Table ofContents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2010**

 

**Or**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                    to                    **

 

**Commission file number: 001-33069**

 

**OCCAM NETWORKS, 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 areacode: **(805) 692-2900**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  Yes o No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See definition 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) |   |                        |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o No x

 

As of July 23, 2010, the number of shares outstanding of theregistrant’s common stock was 21,058,093 shares.

 

 

 

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Table ofContents

 

**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 | 12       |
|                                    |                                                                                        |     |
| Item  3.                                | Quantitative  And Qualitative Disclosures About Market Risk                                 | 20       |
|                                    |                                                                                        |     |
| Item 4.                                 | Controls And  Procedures                                                                    | 21       |
|                                    |                                                                                        |     |
| PART II—OTHER INFORMATION     | 21                                                                                          |
|                                    |                                                                                        |     |
| Item 1.                                 | Legal Proceedings                                                                           | 21       |
|                                    |                                                                                        |     |
| Item 1a.                                | Risk Factors                                                                                | 23       |
|                                    |                                                                                        |     |
| Item 2.                                 | Unregistered Sales Of Equity Securities  And Use Of Proceeds                                | 37       |
|                                    |                                                                                        |     |
| Item 3.                                 | Defaults Upon Senior Securities                                                             | 37       |
|                                    |                                                                                        |     |
| Item 4.                                 | Removed and Reserved                                                                        | 37       |
|                                    |                                                                                        |     |
| Item 5.                                 | Other Information                                                                           | 37       |
|                                    |                                                                                        |     |
| Item 6.                                 | Exhibits                                                                                    | 37       |

 

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Table ofContents

 

**PART I—FINANCIAL INFORMATION**

 

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

 

**OCCAM NETWORKS, INC. AND SUBSIDIARY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                             | ** ** | **2010**          | ** ** | **2009 (*)**     | ** ** |
| ** **                                                                                                                                                                                                             | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                             |       |              |       |                  |       |
| Current assets:                                                                                                                                                                                                        |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                              |       | $                 | 41,923     |                  | $          | 39,268 |   |
| Restricted cash                                                                                                                                                                                                        |       | 1,804             |       | 5,721                 |       |
| Accounts receivable, net                                                                                                                                                                                               |       | 14,308            |       | 14,874                |       |
| Inventories                                                                                                                                                                                                            |       | 10,214            |       | 12,927                |       |
| Prepaid and other current  assets                                                                                                                                                                                      |       | 992               |       | 1,426                 |       |
| Total current assets                                                                                                                                                                                                   |       | 69,241            |       | 74,216                |       |
| Property and equipment,  net                                                                                                                                                                                           |       | 8,736             |       | 8,699                 |       |
| Intangibles, net                                                                                                                                                                                                       |       | 109               |       | 156                   |       |
| Other assets                                                                                                                                                                                                           |       | 73                |       | 91                    |       |
| Total assets                                                                                                                                                                                                           |       | $                 | 78,159     |                  | $          | 83,162 |   |
|                                                                                                                                                                                                                   |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                         |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                                                   |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                       |       | $                 | 9,360      |                  | $          | 8,274 |   |
| Accrued liabilities                                                                                                                                                                                                    |       | 6,275             |       | 6,999                 |       |
| Deferred revenue                                                                                                                                                                                                       |       | 6,411             |       | 13,035                |       |
| Deferred rent                                                                                                                                                                                                          |       | 361               |       | 361                   |       |
| Capital lease obligations                                                                                                                                                                                              |       | 25                |       | 26                    |       |
| Total current liabilities                                                                                                                                                                                              |       | 22,432            |       | 28,695                |       |
| Deferred rent, net of  current portion                                                                                                                                                                                 |       | 1,425             |       | 1,597                 |       |
| Capital lease obligations,  net of current portion                                                                                                                                                                     |       | 9                 |       | 20                    |       |
| Total liabilities                                                                                                                                                                                                      |       | 23,866            |       | 30,312                |       |
| Commitments and  contingencies (See Note 5)                                                                                                                                                                            |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                             |       |              |       |                  |       |
| Common stock, $0.001 par  value, 250,000,000 shares authorized; and 21,058,093 shares issued and  outstanding at June 30, 2010 and 20,669,089 shares issued and  outstanding at December 31, 2009. |       | 289               |       | 289                   |       |
| Additional paid-in capital                                                                                                                                                                                             |       | 190,386           |       | 188,013               |       |
| Accumulated deficit                                                                                                                                                                                                    |       | (136,382          | )          | (135,452              | )          |
| Total stockholders’ equity                                                                                                                                                                                        |       | 54,293            |       | 52,850                |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                                       |       | $                 | 78,159     |                  | $          | 83,162 |   |

 

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*Derived from audited consolidated financial statements included in theregistrant’s Annual Report on Form 10-K for the year endedDecember 31, 2009.

 

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**OCAM NETWORKS, INC. AND SUBSIDIARY**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **June 30,  2010**          | ** ** | **June 30,  2009**        | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
| ** **                                                    | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                       |       | $                                | 23,776     |                           | $          | 21,028 |   | $ | 46,120 |   | $ | 40,447 |   |
| Cost of revenue                                               |       | 14,007                           |       | 13,000                         |       | 26,518 |   | 24,245 |   |
| Gross margin                                                  |       | 9,769                            |       | 8,028                          |       | 19,602 |   | 16,202 |   |
| Operating expenses:                                           |       |                             |       |                           |       |   |   |   |   |
| Research and  product-development                             |       | 3,835                            |       | 4,035                          |       | 7,600 |   | 8,424 |   |
| Sales and marketing                                           |       | 4,514                            |       | 4,364                          |       | 9,118 |   | 8,945 |   |
| General and administrative                                    |       | 1,738                            |       | 2,053                          |       | 3,804 |   | 4,419 |   |
| Restructuring charges                                         |       | —                           |       | 213                            |       | — |   | 213 |   |
| Total operating expenses                                      |       | 10,087                           |       | 10,665                         |       | 20,522 |   | 22,001 |   |
| Loss from operations                                          |       | (318                             | )          | (2,637                         | )          | (920 | ) | (5,799 | ) |
| Other income (expense),  net                                  |       | —                           |       | 104                            |       | — |   | 104 |   |
| Interest income (expense),  net                               |       | 2                                |       | 91                             |       | 6 |   | 236 |   |
| Loss before provision for  income taxes                       |       | (316                             | )          | (2,442                         | )          | (914 | ) | (5,459 | ) |
| Provision for (benefit  from) income taxes                    |       | 4                                |       | (27                            | )          | 16 |   | (14 | ) |
| Net loss                                                      |       | $                                | (320       | )                              | $          | (2,415 | ) | $ | (930 | ) | $ | (5,445 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Net loss per share  attributable to common stockholders:      |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted                                             |       | $                                | (0.02      | )                              | $          | (0.12 | ) | $ | (0.04 | ) | $ | (0.27 | ) |
| Weighted average shares  attributable to common stockholders: |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted                                             |       | 20,853                           |       | 20,219                         |       | 20,751 |   | 20,184 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**OCCAM NETWORKS, INC. AND SUBSIDIARY**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(In thousands)**

