  Although we believe these fundswill be sufficient to maintain and expand our operations in accordance with ourbusiness strategy, we may need additional funds in the future.  If we are unable to raise additionalfinancing when and if needed, we may be required to reduce certaindiscretionary spending, which could have a material adverse effect on ourability to achieve our intended business objectives.

 

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**Contractual Obligations**

 

We lease our facilities and certain assets under non-cancelableoperating leases expiring through 2015, excluding various renewal options. Welease certain office equipment under capital leases.

 

Thefollowing table summarizes our minimum purchase commitments to our contractmanufacturers, our minimum commitments under non-cancelable operating leases,our commitment under capital leases, our commitment under fixed assets andlicensing agreements as of March 31, 2010 (in thousands):

 
| ** **                  | ** ** | **Payments Due By Period** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| **Contractual Obligations** |       |                                      |       |   |   |   |   |   |   |   |   |
| Purchase commitments (1)    |       | $                                         | 20,477     |   | $ | 20,477 |   | $ | — |   | $ | — |   | $ | — |   |
| Operating leases            |       | $                                         | 6,572      |   | $ | 1,088 |   | $ | 4,517 |   | $ | 697 |   | $ | — |   |
| Capital leases              |       | $                                         | 40         |   | $ | 21 |   | $ | 19 |   | $ | — |   | $ |   |   |
| Licensing agreements        |       | $                                         | 104        |   | $ | 94 |   | $ | 10 |   | $ | — |   | $ | — |   |

 

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(1)          Under the terms of agreements with ourcontract manufacturers and original design manufacturers, we issue purchaseorders for the production of our products. We are required to place orders in advance with our contractmanufacturers and original design manufacturers to meet estimated salesdemands.  The agreements include certainlead-time and cancellation provisions. Future amounts payable to our contract manufacturer will vary based onthe level of purchase requirements.

 

Of the unrecognized tax benefit liability of approximately$9.3 million, unrecognized tax benefits of only $0.1 million would requirea cash settlement and is not included in the table above due to our significanttax net loss and research tax credit carry forward position. If some or all ofthe unrecognized tax benefit liability became a recognized tax liability, itwould generally result in reduction of these net operating losses and taxcredits and would not result in the use of cash to satisfy the tax liability.

 

*Off-Balance Sheet Arrangements*

 

Asof March 31, 2010, we had no material off-balance sheet arrangements,other than operating leases and certain purchase commitments described in thecontractual obligations table above.

 

*Indemnification Obligations*

 

Weenter into indemnification provisions under our agreements with other companiesin our ordinary course of business, typically with our contractors, customers,and landlords. As of March 31, 2010, we did not have any material accruedliability related to these indemnification agreements.

 

RecentAccounting Pronouncements

 

In February 2010, the Financial Accounting Standards Board (FASB)amended its guidance on subsequent events. The amendment states that entitiesthat are required to file or furnish their financial statements with the SECare no longer required to disclose the date through which the entity hasevaluated subsequent events. This amendment is effective for the Company’sinterim reporting period ended March 31, 2010, and the implementation didnot have an impact on the Company’s financial position, results of operationsor cash flows as it is disclosure-only in nature.

 

In January 2010, the Financial Accounting Standards Board (FASB)issued Update No. 2010-06, which amends the Fair Value Measurements andDisclosures topic of the FASB Accounting Standards Codification (Codification).The amendments in this update require new disclosures about transfers in andout of Levels 1 and 2 fair value measurements and the activity in Level 3 fairvalue measurements and, in addition, clarify existing disclosures required forlevels of disaggregation and inputs and valuation techniques. These amendmentswill be effective for interim and annual reporting periods beginning after December 15,2009, except for the disclosures about activity in Level 3 fair valuemeasurements, which is effective for fiscal years beginning after December 15,2010, and for interim periods within those fiscal years. The adoption of thisamendment did not have an impact on our financial position, results ofoperations, and cash flows.

 

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**ITEM 3.****                       ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Becauseour portfolio of cash equivalents is of a short-term nature, we are not subjectto significant market price risk related to investments. However, our interestincome is sensitive to changes in the general level of taxable and short-termU.S. interest rates.  Our exposure tomarket risk due to changes in the general level of U.S. interest rates relatesprimarily to our cash equivalents.  Wegenerally invest our surplus cash balances in money-market funds with originalor remaining contractual maturities of less than 90 days.  The primary objective of our investmentactivities is the preservation of principal while minimizing risk.  We do not hold financial instruments fortrading or speculative purposes.  We donot use any derivatives or similar instruments to manage our interest raterisk.

 

**ITEM 4.****                       ****CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controlsand Procedures***

 

Under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, we conductedan evaluation of the effectiveness of the design and operation of ourdisclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, as of March 31, 2010, which werefer to as the Evaluation Date or the end of the period covered by thisQuarterly Report on Form 10-Q.

 

The purpose of this evaluation was to determine whether as of theEvaluation Date our disclosure controls and procedures were effective toprovide reasonable assurance that the information we are required to disclosein reports that we file or submit under the Exchange Act, (i) is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and (ii) is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosure.

 

Based on this evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that as of March 31, 2010, our disclosurecontrols and procedures were effective.

 

***Changes in Internal Control Over FinancialReporting***

 

There have been no changes in our internal controlover financial reporting during the three months ended March 31, 2010 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

***Limitations of Internal Control Procedures***

 

Our management does notexpect that our internal control over financial reporting will prevent ordetect all errors and all fraud. A control system, no matter how well designedand operated, can provide only reasonable, not absolute, assurance that thecontrol system’s objectives will be met. Because of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat misstatements due to error or fraud will not occur or that all controlissues and instances of fraud, if any, within our company will have beendetected.

 

**PART II—OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

***IPO Allocation Litigation***

 

In June 2001, three putative stockholder class action lawsuitswere filed against Accelerated Networks, certain of its then officers anddirectors and several investment banks that were underwriters of AcceleratedNetworks’ initial public offering. The cases, 

 

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whichwere later consolidated, were filed in the United States District Court for theSouthern District of New York, and the operative Complaint was filed on April 19,2002. The Complaint was filed on behalf of investors who purchased AcceleratedNetworks’ stock between June 22, 2000 and December 6, 2000 andalleged violations of Sections 11 and 15 of the 1933 Act andSections 10(b) and 20(a) and Rule 10b-5 of the 1934 Actagainst one or both of Accelerated Networks and the individual defendants. Theclaims were based on allegations that the underwriter defendants agreed toallocate stock in Accelerated Networks’ initial public offering to certaininvestors in exchange for excessive and undisclosed commissions and agreementsby those investors to make additional purchases in the aftermarket atpre-determined prices. Plaintiffs alleged that the prospectus for AcceleratedNetworks’ initial public offering was false and misleading in violation of thesecurities laws because it did not disclose these arrangements.

 

We believe that over three hundred other companies have been named inover three hundred similar lawsuits that have been coordinated with our case.In October 2002, the plaintiffs voluntarily dismissed the individualdefendants without prejudice. On February 1, 2003 a motion to dismissfiled by the issuer defendants was heard and the court dismissed the 10(b), 20(a) andrule 10b-5 claims against Occam. On October 13, 2004, the Courtcertified a class in six of the approximately 300 other nearly identicalactions (the “focus” cases) and noted that the decision was intended to provideguidance to all parties regarding class certification in the remaining cases.The Second Circuit Court of Appeals vacated the district court’s decisiongranting class certification in those six cases on December 5, 2006.Plaintiffs filed a motion for rehearing. On April 6, 2007, the SecondCircuit denied the petition, but noted that Plaintiffs could ask the DistrictCourt to certify a more narrow class than the one that was rejected.

 

The parties in the approximately 300 coordinated cases, including ours,reached a settlement. On October 5, 2009, the Court approved thesettlement and certified a settlement class. Six notices of appeal of theSecond Circuit of the Court’s approval of the settlement have been filed. Threeobjectors to the settlement who filed a notice of appeal also filed apermission to file an appeal on the basis that the Court purportedly abused itsdiscretion concerning the class certification on the grounds that it wasbroader than the class rejected by the Second Circuit Appeals Court. Plaintiffsfiled an opposition to the petition. The Court has not yet ruled on the petitionand the briefing on the appeals has not yet commenced. The case remains openpending the outcome of the court ruling on the appeals.

 

Due to the inherent uncertainties of litigation, we cannot accuratelypredict the ultimate outcome of the matter. We have not recorded any accrualrelated to the settlement because Occam expects any settlement amounts to becovered by its insurance policies.

 

***IPO Short Swing Profits Litigation***

 

In late 2007, we received a letter from Vanessa Simmonds, a putativeshareholder, demanding that we investigate and prosecute a claim for allegedshort-swing trading in violation of Section 16(b) of the SecuritiesExchange Act of 1934, 15 U.S.C. § 78p(b), by the underwriter of ourinitial public offering (“IPO”) and certain unidentified directors, officersand shareholders of us (then known as Accelerated Networks). We evaluated thedemand and declined to prosecute the claim. On October 12, 2007, theputative shareholder commenced a civil lawsuit in the U.S. District Court forthe Western District of Washington against Credit Suisse Group, the leadunderwriter of our IPO, alleging violations of Section 16(b). Thecomplaint alleges that the combined number of shares of our common stockbeneficially owned by the lead underwriter and certain unnamed officers,directors, and principal shareholders exceeded ten percent of its outstandingcommon stock from the date of Occam’s IPO on June 23, 2000, through atleast June 22, 2001. It further alleges that those entities andindividuals were thus subject to the reporting requirements of Section 16(a) andthe short-swing trading prohibition of Section 16(b), and failed to complywith those provisions. The complaint seeks to recover from the lead underwriterany “short-swing profits” obtained by it in violation of Section 16(b). Wewere named as a nominal defendant in the action, but have no liability for theasserted claims. None of our directors or officers of Occam are named asdefendants in this action.

 

On October 29, 2007, the case was reassigned to Judge James L.Robart along with fifty-four other Section 16(b) cases seekingrecovery of short-swing profits from underwriters in connection with variousIPOs. The Underwriters and Issuers have filed a motion to dismiss the case andreply briefs have been filed. The Court heard oral argument on January 19,2009 from all parties. On March 12, 2009, the Court dismissed the 16 (b) complaintagainst the issuer defendants including Occam on both jurisdictional andstatute of limitation grounds. On March 31, 2009, the Plaintiffs filed aNotice of Appeal and their opening brief on August 26, 2009. The Issuersincluding Occam and the underwriters filed their responses on October 2,2009. Each party’s reply briefs have been filed as of November 17, 2009.To date the Appellate Court for the Ninth Circuit has not set a date of oralargument.

 

Due to the inherent uncertainties of threatened litigation, we cannotaccurately predict the ultimate outcome of the matter. We have not recorded anyaccruals related to the demand letters or Section 16(b) litigationbecause we expect any resulting resolution to be covered by our insurancepolicies.

 

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**Other Matters**

 

From time to time, we are subject to threats of litigation or actuallitigation in the ordinary course of business, some of which may be material.We believe that, except as described above, there are no currently pending mattersthat, if determined adversely to us, would have a material effect on ourbusiness or that would not be covered by our existing liability insurancemaintained by us.

 

**ITEM 1A.  RISK FACTORS**

 

ThisQuarterly Report on Form 10-Q, including any information incorporated byreference herein, contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the ExchangeAct.  The forward-looking statementscontained in this Quarterly Report on Form 10-Q involve known and unknownrisks, uncertainties and situations that may cause our or our industry’s actualresults, level of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by these statements.  These factors include those listed below inthis Item 1A and those discussed elsewhere in this Quarterly Report on Form 10-Q.  We encourage investors to review thesefactors carefully.  We may from time totime make additional written and oral forward-looking statements, includingstatements contained in our filings with the SEC.  However, we do not undertake to update anyforward-looking statement that may be made from time to time by or on behalf ofus.

 

Beforeyou invest in our securities, you should be aware that our business facesnumerous financial and market risks, including those described below, as wellas general economic and business risks. The following discussion provides information concerning the materialrisks and uncertainties that we have identified and believe may adverselyaffect our business, our financial condition and our results ofoperations.  Before you decide whether toinvest in our securities, you should carefully consider these risks anduncertainties, together with all of the other information included in thisQuarterly Report on Form 10-Q, our Annual Report on Form 10-K for theyear ended December 31, 2009 and in our other public filings.

 

**Risks Related to Current Economic Environment and OurFuture Revenues**

 

***Our business is substantiallydependent on the capital spending patterns of telecom operators and hasrecently been adversely affected by reductions and delays in capital spendingby our customers, primarily due to the economic recession. Any continuedreductions in spending or delays in customer orders in response tomacroeconomic conditions, availability of funding under government economicstimulus programs, or otherwise, would adversely affect our business, operatingresults, and financial condition. We cannot predict the timing or impact, ifany, of government economic stimulus programs on capital spending by telecomoperators.***

 

Demand for our products depends on the magnitude and timing of capitalspending by telecom service providers as they construct, expand and upgradetheir networks. In the fourth quarter of 2008, we identified a weakening in neworder activity that continued throughout 2009. We believe this weakeningrelates to reductions in capital expenditures and capital equipment investmentbudgets resulting from the worldwide financial crisis and economic downturn. Inaddition, we believe that many of our customers, particularly those thatparticipate in government funding initiatives such as the United StatesDepartment of Agriculture’s RUS program, may be delaying investment andpurchase activity pending their analysis of the availability of funding underrecently announced government economic stimulus programs. We cannot accuratelypredict the timing or the extent of financial impact, if any, that governmenteconomic stimulus programs may have on our business. In addition, theseprograms may not result in a net increase in capital spending activity iftelecom operators substitute spending under government stimulus programs forcapital spending they would otherwise have made or if private capital spendingdecreases by more than the incremental increase attributable to governmentprograms. Continued reductions, delays, or cancellations in order activity byour customers would be expected to adversely affect our future revenues byreducing the revenue we recognize in any quarter from orders booked and shippedin that quarter and by reducing the amount of deferred revenues that may becomerecognizable in future periods upon satisfaction of revenue recognitioncriteria.

 

In addition to the impact of macroeconomic factors, we believe capitalexpenditures among IOCs have also been adversely affected as our customersconsider their investment and capital expenditure decisions in light of theindustry transition from copper wire to fiber.

 

Other factors affecting the capital spending patterns of telecomservice providers include the following:

 

·                  competitive pressures,including pricing pressures;

 

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·                  consumer demand for newservices;

 

·                  an emphasis on generatingsales from services delivered over existing networks instead of new networkconstruction or upgrades;

 

·                  the timing of annual budgetapprovals;

 

·                  evolving industry standardsand network architectures;

 

·                  free cash flow and access toexternal sources of capital; and

 

·                  completion of major networkupgrades.

 

Changes in government funding programs can also affect capitalexpenditures by IOCs. Because many of our customers are IOCs, their revenuesare particularly dependent upon intercarrier payments (primarily interstate andintrastate access charges) and federal and state universal service subsidies.The Federal Communications Commission, or FCC, and some states are consideringchanges to both intercarrier payments and universal service subsidies, and suchchanges could reduce IOC revenues, which would be expected to have an adverseimpact on capital spending budgets. Furthermore, many IOCs use governmentsupported loan programs or grants to finance capital spending. Changes to thoseprograms, such as the Department of Agriculture’s Rural Utilities Service loanprogram, could reduce the ability of IOCs to access capital. Any decision bytelecom service providers to reduce capital expenditures, whether caused by theeconomic downturn, changes in government regulations and subsidies, or otherreasons, would have a material adverse effect on our business, consolidatedfinancial condition and results of operations.

 

***Our focus on independent telephoneoperating companies limits our sales volume with individual customers and makesour future operating results difficult to predict.***

 

We currently focus our sales efforts on the independent telephoneoperating companies, or IOCs, in North America. These customers generallyoperate relatively small networks with limited capital expenditure budgets.Accordingly, we believe the total potential sales volume for our products atany individual IOC is limited, and we must identify and sell products to newIOC customers each quarter to continue to increase our sales. In addition, thespending patterns of many IOCs are characterized by small and sporadicpurchases. Moreover, because our sales to IOCs are predominantly based onpurchase orders rather than long-term contracts, our customers may stoppurchasing equipment from us with little advance notice. As a result, we havelimited backlog, our future operating results are difficult to predict and wewill likely continue to have limited visibility into future operating results.