 
| ** **                                                                   | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **June 30,  2010**        | ** ** | **June 30,  2009** | ** ** |
| ** **                                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Operating activities**                                                     |       |                           |       |   |   |
| Net loss                                                                     |       | $                              | (930       | ) | $ | (5,445 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                           |       |   |   |
| Stock-based compensation                                                     |       | 1,490                          |       | 1,634 |   |
| Depreciation and  amortization                                               |       | 1,560                          |       | 1,655 |   |
| Accounts receivable  reserves                                                |       | (37                            | )          | (109 | ) |
| Inventory reserves                                                           |       | (47                            | )          | (358 | ) |
| Changes in operating  assets and liabilities:                                |       |                           |       |   |   |
| Accounts receivable                                                          |       | 613                            |       | 2,785 |   |
| Inventories                                                                  |       | 2,750                          |       | 6,684 |   |
| Prepaid expenses and other  current assets                                   |       | 452                            |       | 1,475 |   |
| Accounts payable                                                             |       | 1,086                          |       | (1,921 | ) |
| Accrued expenses                                                             |       | (724                           | )          | (1,803 | ) |
| Deferred revenue                                                             |       | (6,624                         | )          | (5,196 | ) |
| Deferred rent                                                                |       | (172                           | )          | (161 | ) |
| Net cash used in operating  activities                                       |       | (583                           | )          | (760 | ) |
| **Investing activities**                                                     |       |                           |       |   |   |
| Decrease in restricted  cash                                                 |       | 3,917                          |       | 4,022 |   |
| Net purchases of property  and equipment                                     |       | (1,550                         | )          | (455 | ) |
| Net cash provided by  investing activities                                   |       | 2,367                          |       | 3,567 |   |
| **Financing activities**                                                     |       |                           |       |   |   |
| Exercise of stock options                                                    |       | 909                            |       | — |   |
| Payments of payroll taxes  for vested restricted stock units                 |       | (259                           | )          | — |   |
| Payments of capital lease  obligations                                       |       | (12                            | )          | (10 | ) |
| Proceeds from employee  stock purchase plan                                  |       | 233                            |       | 355 |   |
| Net cash provided by  financing activities                                   |       | 871                            |       | 345 |   |
| Net increase in cash and  cash equivalents                                   |       | 2,655                          |       | 3,152 |   |
| Cash and cash equivalents,  beginning of period                              |       | 39,268                         |       | 30,368 |   |
| Cash and cash equivalents,  end of period                                    |       | $                              | 41,923     |   | $ | 33,520 |   |
| **Supplemental disclosure of cash  flow information:**                       |       |                           |       |   |   |
| Income taxes paid                                                            |       | $                              | 132        |   | $ | 202 |   |
| Interest paid                                                                |       | $                              | 2          |   | $ | 3 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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** **

**OCCAM NETWORKS, INC. AND SUBSIDIARY**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.****   ****Business and Basis of Presentation**

 

Occam Networks, Inc. (“Occam,”the “Company,” “we” or “us”) develops markets and supports innovative broadbandaccess products designed to enable telecom service providers to offer bundledvoice, video and high speed internet, or Triple Play, services over both copperand fiber optic networks.  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*

 

Theaccompanying condensed consolidated financial statements are unaudited.  The condensed consolidated balance sheet atDecember 31, 2009 is derived from Occam’s audited consolidated financialstatements included in its Annual Report on Form 10-K for the year endedDecember 31, 2009.  These unauditedcondensed consolidated financial statements reflect all material entries,consisting only of normal recurring entries, which, in the opinion ofmanagement, are necessary to fairly state our financial position, results ofoperations and cash flows for the interim periods.  The results of operations for the currentinterim periods are not necessarily indicative of results to be expected forthe entire year.

 

Theunaudited condensed consolidated financial statements include management’sestimates and assumptions that affect the reported amounts of assets andliabilities as of the date of the consolidated financial statements and thereported amounts of revenue and expenses during the reporting period.  Actual results could differ from thoseestimates, and material effects on consolidated operating results andconsolidated financial position may result.

 

Theunaudited interim condensed financial statements have been prepared inaccordance with accounting principles generally accepted in the United States (“GAAP”)for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notesrequired by GAAP for annual financial statements.  Because all of the disclosures required byGAAP are not included, as permitted by the rules of the Securities andExchange Commission, or the SEC, these interim condensed consolidated financialstatements should be read in conjunction with the audited consolidated financialstatements and accompanying notes included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2009. In the opinion ofmanagement, all adjustments consisting of normal and recurring entriesconsidered necessary for a fair statement of the results for the interimperiods have been included in the Company’s financial position as of June 30,2010, the results of its operations for the three and six months ended June 30,2010 and 2009, and its cash flow for the six months ended June 30, 2010and 2009.

 

Certainamounts in the prior periods presented have been reclassified to conform to thecurrent period financial statement presentation. These reclassifications had noeffect on previously reported net income (loss).

 

TheCompany warrants its products for periods up to five years and records anestimated warranty accrual when shipped.