 

***We have had limited experienceselling to larger telecommunication companies, and our ability to recognizerevenue, if any, from contracts with these companies may be difficult topredict. In addition, FairPoint Communications, our only Tier-2 customer,recently filed for bankruptcy protection.***

 

In early 2008, we announced that we had been selected as the leadaccess equipment provider for a substantial broadband upgrade by FairPointCommunications, Inc. in its network in Vermont, New Hampshire, and Maine.FairPoint acquired these networks through its acquisition of certain assets ofVerizon Communications, Inc. FairPoint represented our first customer whois considered Tier 2 based on the number of telephone lines serviced. Wehave limited experience selling or servicing Tier 2 customers, and ourability to recognize substantial revenue from the FairPoint relationship or anyother relationships we may establish with Tier 2 customers will depend onseveral factors, including, among others, the timing of orders and the termsand conditions of the orders, which can affect our ability to satisfy revenuerecognition criteria. We cannot currently predict with any accuracy the timingof orders from FairPoint, and any delays or termination of FairPoint’santicipated upgrade of its northern New England network could have a materialadverse effect on our future revenues and operating results. FairPointCommunications has publicly reported certain financial difficulties that it hasencountered related to the Northern New England network.

 

On October 26, 2009, FairPoint announced that it had filed abankruptcy petition under chapter 11 of the United States Bankruptcy Code.According to the documents filed with the bankruptcy court, FairPoint’s plan isto restructure its debt and continue day to day operations under courtsupervision. As of March 31, 2010, we had an outstanding receivablebalance from FairPoint of approximately $2.1 million. Of this amount,$1.7 million related to transactions that occurred before FairPoint filedits bankruptcy petition, including $1.4 million which was invoiced within45 days of the bankruptcy petition filing and is covered by a “reclamationclaim” that we filed in November 2009. We currently cannot predict theextent to which these receivables may be paid. We have deferred approximately$1.7 million of revenue and related cost of revenue as of March 31, 2010,for which cash has not been collected.

 

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We cannot assure that the impact of FairPoint’s bankruptcy will nothave a material adverse effect on our business and our results of operationsincluding the timing and amount of orders we may receive from FairPoint as wellas the timing and amount of any revenue we might recognize related to suchorders. In addition, debtors-in-possession or bankruptcy trustees could seek torecover payments made to us in the 90 day period prior to the bankruptcyfiling on the grounds that these payments constituted “preferences” underapplicable bankruptcy law. We believe we would have a complete defense to anysuch claim in that payments to us have been made in the ordinary course ofbusiness in exchange for newly purchased equipment. However, any litigationagainst us relating to a preference claim would result in our incurring incrementallegal expenses and, if successful, would have an adverse impact on our cash andcash equivalents.

 

***Fluctuations in our quarterly andannual operating results may adversely affect our business and prospects.***

 

A number of factors, many of which are outside our control, may causeor contribute to significant fluctuations in our quarterly and annual operatingresults. These fluctuations may make financial planning and forecasting moredifficult. In addition, these fluctuations may result in unanticipated decreasesin our available cash, which could limit our growth and delay implementation ofour expansion plans. Factors that may cause or contribute to fluctuations inour operating results include:

 

·                  fluctuations in demand forour products, including the timing of decisions by our target customers toupgrade their networks and deploy our products;

 

·                  delays in customer orders asIOCs evaluate and consider their capital expenditures and investments in lightof the industry transition from copper wire to fiber;

 

·                  increases in warrantyaccruals and other costs associated with remedying any performance problemsrelating to our products;

 

·                  seasonal reductions in fieldwork during the winter months and the impact of annual budgeting cycles;

 

·                  the size and timing oforders we receive and products we ship during a given period;

 

·                  delays in recognizingrevenue under applicable revenue recognition rules, particularly fromgovernment funded contracts, as a result of additional commitments we may berequired to make to secure purchase orders, or with respect to sales to valueadded resellers where we cannot establish based on our credit analysis thatcollectability is reasonably assured;

 

·                  introductions orenhancements of products, services and technologies by us or our competitors,and market acceptance of these new or enhanced products, services andtechnologies;

 

·                  our ability to achievetargeted cost reductions;

 

·                  the amount and timing of ouroperating costs, including sales, engineering and manufacturing costs andcapital expenditures; and

 

·                  quarter-to-quartervariations in our operating margins resulting from changes in our product mix.

 

As a consequence, operating results for a particular future period aredifficult to predict and prior results are not necessarily indicative ofresults to be expected in the future. Any of the foregoing factors may have amaterial adverse effect on our consolidated results of operations.

 

***We have a history of losses andnegative cash flow, and we may not be able to generate positive operatingincome and cash flows in the future to support the expansion of our operations.***

 

We have incurred significant losses since our inception. As of March 31,2010, we had an accumulated deficit of $136.1 million. We incurredsubstantial losses in 2009. We may continue to incur losses in 2010. We cannotassure you that we will not continue to incur losses or experience negativecash flow in the future. We have only generated operating income in thequarters ended December 25, 2005, September 24, 2006, December 31,2006 and December 31, 2008. Our inability to generate positive operatingincome and cash flow would materially and adversely affect our liquidity,consolidated results of operations and consolidated financial condition.

 

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A significant portion of our expenses is fixed, and we expect tocontinue to incur significant expenses for research and development, sales andmarketing, customer support, and general and administrative functions. Giventhe rate of growth in our customer base, our limited operating history and theintense competitive pressures we face, we may be unable to adequately controlour operating costs. In order to achieve and maintain profitability, we mustincrease our sales while maintaining control over our expense levels.

 

**Risks Related to Internal Controls**

 

***If we fail to maintain proper andeffective internal controls, our ability to produce accurate financialstatements on a timely basis could be impaired, which would adversely affectour consolidated operating results, our ability to operate our business and ourstock price.***

 

In connection with the 2007 audit committee review of our revenuerecognition practices and our resulting financial restatement, we determinedthat we did not have adequate internal financial and accounting controls toproduce accurate and timely financial statements. Among weaknesses anddeficiencies identified in our review, we determined that we had a materialweakness with respect to revenue recognition. The material weakness continuedto exist at December 31, 2008. Since the restatement was completed in October 2007,we have implemented new processes and procedures to improve our internalcontrols and have expanded our finance and accounting staff. We believe thatthese actions have remediated the identified weaknesses and deficiencies,including the material weakness. As of December 31, 2009, our chief executiveofficer and chief financial officer determined that our internal controls overfinancial reporting were effective to provide reasonable assurance regardingthe reliability of our financial reporting and the preparation of financialstatements for external reporting in accordance with generally acceptedaccounting principles in the United States.

 

Ensuring that we have adequate internal financial and accountingcontrols and procedures in place to produce accurate financial statements on atimely basis is a costly and time-consuming effort that needs to bere-evaluated frequently. Our management is responsible for establishing andmaintaining adequate internal control over financial reporting to providereasonable assurance regarding the reliability of our financial reporting andthe preparation of financial statements for external purposes in accordancewith generally accepted accounting principles in the United States. Ourmanagement does not expect that our internal control over financial reportingwill prevent or detect all errors and all fraud. A control system, no matterhow well designed and operated, can provide only reasonable, not absolute,assurance that the control system’s objectives will be met. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that misstatements due to error or fraud will notoccur or that all control issues and instances of fraud, if any, within ourcompany will have been detected. As discussed in our Annual Report on Form 10-Kfor our 2009 fiscal year and our Quarterly Reports on Form 10-Q for our2009 fiscal quarters, our audit committee and management, together with ourcurrent and former independent registered public accounting firms, haveidentified numerous control deficiencies in the past and may identifyadditional deficiencies in the future. Failure on our part to have effectiveinternal financial and accounting controls could cause our financial reportingto be unreliable, could have a material adverse effect on our business,operating results, and financial condition, and could adversely affect thetrading price of our common stock.

 

We were initially required to comply with Section 404 of theSarbanes Oxley Act of 2002 in connection with our Annual Report on Form 10-Kfor our year ended December 31, 2007. We have expended significantresources in developing the necessary documentation and testing proceduresrequired by Section 404 of the Sarbanes Oxley Act. We cannot be certainthat the actions we have taken and are taking to improve our internal controlsover financial reporting will be sufficient to maintain effective internalcontrols over financial reporting in subsequent reporting periods or that wewill be able to implement our planned processes and procedures in a timelymanner. In addition, we may be unable to produce accurate financial statementson a timely basis. Any of the foregoing could cause investors to loseconfidence in the reliability of our consolidated financial statements, which couldcause the market price of our common stock to decline and make it moredifficult for us to finance our operations and growth.

 

**Risks Related to Our Business and Industry**

 

***Because our markets are highlycompetitive and dominated by large, well-financed participants, we may beunable to compete effectively.***

 

Competition in our market is intense, and we expect competition toincrease. The market for broadband access equipment is dominated primarily bylarge, established suppliers such as Alcatel Lucent SA, Motorola, Tellabsand ADTRAN Inc. While these suppliers focus primarily on large serviceproviders, they have competed, and may increasingly compete, in the IOC marketsegment. In addition, a number of companies, including Calix, Inc., havedeveloped, or are developing, products that compete with ours, including withinour core IOC segment.

 

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Our ability to compete successfully depends on a number of factors,including:

 

·                  the successfulidentification and development of new products for our core market;

 

·                  our ability to timelyanticipate customer and market requirements and changes in technology andindustry standards;

 

·                  our ability to gain accessto and use technologies in a cost-effective manner;

 

·                  our ability to timelyintroduce cost-effective new products;

 

·                  our ability to differentiateour products from our competitors’ offerings;

 

·                  our ability to gain customeracceptance of our products;

 

·                  the performance of ourproducts relative to our competitors’ products;

 

·                  our ability to market andsell our products through effective sales channels;

 

·                  our ability to establish andmaintain effective internal financial and accounting controls and proceduresand restore confidence in our financial reporting;

 

·                  the protection of ourintellectual property, including our processes, trade secrets and know-how; and

 

·                  our ability to attract andretain qualified technical, executive and sales personnel.

 

Many of our existing and potential competitors are larger than we arewith longer operating histories, and have substantially greater financial,technical, marketing or other resources; significantly greater namerecognition; and a larger installed base of customers than we do. Unlike manyof our competitors, we do not provide equipment financing to potential customers.In addition, many of our competitors have broader product lines than we do, sothey can offer bundled products, which may appeal to certain customers.

 

Because the products that we and our competitors sell require asubstantial investment of time and funds to install, customers are typicallyreluctant to switch equipment suppliers once a particular supplier’s producthas been installed. As a result, competition among equipment suppliers tosecure contracts with potential customers is particularly intense and willcontinue to place pressure on product pricing. Some of our competitors have inthe past and may in the future resort to offering substantial discounts to winnew customers and generate cash flows. If we are forced to reduce prices inorder to secure customers, we may be unable to sustain gross margins at desiredlevels or achieve profitability.

 

***We have relied, and expect tocontinue to rely, on our BLC 6000 product line for the substantial majority ofour sales, and a decline in sales of our BLC 6000 line would cause our overallsales to decline proportionally.***

 

We have derived a substantial majority of our sales in recent yearsfrom our BLC 6000 product line. We expect that sales of this product line willcontinue to account for a substantial majority of our sales for the foreseeablefuture. Any factors adversely affecting the pricing of, or demand for, our BLC6000 line, including competition or technological change, could cause our salesto decline materially and our business to suffer.

 

***If we fail to enhance our existingproducts and develop new products and features that meet changing customerrequirements and support new technological advances, our sales would bematerially and adversely affected.***

 

Our market is characterized by rapid technological advances, frequentnew product introductions, evolving industry standards and recurring changes inend-user requirements. Our future success will depend significantly on ourability to anticipate and adapt to such changes and to offer, on a timely andcost-effective basis, products and features that meet changing customer demandsand industry standards. The timely development of new or enhanced products is acomplex and uncertain process, and we may not be able to accurately anticipatemarket trends or have sufficient resources to successfully manage longdevelopment cycles. We may also experience design, manufacturing, marketing andother difficulties that could delay or prevent the development, introduction ormarketing of new products and enhancements. The introduction of new or enhancedproducts also requires that we manage the transition from older products tothese new or enhanced products in order to minimize disruption in customerordering patterns and ensure that adequate supplies of new products areavailable for delivery to meet anticipated customer demand. If we are unable todevelop new products or enhancements to our existing products on a timely andcost-effective basis, or if our new products or enhancements fail to achievemarket acceptance, our business, consolidated financial condition andconsolidated results of operations would be materially and adversely affected.

 

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We have enhanced our BLC 6000 platform to support active GigabitEthernet fiber-to-the-premises, or FTTP, services. Although we have investedsignificant time and resources to develop this enhancement, these FTTP-enabled productsare relatively new, with limited sales to date, and market acceptance of theseproducts may fall below our expectations. The introduction of new products isalso expected to place pressure on our gross margins as most new productsrequire time and increased sales volumes to achieve cost-saving efficiencies inproduction. To the extent our new products and enhancements do not achievebroad market acceptance, we may not realize expected returns on ourinvestments, and we may lose current and potential customers.

 

***If our productscontain undetected defects, including errors and interoperability issues, wecould incur significant unexpected expenses to remedy the defects, which couldhave a material adverse effect on our sales, results of operations or financialcondition.***

*** ***

Althoughour products are tested prior to shipment, they may contain software orhardware errors, defects or interoperability issues (collectively described as “defects”)that may only be detected when deployed in live networks that generate highamounts of communications traffic.  Inaddition, defects or other malfunctions or quality control issues may notappear until the equipment has been deployed for an extended period of time.  We also continue to introduce new productsthat may have undetected software or hardware defects.  Our customers may discover defects in ourproducts at any time after deployment or as their networks are expanded andmodified.  Any defects in our productsdiscovered in the future, or failures of our customers’ networks, whethercaused by our products or those of another vendor, could result in lost salesand market share and negative publicity regarding our products. In 2007, weexperienced higher than average failures of certain assemblies that werefabricated between October 2005 and January 2006 and identified  design issues associated with a transistorthat resulted in equipment disruption and that required a rework effort.Recently, we have identified malfunctions or defects that we were required to repairunder applicable warranties (or elected to repair for customer relationspurposes) related to equipment that had been in service for extended periods oftimes.

 

Defects,malfunctions, or other performance issues relating to our products couldincrease our warranty accruals and operating expenses, could have an adverseeffect on market perceptions of our products, and could have a material adverseeffect on our business, consolidated results of operations, and consolidatedfinancial condition.  We quantify andrecord an estimate for warranty-related costs based on a variety of factorsincluding but not limited to our actual history, projected return and failurerates and current repair costs.  Ourestimates are primarily based on an estimate of products that may be returnedfor warranty repair, estimated costs of repair, including parts and labor,depending on the type of service required. These estimates require us to examine past and current warranty issuesand consider their continuing impact in the future.  Our estimates of future warranty liabilityare based on prediction of future events, conditions and other complicatedfactors that are difficult to predict. The actual costs we incur may differ materially from our estimates.

 

***Our efforts to increase our salesand marketing efforts to larger telecom operators, which may require us tobroaden our reseller relationships, may be unsuccessful.***

 

To date, our sales and marketing efforts have been focused on small andmid-sized IOCs. A key element of our long-term strategy is to increase sales tolarge IOCs, competitive local exchange carriers, regional Bell operatingcompanies and international telecom service providers. We may be required todevote substantial technical, marketing and sales resources to the pursuit ofthese customers, who have lengthy equipment qualification and sales cycles. Inparticular, sales to these customers may require us to upgrade our products tomeet more stringent performance criteria, develop new customer specificfeatures or adapt our product to meet international standards. We may incursubstantial technical, sales and marketing expenses and expend significantmanagement effort without any assurance of generating sales. Because we havelimited resources and large telecom operators may be reluctant to purchaseproducts from a relatively small supplier like us, we plan to target thesecustomers in cooperation with strategic resellers. These reseller relationshipsmay not be available to us, and if formed, may include terms, such asexclusivity and non-competition provisions, that restrict our activities orimpose onerous requirements on us. Moreover, in connection with theserelationships, we may forego direct sales opportunities in favor of formingrelationships with strategic resellers. If we are unable to successfullyincrease our sales to larger telecom operators or expand our resellerrelationships, we may be unable to implement our long-term growth strategy.