 

*Use ofEstimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and the accompanying notes.  Actual results could differ from thoseestimates and such differences may be material to the consolidated financialstatements.

 

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*RevenueRecognition*

 

Occam generally recognizesrevenue under Staff Accounting Bulletin Codification Topic 13, RevenueRecognition, in the period when all of the requirements of Staff AccountingBulletin Codification Topic 13: Revenue Recognition 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.

 

The Company enters intotransactions with value-added resellers where the resellers may not have theability to pay for these sales independent of payment to them by the end-user.In these cases, the Company does not recognize revenue until payment has beenreceived, provided the remaining revenue recognition criteria are met.

 

The Company sells hardwareproducts that contain embedded operating system software. These tangibleproducts contain software components and non-software components that functiontogether to deliver the product’s essential functionality. Revenue isrecognized for these products under Staff Accounting Bulletin CodificationTopic 13: Revenue Recognition. The Company has one minor software networkmanagement product which is a stand- alone product not essential to thefunctionality of other products that the Company sells. Revenue is recognizedfor this product in accordance with FASB Accounting Standard Codification Topic985, Software. The amount of sales of this product and the related revenuerecognized to date by the Company have been immaterial.

 

In addition to theaforementioned general policy, the Company enters into transactions thatrepresent multiple-element arrangements, which may include training andpost-sales technical support and maintenance to our customers as needed toassist them in installation or use of our products, and makes provisions forthese costs in the periods of sale. Multiple-element arrangements are assessedto determine whether they can be separated into more than one unit ofaccounting. A multiple-element arrangement is separated into more than one unitof accounting if all of the following criteria are met:

 

·                  the delivereditem(s) has value 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 notmet, then revenue is deferred until such criteria are met or until theperiod(s) over which the last undelivered element is delivered. If thereis objective and reliable evidence of fair value for all units of accounting inan arrangement, the arrangement consideration is allocated to the separateunits of accounting based on each unit’s relative fair value. When the Companyis unable to establish selling price using vendor specific objective evidenceor third party evidence, the Company uses “estimated selling price” (“ESP”) inits allocation of arrangement consideration. The objective of ESP is todetermine the price at which the Company would transact a sale if the productor service were sold on a stand-alone basis. ESP is generally used for newproducts, and it applies to a small proportion of the Company’s arrangementswith multiple deliverables. The Company determines ESP for a product or serviceby considering multiple factors including, but not limited to, geographies,market conditions, competitive landscape, internal costs, gross marginobjectives, and pricing practices.

 

In certain circumstances, the Company enters intoarrangements with customers who receive financing support in the form oflong-term low interest rate loans from the United States Department ofAgriculture’s Rural Utilities Service, or RUS. The terms of the RUS contractsprovide that in certain instances transfer of title of the Company’s productsdoes not occur until customer acceptance, The Company recognizes revenue onthese RUS contracts upon customer acceptance, given the remaining revenuerecognition criteria, such as collectability, under Staff Accounting BulletinCodification Topic 13: Revenue Recognition have been met.

 

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**2.****   ****Fair Value Measurements**

 

EffectiveJanuary 1, 2008, the Company adopted the authoritative guidance on fairvalue measurements. Fair value is defined as an exit price, representing theamount that would be received to sell an asset or paid to transfer a liabilityin an orderly 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:

 

Level1 - Observable inputs that reflect quoted prices (unadjusted) for identicalassets or liabilities in active markets.

 

Level2 - Include other inputs that are directly or indirectly observable in themarketplace.

 

Level3 - Unobservable inputs which are supported by little or no market activity.

 

Thefair value hierarchy also requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring fair value.

 

Inaccordance with this guidance, we measure our cash equivalents at fairvalue.  Our cash equivalents areclassified within Level 1.  Cashequivalents are valued primarily using quoted market prices utilizing marketobservable inputs.  At June 30,2010, cash equivalents consisted of money market funds measured at fair value ona recurring basis.  Fair value of ourmoney market funds was $38.8 million at June 30, 2010.

 

EffectiveJanuary 1, 2009, the Company adopted, the FASB staff position that delayedthe guidance on fair value measurements for non financial assets and non financialliabilities. The adoption of this guidance did not have a material impact onthe Company’s consolidated financial statements.

 

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

 
| ** **        | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------|------------|--------------------|------------|-----------------------------|------------|
| Raw materials     |       | $                  | 998        |                        | $          | 274 |   |
| Work-in-process   |       | 437                |       | 56                          |       |
| Finished goods(1) |       | 8,779              |       | 12,597                      |       |
| Total inventories |       | $                  | 10,214     |                        | $          | 12,927 |   |

 

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| (1) |   | $3.5 million and  $6.2 million of finished goods inventory were shipped to customers as of  June 30, 2010 and December 31, 2009, respectively. The majority  were sent to RUS contract customers and value-added resellers. Revenue and  related cost of revenue were not recognized at the time of shipments as  defined by the Company’s revenue recognition policy and therefore were  included in inventories. For more information regarding our revenue  recognition policy, see Revenue Recognition under Note 1 to these  unaudited condensed consolidated financial statements. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**4.****   ****Net Loss Per Share Attributable toCommon Stockholders**

 

The following table setsforth the computation of basic and diluted loss per share (in thousands, exceptper share data):

 
| ** **                                                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                  | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009**    | ** ** | **June 30, 2010** | ** ** | **June 30, 2009** | ** ** |
| ** **                                                                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss attributable to  common stockholders                                               |       | $                                | (320       | )                              | $          | (2,415 | ) | $ | (930 | ) | $ | (5,445 | ) |
| **Shares used in computation:**                                                             |       |                             |       |                           |       |   |   |   |   |
| Weighted average common  shares outstanding used in computation of basic net loss per share |       | 20,853                           |       | 20,219                         |       | 20,751 |   | 20,184 |   |
| Dilutive effect of stock  options                                                           |       | —                           |       | —                         |       | — |   | — |   |
| Dilutive effect of common  stock warrants                                                   |       | —                           |       | —                         |       | — |   | — |   |
| Shares used in computation  of diluted net income (loss) per share                          |       | 20,853                           |       | 20,219                         |       | 20,751 |   | 20,184 |   |
| Basic and diluted net loss per share                                                        |       | $                                | (0.02      | )                              | $          | (0.12 | ) | $ | (0.04 | ) | $ | (0.27 | ) |

 

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Basic and diluted net lossper share are identical because we had losses from continuing operations andthe impact of common equivalent shares was anti-dilutive and therefore excluded.The anti-dilutive weighted average shares that were excluded from the sharesused in computing diluted net loss per share for three months endedJune 30, 2010 and June 30, 2009, amounted to approximately 0.6million and 3.1 million shares, respectively and for the six months endedJune 30, 2010 and June 30, 2009, amounted to approximately 0.6million and 3.1 million shares, respectively.

 

**5.****   ****Commitments and Contingencies**

 

TheCompany leases its office facilities and certain equipment under non-cancelableoperating lease agreements, which expire at various dates through 2015.Operating leases contain escalation clauses with annual base rent adjustmentsor a cost of living adjustment. Total rent expense was $0.3 million for boththe three months ended June 30, 2010 and June 30, 2009, and $0.6million, for both the six months ended June 30, 2010 and June 30,2009 respectively.

 

Minimumannual lease commitments under non-cancelable operating leases are as follows(in thousands):

 
| **Remainder of fiscal year,**         | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|
| 2010                                  |       | $          | 726        |   |
| Fiscal year ending  December 31, |       |       |       |
| 2011                                  |       | 1,469      |       |
| 2012                                  |       | 1,505      |       |
| 2013                                  |       | 1,543      |       |
| 2014                                  |       | 639        |       |
| 2015                                  |       | 328        |       |
| Total Minimum Lease  Payments         |       | $          | 6,210      |   |

 

Royalties

 

Fromtime to time, the Company may license certain technology for incorporation intoits products. Under the terms of these multi-year agreements, royalty paymentswill be made based on per-unit sales of certain of the Company’s products. TheCompany incurred royalty expense of $75,284 and $67,000 for the three monthsended June 30, 2010 and June 30, 2009, respectively. The Companyincurred $129,473 and $108,000 in royalty expenses for the six months endedJune 30 2010 and June 30, 2009, respectively.

 

*Legal Proceedings*

 

*IPO Allocation Litigation*

 

In June 2001, threeputative stockholder class action lawsuits were filed against AcceleratedNetworks, certain of its then officers and directors and several investmentbanks that were underwriters of Accelerated Networks’ initial public offering.The cases, which were later consolidated, were filed in the United StatesDistrict Court for the Southern District of New York, and the operativeComplaint was filed on April 19, 2002. The Complaint was filed on behalfof 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) andRule 10b-5 of the 1934 Act against one or both of Accelerated Networks andthe individual defendants. 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 thatover three hundred other companies have been named in over three hundredsimilar lawsuits that have been coordinated with the Company’s case. InOctober 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) 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, theSecond Circuit denied the petition, but noted that Plaintiffs could ask theDistrict Court to certify a more narrow class than the one that was rejected.

 

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The parties in theapproximately 300 coordinated cases, including the Company’s, reached asettlement. On October 5, 2009, the Court approved the settlement andcertified a settlement class. Six notices of appeal of the Second Circuit ofthe Court’s approval of the settlement have been filed. Three objectors to thesettlement who filed a notice of appeal also filed a permission to file anappeal on the basis that the Court purportedly abused its discretion concerningthe class certification on the grounds that it was broader than the classrejected by the Second Circuit Appeals Court. Plaintiffs filed an opposition tothe petition. The Court has not yet ruled on the petition and the briefing onthe appeals has not yet commenced. The case remains open pending the outcome ofthe court ruling on the appeals.

 

Due to the inherentuncertainties of litigation, the Company cannot accurately predict the ultimateoutcome of the matter. The Company has not recorded any accrual related to thesettlement because the Company expects any settlement amounts to be covered byits insurance policies.

 

*IPO Short Swing Profits Litigation*

 

In late 2007, the Companyreceived a letter from Vanessa Simmonds, a putative shareholder, demanding thatthe Company investigate and prosecute a claim for alleged short-swing tradingin violation of Section 16(b) of the Securities Exchange Act of 1934,15 U.S.C. § 78p(b), by the underwriter of the Company’s initial publicoffering (“IPO”) and certain unidentified directors, officers and shareholdersof the Company (then known as Accelerated Networks). The Company 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 the Company IPO, alleging violations of Section 16(b). Thecomplaint alleges that the combined number of shares of the Company commonstock beneficially 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 ofSection 16(a) and the short-swing trading prohibition ofSection 16(b), and failed to comply with those provisions. The complaintseeks to recover from the lead underwriter any “short-swing profits” obtainedby it in violation of Section 16(b). The Company was named as a nominaldefendant in the action, but has no liability for the asserted claims. None ofthe directors or officers of the Company are named as defendants in thisaction.

 

On October 29, 2007,the case was reassigned to Judge James L. Robart along with fifty-four otherSection 16(b) cases seeking recovery of short-swing profits fromunderwriters in connection with various IPOs. The Underwriters and Issuers havefiled a motion to dismiss the case and reply briefs have been filed. The Courtheard oral argument on January 19, 2009 from all parties. OnMarch 12, 2009, the Court dismissed the 16 (b) complaint against theissuer defendants including Occam on both jurisdictional and statute oflimitation grounds. On March 31, 2009, the Plaintiffs filed a Notice ofAppeal and their opening brief on August 26, 2009. The Issuers includingOccam and the underwriters filed their responses on October 2, 2009. Eachparty’s reply briefs have been filed as of November 17, 2009. To date theAppellate Court for the Ninth Circuit has not set a date of oral argument.

 

Due to the inherentuncertainties of threatened litigation, the Company cannot accurately predictthe ultimate outcome of the matter. The Company has not recorded any accrualsrelated to the demand letters or Section 16(b) litigation because theCompany expects any resulting resolution to be covered by its insurancepolicies.

 

*Other Matters*

 

From time to time, theCompany is subject to threats of litigation or actual litigation in theordinary course of business, some of which may be material. The Companybelieves that, except as described above, there are no currently pendingmatters that, if determined adversely to us, would have a material effect onthe Company’s business or that would not be covered by our existing liabilityinsurance maintained by the Company.