 

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***If we were to experience paymentproblems with either resellers or customers for whom we are unable to assesscreditworthiness, it could have an adverse impact on our business, operatingresults, or financial condition.***

 

Value added resellers, or VARs, account for a substantial portion ofour revenue in a quarter. Some of these VARs are not well capitalized, makingcollection of receivables from them uncertain. In addition, in certaininstances, we are limited in our ability to evaluate the creditworthiness ofdirect customers who decline to provide us with financial information. In 2007,in connection with the restatement of our consolidated financial statements, weadopted a revenue recognition policy that we would not recognize revenue fromthose resellers who lacked an independent ability to pay us until we receivedcash payment. Sales to VARs for whom we are not able to recognize revenue untilwe receive cash payment are reflected as deferred revenue. Any materialcollection issues we may experience with these resellers or direct customerscould have an adverse impact on our business, operating results, or financialcondition and could result in increases in bad debt expense or collectioncosts, inventory impairments, or adjustments to our reported revenues ordeferred revenues. Any of these could result in a decline in our stock price.

 

***We rely on resellers to promote,sell, install and support our products to small customers in North America, andinternationally. Their failure to do so or our inability to recruit or retainresellers may substantially reduce our sales and thus seriously harm ourbusiness.***

 

We rely on value added resellers who can provide high quality sales andsupport services. We compete with other telecommunications systems providersfor our resellers’ business as our resellers generally market competingproducts. If a reseller promotes a competitor’s products to the detriment ofour products or otherwise fails to market our products and serviceseffectively, we could lose market share. In addition, the loss of a keyreseller or the failure of resellers to provide adequate customer service couldhave a negative effect on customer satisfaction and could cause harm to ourbusiness. If we do not properly train our resellers to sell, install andservice our products, our business, financial condition and results ofoperations will suffer.

 

***We may be unable to successfullyexpand our international operations. In addition, our international expansionplans, if implemented, will subject us to a variety of risks that may adverselyaffect our business.***

 

We currently generate almost all of our sales from customers in NorthAmerica and have very limited experience marketing, selling and supporting ourproducts and services outside North America or managing the administrativeaspects of a worldwide operation. While we intend to expand our internationaloperations, we may not be able to create or maintain international market demandfor our products. In addition, regulations or standards adopted by othercountries may require us to redesign our existing products or develop newproducts suitable for sale in those countries. If we invest substantial timeand resources to expand our international operations and are unable to do sosuccessfully and in a timely manner, our business, financial condition andresults of operations will suffer. In the course of expanding our internationaloperations and operating overseas, we will be subject to a variety of risks,including:

 

·                  differing regulatoryrequirements, including tax laws, trade laws, labor regulations, tariffs,export quotas, custom duties or other trade restrictions and changes thereto;

 

·                  greater difficultysupporting and localizing our products;

 

·                  different or uniquecompetitive pressures as a result of, among other things, the presence of localequipment suppliers;

 

·                  challenges inherent inefficiently managing an increased number of employees over large geographicdistances, including the need to implement appropriate systems, policies,benefits and compliance programs;

 

·                  limited or unfavorableintellectual property protection;

 

·                  changes in a specificcountry’s or region’s political or economic conditions; and

 

·                  restrictions on therepatriation of earnings.

 

***We may pursue acquisitions tobroaden our product line or address new or larger markets. Acquisitions involvea number of risks. If we are unable to address and resolve these riskssuccessfully, such acquisitions could have a material adverse impact to our business,consolidated results of operations and consolidated financial condition.***

 

We may make acquisitions of businesses, products or technologies toexpand our product offerings and capabilities, customer base and business. In October 2007,we acquired certain assets and assumed certain liabilities of TerawaveCommunications and we 

 

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haveevaluated, and expect to continue to evaluate, a wide array of potentialstrategic transactions. We have limited experience making such acquisitions.Any of these transactions could be material to our consolidated financialcondition and results of operations. The anticipated benefit of acquisitionsmay never materialize. In addition, the process of integrating an acquiredbusiness, products or technologies may create unforeseen operating difficultiesand expenditures. Some of the areas where we may face acquisition related risksinclude:

 

·                  diversion of management timeand potential business disruptions;

 

·                  expenses, distractions andpotential claims resulting from acquisitions, whether or not they arecompleted;

 

·                  retaining and integratingemployees from any businesses we may acquire;

 

·                  issuance of dilutive equitysecurities or incurrence of debt;

 

·                  integrating variousaccounting, management, information, human resource and other systems to permiteffective management;

 

·                  incurring possiblewrite-offs, impairment charges, contingent liabilities, amortization expense orwrite-offs of goodwill;

 

·                  difficulties integrating andsupporting acquired products or technologies;

 

·                  unexpected capital equipmentoutlays and related costs;

 

·                  insufficient revenues tooffset increased expenses associated with the acquisition;

 

·                  under performance problemsassociated with acquisitions;

 

·                  opportunity costs associatedwith committing capital to such acquisitions;, and

 

·                  becoming involved inacquisition related litigation.

 

Foreign acquisitions involve unique risks in addition to thosementioned above, including those related to integration of operations acrossdifferent cultures and languages, currency risks and the particular economic,political and regulatory risks associated with specific countries. We cannotassure that we will be able to address these risks successfully, or at all,without incurring significant costs, delay or other operating problems. Ourinability to resolve any of such risks could have a material adverse impact onour business, consolidated financial condition and consolidated results ofoperations.

 

***If we lose any of our key personnel,or are unable to attract, train and retain qualified personnel, our ability tomanage our business and continue our growth would be negatively impacted.***

 

Our success depends, in large part, on the continued contributions ofour key management, engineering, sales and marketing personnel, many of whomare highly skilled and would be difficult to replace. None of our seniormanagement or key technical or sales personnel is bound by a written employmentcontract to remain with us for a specified period. In addition, we do notcurrently maintain key-man life insurance covering our key personnel. If welose the services of any key personnel, our business, financial condition andresults of operations may suffer.

 

Competition for skilled personnel, particularly those specializing inengineering and sales is intense. We cannot be certain that we will besuccessful in attracting and retaining qualified personnel, or that newly hiredpersonnel will function effectively, either individually or as a group. Inparticular, we must continue to expand our direct sales force, including hiringadditional sales managers, to grow our customer base and increase sales. Even ifwe are successful in hiring additional sales personnel, new salesrepresentatives require up to a year to become effective, and the recent lossof a senior sales executive could have an adverse impact on our ability torecruit and train additional sales personnel. In addition, our industry ischaracterized by frequent claims relating to unfair hiring practices. We maybecome subject to such claims and may incur substantial costs in defendingourselves against these claims, regardless of their merits. If we are unable toeffectively hire, integrate and utilize new personnel, the execution of ourbusiness strategy and our ability to react to changing market conditions may beimpeded, and our business, financial condition and results of operations couldsuffer.

 

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***We may have difficulty managinggrowth in our business, if any, which could limit our ability to increase salesand cash flow.***

 

We expect to expand our research and development, sales, marketing andsupport activities, including our activities outside the U.S. depending onfuture business and economic conditions. Our historical growth has placed, andis expected to continue to place, significant demands on our management, aswell as our financial and operational resources, as required to:

 

·                  implement and maintaineffective financial disclosure controls and procedures, including theremediation of internal control deficiencies identified in our audit committeeinvestigation;

 

·                  implement appropriateoperational and financial systems;

 

·                  manage a largerorganization;

 

·                  expand our manufacturing anddistribution capacity;

 

·                  increase our sales andmarketing efforts; and

 

·                  broaden our customer supportcapabilities.