 

*Indemnifications and Guarantees*

 

The Company enters into indemnification provisionsunder its agreements with other companies in the ordinary course of business,typically with its contractors, customers, value-added resellers, andlandlords. As of June 30, 2010, the Company did not have any material accruedliability related to these indemnification agreements.

 

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*PurchaseOrders*

 

Underthe terms of Occam’s contract manufacturer agreements and original designmanufacturer agreements, Occam is required to place orders with its contractmanufacturers and original design manufacturers to provide inventory to meetits estimated sales demand. Certain contract manufacturer agreements includeproduction forecast change, lead-time and cancellation provisions. AtJune 30, 2010, open purchase orders with contract manufacturers were $23.7million.

 

*Warranties*

 

Occamprovides standard warranties with the sale of products for up to five yearsfrom date of shipment. The estimated cost of providing the product warranty isrecorded at the time of shipment. Occam maintains product quality programs andprocesses including actively monitoring and evaluating the quality of itssuppliers. Occam quantifies and records an estimate for warranty related costsbased on Occam’s actual history, projected return and failure rates and currentrepair and replacement costs. The following table summarizes changes in Occam’saccrued warranty liability that is included in accrued liabilities (inthousands):

 
| ** **                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ** **                                   | ** ** | ** **        | ** ** | ** **            | ** ** |
| Warranty liability at  beginning of the year |       | $                 | 4,818      |                  | $          | 4,326 |   |
| Accruals for warranty  during the period     |       | 1,240             |       | 2,830                 |       |
| Warranty utilization                         |       | (2,405            | )          | (2,338                | )          |
| Warranty liability at end  of the period     |       | $                 | 3,653      |                  | $          | 4,818 |   |

 

The increased warrantyutilization for the six months ended June 30, 2010, was primarily due tofield rework and replacement for specific customer deployments related tocapacitor power function failures.

 

**6.****   ****Accrued Liabilities**

 

Themajor components of accrued liabilities are (in thousands):

 
| ** **                                   | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------|------------|--------------------|------------|-----------------------------|------------|
| Warranty accruals                            |       | $                  | 3,653      |                        | $          | 4,818 |   |
| Payroll, paid time off and  related accruals |       | 1,850              |       | 1,620                       |       |
| Commissions                                  |       | 304                |       | 234                         |       |
| Other accruals                               |       | 468                |       | 327                         |       |
| Total                                        |       | $                  | 6,275      |                        | $          | 6,999 |   |

 

**7.****   ****Stock Options, Stock Awards,Employee Stock Purchase Plan, and Stock-Based Compensation**

 

Stockoption activity, under the Company’s stock option plan for the six months endedJune 30, 2010, is summarized as below (shares and intrinsic value inthousands):

 
| ** **                           | ** ** | **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                              |       | 66          |       |                                        |       |                                                 |       |                            |       |
| Exercised                            |       | (244        | )          |                                        |       |                                                 |       |                            |       |
| Forfeited or expired                 |       | (33         | )          |                                        |       |                                                 |       |                            |       |
| Outstanding at June 30,  2010        |       | 3,712       |       | $                                           | 5.67       |                                                 | 6.71       |                            | $          | 6,379 |   |
| Exercisable at June 30,  2010        |       | 2,552       |       | $                                           | 6.75       |                                                 | 5.88       |                            | $          | 3,601 |   |

 

Theweighted-average fair value of options granted to employees on the date of thegrant for the three months ended June 30, 2010 was $2.89 per share and forthe six months ended June 30, 2010 was $3.18 per share.

 

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The2006 Equity Incentive Plan, or 2006 Plan, provides for automatic annualincreases in the number of shares available for issuance under the 2006 Planeffective as of the first day of each fiscal year equal to the lesser of(a) 3% of the outstanding shares of the common stock on the first day ofthe applicable fiscal year; (b) 750,000 shares; or (c) such otheramount as the Board of Directors or a committee of the board may determine. OnFebruary 23, 2010, the Board of Directors approved an increase of 620,073shares reserved for issuance under the 2006 Plan for fiscal 2010. Thisrepresented 3% of the outstanding common shares as of January 1, 2010.

 

***Stock Awards***

 

Asummary of the Company’s restricted stock unit activities is as follows (inthousands):

 
| ** **                           | ** ** | **Restricted Stock  Units** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  January 1, 2010 |       | 315                         |       | 1.09                                                 |       | $                               | 1,703      |   |
| Awarded                              |       | 3                           |       |                                                 |       |                            |       |
| Released                             |       | (67                         | )          |                                                 |       |                            |       |
| Forfeited or expired or  cancelled   |       | (46                         | )          |                                                 |       |                            |       |
| Outstanding at  June 30, 2010   |       | 205                         |       | 1.06                                                 |       | $                               | 1,138      |   |

 

***Employee Stock Purchase Plan***

 

InMarch 2008, the Board of Directors approved an amendment to our 2006Employee Stock Purchase Plan or the ESPP. The amendment increased the maximumnumber of shares of the Company’s common stock that an eligible employee maypurchase during each offering period from 1,000 shares to 5,000 shares. Underthe ESPP, 78,320 shares were issued on February 16, 2010 at a purchaseprice per share of $2.97.

 

TheESPP provides for an automatic annual increase in the number of sharesavailable for issuance under the ESPP effective as of the first day of eachfiscal year equal to the lesser of (a) 300,000 shares of common stock;(b) 1.5% of the outstanding shares of common stock on the first day of theapplicable fiscal year; or (c) an amount determined by the Board ofDirectors. On February 23, 2010, the Board of Directors approved anincrease of 300,000 shares in the number of shares reserved for issuance underthe ESPP.

 

***Stock-Based Compensation***

 

Thefollowing table summarizes the stock-based compensation expense, for allstock-based awards to employees and directors, including employee stockoptions, restricted stock and restricted stock units and shares purchasedpursuant to the ESPP based on the estimated fair value on our ConsolidatedStatements of Operations (in thousands):

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                  | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009**    | ** ** | **June 30, 2010** | ** ** | **June 30, 2009** | ** ** |
| ** **                                                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Employee stock-based  compensation in:**                                  |       |                             |       |                           |       |   |   |   |   |
| Cost of revenue                                                             |       | $                                | 84         |                           | $          | 104 |   | $ | 171 |   | $ | 193 |   |
| Research and product  development expense                                   |       | 199                              |       | 258                            |       | 448 |   | 481 |   |
| Sales and marketing  expense                                                |       | 186                              |       | 247                            |       | 404 |   | 444 |   |
| General and administrative  expense                                         |       | 238                              |       | 282                            |       | 467 |   | 516 |   |
| Total SFAS  123(R) stock-based compensation in operating expenses |       | 623                              |       | 787                            |       | 1,319 |   | 1,441 |   |
| Total SFAS  123(R) stock-based compensation                            |       | $                                | 707        |                           | $          | 891 |   | $ | 1,490 |   | $ | 1,634 |   |

 

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Asof June 30, 2010, total unamortized stock-based compensation cost related tonon-vested stock options after accounting for estimated forfeitures was $1.8million, which the Company expects to recognize over the remaining vestingperiod of each grant, up to the next 48 months.

 

Uponadoption of the FASB Accounting Standard Codification Topic 718, stock-basedcompensation, we selected the Black-Scholes option pricing model as the mostappropriate model for determining the estimated fair value for stock-basedawards. The use of the Black-Scholes model requires the use of extensive actualemployee exercise behavior data and the use of a number of complex assumptionsincluding expected volatility, risk-free interest rate, forfeitures, andexpected dividends. The assumptions used to value options granted are asfollows:

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009**    | ** ** | **June 30, 2010** | ** ** | **June 30, 2009** | ** ** |
| Risk-free interest rate |       | 2.04                             | %          | 2.93                           | %          | 2.27 | % | 2.87 | % |
| Expected term (years)   |       | 5.0                              |       | 4.9                            |       | 4.9 |   | 4.9 |   |
| Dividend yield          |       | 0                                | %          | 0                              | %          | 0 | % | 0 | % |
| Expected volatility     |       | 54                               | %          | 57                             | %          | 54 | % | 57 | % |

 

Therisk-free interest rate is based on the U.S. Treasury yield curve in effect atthe time of grant. We do not anticipate declaring dividends in the foreseeablefuture. Expected volatility is based on the annualized weekly historicalvolatility of our stock price and we believe it is indicative of futurevolatility. We estimate the expected life of options granted based onhistorical exercise and post-vesting cancellation patterns with considerationof our industry peers of similar size with similar option vesting periods. Ouranalysis of stock price volatility and option lives involves management’s bestestimates at the time of determination. FASB Accounting Standard CodificationTopic 718, stock-based compensation, also requires that we recognizecompensation expense for only the portion of options or stock units that areexpected to vest. Therefore, we apply an estimated forfeiture rate that isderived from historical employee termination behavior. If the actual number offorfeitures differs from that estimated by management, additional adjustmentsto compensation expense may be required in future periods.

 

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

 

As of December 31, 2009, the Company had netoperating loss carry forwards of approximately $109.1 million and$72.1 million to offset federal and state future taxable income,respectively.   These amounts have been reduced due to an ownershipchange which occurred, as defined by Sections 382 of the Internal Revenue Code,resulting in the forfeiture of a portion of the Company’s net operating losscarryforwards.  Gross deferred tax assets and related valuation allowancehave been reduced by $2.8 million to $54.0 million in the first quarter of 2010to reflect the conclusions of this analysis.

 

**9.****             ****FairPointCommunications, Inc. Bankruptcy**

 

OnJune 1, 2010, the US Bankruptcy Court ordered the payment of $1.7 million byFairPoint Communications in full satisfaction of Occam’s pre-petitionclaim.  On June 18, 2010, Occam receivedthe amount of $1.7 million. As a result we have recognized $1.7 million asrevenue in the quarter ended June 30, 2010, previously deferred, since all thecriteria of Staff Accounting Bulletin Codification Topic 13: RevenueRecognition have been met.  The expensepreviously recorded for inventory impairment, $138,000, was reversed in the quarterended June 30, 2010 since the related revenue has been recognized.

 

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**ITEM 2.****                        ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

*Youshould read the following discussion and analysis in conjunction with ourcondensed consolidated financial statements and the related notes theretoincluded in this 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 endedDecember 31, 2009. The following discussion contains both historicalinformation and forward-looking statements within the meaning ofSection 21E of the Exchange Act. A number of factors affect our operatingresults and could cause our actual future results to differ materially from anyforward-looking results discussed below. In some cases, you can identifyforward-looking statements by terminology such as “anticipates,” “appears,” “believes,”“continue,” “could,” “estimates,” “expects,” “feels,” “goal,” “hope,” “intends,”“may,” “our future success depends,” “plans,” “potential,” “predicts,” “projects,”“reasonably,” “seek to continue,” “should,” “thinks,” “will” or the negative ofthese terms or other comparable terminology. These statements are onlypredictions. Actual events or results may differ materially. In addition,historical information should not be considered an indicator of futureperformance. Factors that could cause or contribute to these differencesinclude, but are not limited to, the risks discussed in this Report inPart II, Item 1A under the caption “Risk Factors.” These factors may causeour actual results to differ materially from any forward-looking statements.*

* *

*Althoughwe believe that the expectations reflected in the forward-looking statementsare reasonable, we cannot guarantee future results, levels of activity,performance or achievements. Moreover, we are under no duty to update any ofthe forward-looking statements after the date of this Quarterly Report onForm 10-Q to conform these statements to actual results. Theseforward-looking statements are made in reliance upon the safe harbor provisionof The Private Securities Litigation Reform Act of 1995.*

 

**Overview**

 

We develop, market and support innovative broadbandaccess products designed to enable telecom service providers to offer bundledvoice, video and high speed internet, or Triple Play, services over both copperand fiber optic networks.  Our BroadbandLoop Carrier, or BLC, is an integrated hardware and software platform that usesInternet Protocol, or IP, and Ethernet technologies to increase the capacity oflocal 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, and high-definition television, or HDTV.  Our platform simultaneously supportstraditional voice and data services, enabling our customers to leverage theirexisting networks and migrate to IP without disruption.  In addition to providing our customers withincreased bandwidth, our products provide incremental value by offeringsoftware-based features to improve the quality, resiliency and security ofnetwork service offerings.  We market ourproducts through a combination of direct and indirect channels.  Our direct sales efforts are focused on theNorth American independent operating company, or IOC, segment of the telecomservice provider market. As of June 30, 2010, we had shipped our BLC platformto over 350 telecommunications customers.