 

In addition, if we cannot grow or manage our business growtheffectively, we may not be able to execute our business strategies and ourbusiness, consolidated financial condition and consolidated results ofoperations would suffer.

 

***Because we depend upon a smallnumber of outside contractors to manufacture our products, our operations couldbe disrupted if we encounter problems with any of these contractors.***

 

We do not have internal manufacturing capabilities and rely upon asmall number of contract manufacturers to build our products. In particular, werely on AsteelFlash Group (formerly Flash Electronics), Inc. for themanufacture of our BLC 6000 blade products. Our reliance on a small number ofcontract manufacturers makes us vulnerable to possible capacity constraints andreduced control over component availability, delivery schedules, manufacturingyields and costs. We do not have long-term supply contracts with our primarycontract manufacturers. Consequently, these manufacturers are not obligated tosupply products to us for any specific period, in any specific quantity or atany certain price, except as may be provided by a particular purchase order. Ifany of our manufacturers were unable or unwilling to continue manufacturing ourproducts in required volumes and at high quality levels, we would have toidentify, qualify and select acceptable alternative manufacturers. It ispossible that an alternate source may not be available to us when needed or maynot be in a position to satisfy our production requirements at commerciallyreasonable prices and quality. Any significant interruption in manufacturingwould require us to reduce our supply of products to our customers, which inturn could have a material adverse effect on our customer relations, business,consolidated financial condition and consolidated results of operations.

 

A portion of our manufacturing was moved to the overseas facilities ofour primary contract manufacturer. This transition presents a number of risks,including the potential for a supply interruption or a reduction inmanufacturing quality or controls, any of which would negatively impact ourbusiness, customer relationships and results of operations.

 

***We depend on sole source and limitedsource suppliers for key components and license technology from third parties.If we are unable to source these components and technologies on a timely basis,we will not be able to deliver our products to our customers.***

 

We depend on sole source and limited source suppliers for keycomponents of our products. We may from time to time enter into originalequipment manufacturer (OEM) and/or original design manufacturer (ODM)agreements to manufacture and/or design certain products. Any of the solesource and limited source suppliers, OEM and ODM suppliers upon which we relycould stop producing our components, cease operations entirely, or be acquiredby, or enter into exclusive arrangements with, our competitors. We do not havelong-term supply agreements with our suppliers, and our purchase volumes arecurrently too low for us to be considered a priority customer by most of oursuppliers. As a result, these suppliers could stop selling components to us atcommercially reasonable prices, or at all. Any such interruption or delay mayforce us to seek similar components from alternate sources, if available atall. Switching suppliers may require that we redesign our products toaccommodate the new component and may potentially require us to re-qualify ourproducts with our customers, which would be costly and time-consuming. Anyinterruption in the supply of sole source or limited source components wouldadversely affect our ability to meet scheduled product deliveries to ourcustomers and would materially and adversely affect our business, consolidatedfinancial condition and consolidated results of operations.

 

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Periodically, we may be required to license technology from thirdparties to develop new products or product enhancements. These third partylicenses may be unavailable to us on commercially reasonable terms, if at all.Our inability to obtain necessary third party licenses may force us to obtainsubstitute technology of lower quality or performance standards or at greatercost, any of which could seriously harm the competitiveness of our products andwhich would result in a material and adverse effect on our business,consolidated financial condition and consolidated results of operations.

 

***If we fail to accurately predict ourmanufacturing requirements and manage our inventory, we could incur additionalcosts, experience manufacturing delays, or lose revenue.***

 

Lead times for the materials and components that we order through ourcontract manufacturers may vary significantly and depend on numerous factors,including the specific supplier, contract terms and market demand for acomponent at a given time. If we overestimate our production requirements, ourcontract manufacturers may purchase excess components and build excessinventory. If our contract manufacturers purchase excess components that areunique to our products or build excess products, we could be required to payfor these excess parts or products and recognize related inventory write-downcosts. If we underestimate our product requirements, our contract manufacturersmay have inadequate component inventory, which could interrupt manufacturing ofour products and result in delays or cancellation of sales. In prior periods wehave experienced excess and obsolete inventory write downs which impact ourcost of revenue. This may continue in the future, which would have an adverseeffect on our gross margins, consolidated financial condition and consolidatedresults of operations.

 

***Demand for our products is dependenton the willingness of our customers to deploy new services, the success of ourcustomers in selling new services to their subscribers, and the willingness ofour customers to utilize IP and Ethernet technologies in local access networks.***

 

Demand for our products is dependent on the success of our customers indeploying and selling services to their subscribers. Our BLC 6000 platformsimultaneously supports IP-based services, such as broadband Internet, VoIP,IPTV and FTTP, and traditional voice services. If end-user demand for IP-basedservices does not grow as expected or declines and our customers are unable orunwilling to deploy and market these newer services, demand for our productsmay decrease or fail to grow at rates we anticipate.

 

Our strategy includes developing products for the local access networkthat incorporate IP and Ethernet technologies. If these technologies are notwidely adopted by telecom service providers for use in local access networks,demand for our products may decline or not grow. As a result, we may be unableto sell our products to recoup our expenses related to the development of theseproducts and our consolidated results of operations would be harmed.

 

***Changes in existing accounting ortaxation rules or practices may adversely affect our consolidated resultsof operations. In addition, as we expand our business, we could become subjectto taxation in new states or jurisdictions, which will require us to incuradditional compliance costs and potential taxes and fees associated withcomplying with such tax laws.***

 

We are subject to numerous tax and accounting requirements, and changesin existing accounting or taxation rules or practices, or varyinginterpretations of current rules or practices, could have a significantadverse effect on our financial results or the manner in which we conduct ourbusiness. For example, prior to fiscal 2006, we accounted for options grantedto employees using the intrinsic value method, which, given that we generallygranted employee options with exercise prices equal to the fair market value ofthe underlying stock at the time of grant, resulted in no compensation expense.Beginning in fiscal 2006, we began recording expenses for our stock basedcompensation plans, including option grants to employees, using the fair valuemethod, under which we expect our ongoing accounting charges related to equityawards to employees to be significantly greater than those we would haverecorded under the intrinsic value method. We expect to continue to use stockbased compensation as a significant component of our compensation package forexisting and future employees.

 

Accordingly, changes in accounting for stock based compensation expenseare expected to have a material adverse affect on our reported results. Anysimilar changes in accounting or taxation rules or practices could have amaterial impact on our consolidated financial results or the way we conduct ourbusiness.

 

In recent years, the geographic scope of our business has expanded, andsuch expansion requires us to comply with the tax laws and regulations ofmultiple jurisdictions. Requirements as to taxation vary substantially among statesand other jurisdictions. We have recently expanded our international salesactivity and may become subject to foreign tax laws as well, particularlyrelated to value added taxes. Complying with the tax laws of thesejurisdictions can be time consuming and expensive and could subject us topenalties and fees if we inadvertently fail to comply. In the United States,tax authorities in states where we believed we were not subject to sales taxcould assert jurisdiction and seek to collect sales taxes, which could resultin increased compliance expense as well as penalties and could adversely affectour customer relationships if it is determined we need to collect sales taxesfor prior transactions. In the event we fail inadvertently to comply withapplicable tax laws, it could have a material adverse effect on our business,results of operations, and financial condition.