 

From our inception through June 30, 2010, wehave incurred cumulative net losses of approximately $136.4 million.  We realized income from operations and wereprofitable on a net income basis during the quarters ended December 31,2008, December 31, 2006 and September 24, 2006, and for the yearended December 31, 2006. Previously, we had not been profitable on a quarterly or annual basis,excluding the quarter ended December 25, 2005, in which we realized modestoperating income of $3,000.  We experiencedoperating and net losses in all four quarters of fiscal 2009.   In the first half of 2010, we experienced anincrease in customer bookings activity. We believe this increase was primarilydue to a slight improvement in economic conditions. We expect, however, thatany continuation of current macroeconomic conditions may have an adverse impacton our business. In the short term, we expect that booking activity may varydepending on our customers’ ability to make capital investments using their ownfunds, and their access to credit facilities or other loan program funds.

 

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**CriticalAccounting Policies and Estimates**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these consolidated financial statements requiresus to make estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent assets and liabilities at thedate of the consolidated financial statements and the reported amounts ofrevenue and expenses during the reporting period. On an ongoing basis, we evaluateour estimates 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.

 

We included in our Annual Report on Form 10-Kfor the year ended December 31, 2009, a discussion of our most criticalaccounting policies, which are those that are most important to the portrayalof our financial condition and results of operations and require management’smost difficult, subjective and complex judgments, often as a result of the needto make estimates about the effect of matters that are inherently uncertain.

 

Wewarrant our products for periods up to five years and the estimated cost ofproviding the product warranty is recorded at the time of shipment. We maintainproduct quality programs and processes, including actively monitoring andevaluating the quality 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 parts andlabor, depending on the type of service required. These estimates require us toexamine past and current warranty issues and consider their continuing impactin the future. Our accrual is based on consideration of all these factors whichare known as of the preparation of our consolidated financial statements. Ourestimates of future warranty liability are based on prediction of futureevents, conditions and other complicated factors that are difficult topredict.   The actual costs we incur maydiffer materially from our estimates.

 

**Results ofOperations**

 

*Three-months ended June 30, 2010 and 2009*

 

*Revenue (in thousands, exceptpercentages)*

 
| ** ** | ** ** | **Three Months Ended** | ** ** | **Increase (Decrease) 2010 vs. 2009** | ** ** |
|------------|------------|----------------------------------|------------|-----------------------------------------------------------|------------|
| ** ** | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009**                               | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | ** **                       | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue    |       | $                                | 23,776     |                                                      | $          | 21,028 |   | $ | 2,748 |   | 13 | % |
|            |            |                                  |            |                                                           |            |  |  |  |  |  |  |  |

 

Our revenue is principally comprised of our BLC 6000series system product line, Optical Network Terminals, cabinets and relatedaccessories.  Revenue increased by $2.8million or 13% to $23.8 million for the three months ended June 30, 2010as compared to revenue of $21.0 million for the three months endedJune 30, 2009. The increase in revenue is primarily due to the recognitionof revenue associated with certain orders related to the broadband fundinginitiatives and the recognition of $1.7 million of FairPoint revenue that wasdeferred in the third quarter of 2009. See note 9 “FairPoint Communications, Inc.Bankruptcy” in the notes to our unaudited condensed, consolidated financialstatements above for more information regarding FairPoint.

 

We expect however that any continuation of currentmacroeconomic conditions may have an adverse impact on our business in thesecond half of 2010. We believe IOCs will continue to carefully evaluate theirspending decisions for the rest of 2010, although government broadband fundinginitiatives could have a favorable impact on capital spending trends amongtelecommunications carriers. In the short term, we expect that booking activitymay vary depending on our customers’ ability to make capital investments usingtheir own funds, and their access to credit facilities or other loan programfunds. We have experienced and believe we may continue to experience supplyconstraints as demand increases or as we introduce our newest products.

 

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

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Increase (Decrease) 2010 vs. 2009** | ** ** |
|-------------------------|------------|----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **              | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009**                               | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | ** **                       | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of revenue         |       | $                                | 14,007     |                                                      | $          | 13,000 |   | $ | 1,007 |   | 8 | % |
| Gross margin            |       | $                                | 9,769      |                                                      | $          | 8,028 |   | $ | 1,741 |   | 22 | % |
| Gross margin percentage |       | 41                               | %          | 38                                                        | %          |   |   |   |   |

 

Cost of revenue includes the cost of productsshipped for which revenue was recognized, warranty costs, costs of anymanufacturing yield problems, re-work costs, manufacturing overhead, provisionsfor obsolete inventory and the cost of post-sales support.  The increase in cost of revenue during thethree months ended June 30, 2010 from the similar period during the prioryear was primarily attributable to increased revenue shipments.

 

Gross margin was 41% of revenue for the three monthsended June 30, 2010 and 38% of revenue for the three months ended June 30,2009.  The increase in gross margin wasprimarily attributable to product mix and decreased unit cost of our blades andONT products.

 

We expect that our gross margin will vary fromquarter-to-quarter due in part to product mix, average selling price changesand manufacturing cost changes.  To theextent that lower margin products represent an increased percentage of ourtotal revenue in any period, it will tend to reduce our gross margin.  Additionally, as we introduce new productsinto the market, we anticipate our gross margin may fluctuate.