 

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***The amount of our net operating loss(NOL) and credit carryforwards is uncertain. Prior transactions to which we orour stockholders or their affiliates have been a party, and future transactions to which we or our stockholdersor their affiliates may become a party, including stock issuances and certainshareholder stock transactions could jeopardize our ability to use some or all of our NOLs and tax credits,and the amounts of NOLs or tax credits we would be precluded from using couldbe material. In addition, California and certain states have recently suspendedor are considering suspending, the ability to use net operating losscarryforwards in future years and this could adversely affect future operatingresults.***

 

Based on current tax law, we believe we have certain NOLs and taxcredits for U.S. federal and state income tax purposes to offset future taxableincome and related taxes.  As of December 31,2009, we had incurred significant losses and credits in the United States.  Our ability to utilize these tax attributesmay be subject to significant limitations under Sections 382 and 383 ofthe Internal Revenue Code if we have undergone, or undergo in the future, anownership change.  An ownership changeoccurs for purposes of Section 382 of the Internal Revenue Code if, amongother things, stockholders who own or have owned, directly or indirectly, 5% ormore of our common stock (with certain groups of less-than-5% stockholderstreated as a single stockholder for this purpose) increase their aggregatepercentage ownership of our common stock by more than fifty percentage pointsabove the lowest percentage of the stock owned by these stockholders at anytime during the relevant three-year testing period.  In the event of an ownership change, Sections 382and 383 impose an annual limitation, based upon our company valuation at thetime of the ownership change, on the amount of taxable income a corporation mayoffset with NOLs and credits.  Any unusedannual limitation may be carried over to later years until the applicableexpiration date for the respective NOLs and credits.  In general, the higher our company valuationat the time of such an ownership change, the higher the annual limitation wouldbe, and we could offset a greater amount of taxable income with the NOLs andcredits.  However, if an ownership changehas occurred in a period when our company valuation was low, the annuallimitation would be lower, and we could only offset a lesser amount of taxableincome with the NOLs and credits.  To theextent that these tax attributes become significantly limited, we expect to betaxed on our income, if any, at the U.S. federal and state statutory rates.

 

To the extent that these NOLs and credits become significantly limited,we expect to be taxed on our income, if any, at the U.S. federal and statestatutory rates.  As a result, anyinability to utilize these tax attributes would adversely affect futureoperating results by the amount of the federal or state taxes that would nothave otherwise been payable, having an adverse impact on our operating resultsand financial condition.  In addition,inability to use NOLs and credits would adversely affect our financialcondition relative to our financial condition had these tax attributes beenavailable.  In addition, California andcertain states have suspended use of NOLs, and other states are consideringsimilar measures.  Although thesuspension in California does not currently apply for 2010, it is possible thestate could reinstitute the suspension as it seeks to address budgetchallenges. As a result, we may incur higher state income tax expense in thefuture.  Depending on our future taxposition, continued suspension of our ability to use state NOLs could have anadverse impact on our operating results and financial condition.

 

***Our customers are subject togovernment regulation, and changes in current or future laws or regulationsthat negatively impact our customers could harm our business.***

 

The jurisdiction of the Federal Communications Commission, or FCC,extends to the entire telecommunications industry, including our customers.Future FCC regulations affecting the broadband access industry, our customers,or the service offerings of our customers, may harm our business. For example,FCC regulatory policies affecting the availability of data and Internetservices may impede the penetration of our customers into certain markets oraffect the prices they may charge in such markets. Furthermore, many of ourcustomers are subject to FCC rate regulation of interstate telecommunicationsservices, and are recipients of federal universal service subsidies implementedand administered by the FCC. In addition, many of our customers are subject tostate regulation of intrastate telecommunications services, including rates forsuch services, and may also receive state universal service subsidies. Changesin FCC or state rate regulations or federal or state universal servicesubsidies or the imposition of taxes on Internet access service, couldadversely affect our customers’ revenues and capital spending plans. Inaddition, international regulatory bodies are beginning to adopt standards andregulations for the telecom industry. These domestic and foreign standards,laws and regulations address various aspects of VoIP and broadband use,including issues relating to liability for information retrieved from, ortransmitted over, the Internet. Changes in standards, laws and regulations, orjudgments in favor of plaintiffs in lawsuits against service providers could adverselyaffect the development of Internet and other IP-based services. This, in turn,could directly or indirectly materially adversely impact the telecom industryin which our customers operate. To the extent our customers are adverselyaffected by laws or regulations regarding their business, products or serviceofferings, our business, financial condition and results of operations wouldsuffer.

 

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***If we fail to comply withregulations and evolving industry standards, sales of our existing and futureproducts could be adversely affected.***

 

The markets for our products are characterized by a significant numberof laws, regulations and standards, both domestic and international, some ofwhich are evolving as new technologies are deployed. Our products are requiredto comply with these laws, regulations and standards, including thosepromulgated by the FCC. For example, the FCC required that all facilities basedproviders of broadband Internet access and interconnect VoIP services meet thecapability requirements of the Communications Assistance for Law EnforcementAct by May 14, 2007. Subject to certain statutory parameters, we wererequired to make available to our customers, on a reasonably timely basis andat a reasonable charge, such features or modifications as are necessary topermit our customers to meet those capability requirements. In some cases, weare required to obtain certifications or authorizations before our products canbe introduced, marketed or sold. There can be no assurance that we will be ableto continue to design our products to comply with all necessary requirements inthe future. Accordingly, any of these laws, regulations and standards maydirectly affect our ability to market or sell our products.

 

Some of our operations are regulated under various federal, state andlocal environmental laws. Our planned international expansion will likely subjectus to additional environmental and other laws. For example, the European UnionDirective 2002/96/EC on waste electrical and electronic equipment, known as theWEEE Directive, requires producers of certain electrical and electronicequipment, including telecom equipment, to be financially responsible for thespecified collection, recycling, treatment and disposal of past and presentcovered products placed on the market in the European Union. The European UnionDirective 2002/95/EC on the restriction of the use of hazardous substances inelectrical and electronic equipment, known as the RoHS Directive, restricts theuse of certain hazardous substances, including lead, in covered products.Failure to comply with these and other environmental laws could result in finesand penalties and decreased sales, which could adversely affect our plannedinternational expansion and our consolidated operating results.

 

***Compliance with changing regulationof corporate governance and public disclosure may result in additionalexpenses.***

 

Changing laws, regulations and standards relating to corporategovernance and public disclosure may create uncertainty regarding compliancematters. New or changed laws, regulations and standards are subject to varyinginterpretations in many cases. As a result, their application in practice mayevolve over time. We are committed to maintaining high standards of corporategovernance and public disclosure. Complying with evolving interpretations ofnew or changed legal requirements may cause us to incur higher costs as werevise current practices, policies and procedures, and may divert managementtime and attention from revenue generating to compliance activities. If ourefforts to comply with new or changed laws, regulations and standards differfrom the activities intended by regulatory or governing bodies due toambiguities related to practice, our reputation might also be harmed. Further,our board members, chief executive officer and chief financial officer couldface an increased risk of personal liability in connection with the performanceof their duties. As a result, we may have difficulty attracting and retainingqualified board members and executive officers, which could harm our business.

 

***We may not be able to protect ourintellectual property, which could adversely affect our ability to competeeffectively.***

 

We depend on our proprietary technology for our success and ability tocompete. We currently hold 27 issued patents and have several patentapplications pending. We rely on a combination of patent, copyright, trademarkand trade secret laws, as well as confidentiality agreements and licensingarrangements, to establish and protect our proprietary rights. Existing patent,copyright, trademark and trade secret laws will afford us only limitedprotection. In addition, the laws of some foreign countries do not protectproprietary rights to the same extent, as do the laws of the U.S. We cannotassure you that any pending patent applications will result in issued patents,and issued patents could prove unenforceable. Any infringement of ourproprietary rights could result in significant litigation costs. Further, anyfailure by us to adequately protect our proprietary rights could result in ourcompetitors offering similar products, resulting in the loss of our competitiveadvantage and decreased sales.

 

Despite our efforts to protect our proprietary rights, attempts may bemade to copy or reverse engineer aspects of our products, or to obtain and useinformation that we regard as proprietary. Accordingly, we may be unable toprotect our proprietary rights against unauthorized third party copying or use.Furthermore, policing the unauthorized use of our intellectual property wouldbe difficult for us. Litigation may be necessary in the future to enforce ourintellectual property rights, to protect our trade secrets or to determine thevalidity and scope of the proprietary rights of others. Litigation could resultin substantial costs and diversion of resources and could have a material adverseeffect on our business, consolidated financial condition and consolidatedresults of operations.

 

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***We could become subject tolitigation regarding intellectual property rights that could materially harmour business.***

 

We may be subject to intellectual property infringement claims that arecostly to defend and could limit our ability to use some technologies in thefuture. Our industry is characterized by frequent intellectual propertylitigation based on allegations of infringement of intellectual propertyrights. From time to time, third parties have asserted against us and mayassert against us in the future patent, copyright, trademark or otherintellectual property rights to technologies or rights that are important toour business. In addition, we have agreed, and may in the future agree, toindemnify our customers for any expenses or liabilities resulting from claimedinfringements of patents, trademarks or copyrights of third parties. Any claimsasserting that our products infringe, or may infringe on, the proprietaryrights of third parties, with or without merit, could be time-consuming,resulting in costly litigation and diverting the efforts of our management.These claims could also result in product shipment delays or require us tomodify our products or enter into royalty or licensing agreements. Such royaltyor licensing agreements, if required, may not be available to us on acceptableterms, if at all.

 

***Our business could be shut down orseverely impacted if a natural disaster or other unforeseen catastrophe occurs,particularly in California.***

 

Our business and operations depend on the extent to which ourfacilities and products are protected against damage from fire, earthquakes,power loss and similar events. Some of our key business activities currentlytake place in regions considered as high risk for certain types of naturaldisasters. Despite precautions we have taken, a natural disaster or otherunanticipated problem could, among other things, hinder our research anddevelopment efforts, delay the shipment of our products and affect our abilityto receive and fulfill orders. While we believe that our insurance coverage iscomparable to those of similar companies in our industry, it does not cover allnatural disasters, in particular, earthquakes and floods.

 

**Risks Related to Our Common Stock**

 

***Our executive officers, directorsand their affiliates hold a large percentage of our stock and their interestsmay differ from other stockholders.***

 

As of March 31, 2010, our executive officers, directors and theiraffiliates beneficially owned, in the aggregate, approximately 27% of ouroutstanding common stock, of this 25% is collectively owned by investment fundsaffiliated with U.S. Venture Partners and Norwest Venture Partners.Representatives of U.S. Venture Partners and Norwest Venture Partners aredirectors of Occam. These stockholders have significant influence over mostmatters requiring approval by stockholders, including the election ofdirectors, any amendments to our certificate of incorporation and significantcorporate transactions.

 

***Our stock price may be volatile, andyou may not be able to resell shares of our common stock at or above the priceyou paid.***

 

Our shares of common stock began trading on The NASDAQ Global Market inNovember 2006. An active public market for our shares on The NASDAQ GlobalMarket may not be sustained. In particular, limited trading volumes andliquidity may limit the ability of stockholders to purchase or sell our commonstock in the amounts and at the times they wish. Trading volume in our commonstock tends to be modest relative to our total outstanding shares, and theprice of our common stock may fluctuate substantially (particularly inpercentage terms) without regard to news about us or general trends in thestock market.

 

In addition, the trading price of our common stock could become highlyvolatile and could be subject to wide fluctuations in response to variousfactors, some of which are beyond our control. These factors include thosediscussed in this “Risk Factors” section of this Annual Report on Form 10-Kand others such as:

 

·                  quarterly variations in ourconsolidated results of operations or those of our competitors;

 

·                  changes in earningsestimates or recommendations by securities analysts;

 

·                  announcements by us or ourcompetitors of new products, significant contracts, commercial relationships,acquisitions or capital commitments;

 

·                  developments with respect tointellectual property rights;

 

·                  our ability to develop andmarket new and enhanced products on a timely basis;

 

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·                  commencement of, orinvolvement in, litigation;

 

·                  general market volatility;

 

·                  lack of capital to invest inOccam;

 

·                  changes in governmentalregulations or in the status of our regulatory approvals;

 

·                  a slowdown in the telecomindustry or general economy; and

 

·                  continuation of the currenteconomic and credit crisis.

 

In recent years, the stock market in general, and the market fortechnology companies in particular, has experienced extreme price and volumefluctuations that have often been unrelated or disproportionate to theoperating performance of those companies. Broad market and industry factors mayseriously affect the market price of our common stock, regardless of our actualoperating performance. In addition, in the past, following periods ofvolatility in the overall market and the market price of a particular company’ssecurities, securities class action litigation has often been institutedagainst these companies. Any litigation that may be instituted against us couldresult in substantial costs and a diversion of our management’s attention andresources.

 

***Provisions in our charter documentsand under Delaware law could discourage a takeover that stockholders mayconsider favorable.***

 

Provisions in our certificate of incorporation and bylaws, as amendedand restated, may have the effect of delaying or preventing a change of controlor changes in our management. These provisions include the following:

 

·                  our board of directors hasthe right to elect directors to fill a vacancy created by the expansion of theboard of directors or the resignation, death or removal of a director, whichprevents stockholders from being able to fill vacancies on our board ofdirectors;

 

·                  our stockholders may not actby written consent or call special stockholders’ meetings; as a result, aholder, or holders, controlling a majority of our capital stock would not beable to take certain actions other than at annual stockholders’ meetings orspecial stockholders’ meetings called by the board of directors, the chairmanof the board, the chief executive officer or the president;

 

·                  our certificate ofincorporation prohibits cumulative voting in the election of directors, whichlimits the ability of minority stockholders to elect director candidates;

 

·                  stockholders must provideadvance notice to nominate individuals for election to the board of directorsor to propose matters that can be acted upon at a stockholders’ meeting, whichmay discourage or deter a potential acquiror from conducting a solicitation ofproxies to elect the acquiror’s own slate of directors or otherwise attemptingto obtain control of our company; and

 

·                  our board of directors mayissue, without stockholder approval, shares of undesignated preferred stock;the ability to authorize undesignated preferred stock makes it possible for ourboard of directors to issue preferred stock with voting or other rights orpreferences that could impede the success of any attempt to acquire us.

 

As a Delaware corporation, we are also subject to certain Delawareanti-takeover provisions. Under Delaware law, a corporation may not engage in abusiness combination with any holder of 15% or more of its capital stock unlessthe holder has held the stock for three years or, among other things, the boardof directors has approved the transaction. Our board of directors could rely onDelaware law to prevent or delay an acquisition of us.

 

***We may be unable to raise additionalcapital to fund our future operations, and any future financings oracquisitions could result in substantial dilution to existing stockholders.***

 

While we anticipate our cash balances and any cash from operations,will be sufficient to fund our operations for at least the next 12 months,we may need to raise additional capital to fund operations in the future. Thereis no guarantee that we will be able to 

 

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raiseadditional equity or debt funding when or if it is required. The terms of anyfinancing, if available, could be unfavorable to us and our stockholders andcould result in substantial dilution to the equity and voting interests of ourstockholders. Any failure to obtain financing when and as required would havean adverse and material effect on our business, consolidated financialcondition and consolidated results of operations.

 

***If securities or industry analystsdo not publish research or publish misleading or unfavorable research about ourbusiness, our stock price and trading volume could decline.***

 

The trading market for our common stock depends in part on the researchand reports that securities or industry analysts publish about us or ourbusiness. If no or few securities or industry analysts cover our company, thetrading price for our stock would be negatively impacted. If one or more of theanalysts who covers us downgrades our stock or publishes misleading or unfavorableresearch about our business, our stock price would likely decline. If one ormore of these analysts ceases coverage of our company or fails to publishreports on us regularly, demand for our stock could decrease, which could causeor stock price or trading volume to decline.

 

**ITEM 2.****                                          ****UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3.****                                          ****DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.****                                          ****REMOVED AND RESERVED**

 

**ITEM 5.****                                          ****OTHER INFORMATION**

 

None

 

**ITEM 6.****                                          ****EXHIBITS**

 
| ** ** | ** ** | **Exhibit Title**                                                                                                                                                                            |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.01      |       | Certification  of Chief Executive Officer pursuant to Exchange Act  Rules 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.     |
| 31.02      |       | Certification  of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.     |
| 32.01      |       | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, as amended, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| Dated: April 30, 2010 | OCCAM NETWORKS, INC. |
|----------------------------|----------------------|
|                       |                 |   |
|                       |                 |   |
|                       | By:                  | /s/ JEANNE SEELEY |
|                       |                 | Jeanne Seeley |
|                       |                 | Senior Vice President and  Chief Financial Officer |
|                       |                 | (Principal Financial and  Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Exhibit Title**                                                                                                                                                                       |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.01               |       | Certification  of Chief Executive Officer pursuant to Exchange Act  Rules 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.     |
| 31.02               |       | Certification  of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and  15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.     |
| 32.01               |       | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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