 

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

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Increase (Decrease) 2010 vs. 2009** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                   | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009**                               | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                                                   | ** ** | ** **                       | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and  product-development                            |       | $                                | 3,835      |                                                      | $          | 4,035 |   | $ | (200 | ) | (5 | )% |
| Research and  product-development as a percentage of revenue |       | 16                               | %          | 19                                                        | %          |   |   |   |   |
|                                                              |            |                                  |            |                                                           |            |  |  |  |  |  |  |  |

 

Researchand product-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 $0.2 million or 5% to $3.8 million for the three months ended June 30,2010 as compared to $4.0 million for the three months ended June 30, 2009.The decrease in research and product-development expenses was primarilyattributable to the decrease in personnel related costs related to reduction inforce and decreased contract product-development expenses.

 

Wecurrently expect research and product-development expenses in future periods tobe largely consistent with current expense levels but may vary with theintroduction of new products or any changes in salary levels.

 

*Sales and marketing expenses (in thousands, exceptpercentages)*

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Increase (Decrease) 2010 vs. 2009** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                      | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009**                               | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                                      | ** ** | ** **                       | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and marketing                             |       | $                                | 4,514      |                                                      | $          | 4,364 |   | $ | 150 |   | 3 | % |
| Sales and marketing as a  percentage of revenue |       | 19                               | %          | 21                                                        | %          |   |   |   |   |
|                                                 |            |                                  |            |                                                           |            |  |  |  |  |  |  |  |

 

Salesand marketing expenses consist primarily of salaries, sales commissions, andother personnel-related costs, development and distribution of promotionalmaterials, and other costs related to generating sales and conducting corporatemarketing activities.  Sales andmarketing expenses increased by $0.1 million or 3% to $4.5 million for thethree months ended June 30, 2010 from $4.4 million for the same period in2009. This net increase was primarily due to higher sales commissions due to anincrease in bookings activity and travel related costs, offset by lowerpersonnel related costs.

 

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Wecurrently expect sales and marketing expenses in future periods to beconsistent with current expense levels but may vary with the level of customerbookings and the level of spending on new or expanded marketing programs or anychanges to salary levels.

 

*General and administrative expenses (in thousands, exceptpercentages)*

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Increase (Decrease) 2010 vs. 2009** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                             | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009**                               | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative                             |       | $                                | 1,738      |                                                      | $          | 2,053 |   | $ | (315 | ) | (15 | )% |
| General and administrative  as a percentage of revenue |       | 7                                | %          | 10                                                        | %          |   |   |   |   |
|                                                        |            |                                  |            |                                                           |            |  |  |  |  |  |  |  |

 

Generaland administrative expenses consist primarily of salaries and otherpersonnel-related costs for executive, finance, human resources, andadministrative personnel. Additionally, general and administrative expensesinclude professional fees, liability insurance and other general corporatecosts such as rent, legal, utilities and accounting expenses. General andadministrative expenses decreased by $0.3 million or 15% to $1.7 million forthe three months ended June 30, 2010 as compared to $2.0 million for thethree months ended June 30, 2009. General and administrative expenses decreasedprimarily due to lower legal fees and lower personnel related costs.

 

Wecurrently expect general andadministrative expenses in future periods to be largely consistent withcurrent expense levels but may vary with any changes to salary levels.

 

*Restructuring charges*

 

On May 7, 2009, we implemented areduction-in-force that resulted in the termination of approximately 10% of ourwork force. We substantially completed the reduction-in-force by the end of thesecond quarter of 2009. The purpose of the workforce reduction was to reducecosts, streamline operations, and improve the cost structure in light of theeconomic and operating environment.

 

Duringthe quarter ended June 30, 2009, we recorded approximately $213,000 ofrestructuring charges related to termination benefits in connection with thereduction- in- force. There were no such restructuring charges incurred duringthe quarter ended June 30, 2010.

 

*Stock-based compensation (in thousands)*

 
| ** **                      | ** ** | **Three Months Ended**  | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
| ** **                      | ** ** | ** **              | ** ** | ** ** | ** ** |
| Cost of sales                   |       | $                       | 84         |   | $ | 104 |   |
| Research and development        |       | 199                     |       | 258 |   |
| Sales and marketing             |       | 186                     |       | 247 |   |
| General and administrative      |       | 238                     |       | 282 |   |
| Total stock-based  compensation |       | $                       | 707        |   | $ | 891 |   |

 

Stock-basedcompensation expense decreased by approximately $0.2 million or 21% to $0.7million for the three months ended June 30, 2010 as compared toapproximately $0.9 million for the three months ended June 30, 2009. Thisnet decrease was primarily attributable to the completion of four years ofvesting of certain higher value grants during the initial months of the quartercoupled with a slight increase in the forfeiture rate.

 

Weanticipate that the stock-based compensation expense calculated under FASBAccounting Standards Codification Topic 718 will continue to have a materialeffect on our consolidated statement of operations.

 

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*Interest income (expense), net (in thousands)*

* *
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Increase (Decrease) 2010 vs.  2009** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|-------------------------------------------------------|------------|
| ** **                            | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009**                           | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | ** **                       | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                       |       | $                                | 4          |                                                  | $          | 94 |   | $ | (90 | ) | (96 | )% |
| Interest expense                      |       | (2                               | )          | (3                                                    | )          | 1 |   | 33 | % |
| Total interest income  (expense), net |       | $                                | 2          |                                                  | $          | 91 |   | $ | (89 | ) | (98 | )% |

 

Interestincome, net decreased by $89,000 or 98% to $2,000 for the three months ended June 30,2010, as compared to $91,000 for the three months ended June 30, 2009. Thedecrease is primarily attributable to lower average restricted cash balances earninginterest and lower interest rates.

 

*Provision for income taxes (in thousands)*

 

Forincome tax purposes, we consider our projected annual income and theutilization of our net operating loss carry forwards among other factors. Forthe three months ended June 30, 2010, we provided for $4,000 and for thethree months ended June 30, 2009, we recorded a tax benefit of $27,000,for federal and state income taxes.

 

*Sixmonths ended June 30, 2010 and June 30, 2009*

 

*Revenue**(in thousands, except percentages)*

 
| ** ** | ** ** | **Six Months Ended** | ** ** | **Increase (Decrease) 2010 vs. 2009** | ** ** |
|------------|------------|--------------------------------|------------|-----------------------------------------------------------|------------|
| ** ** | ** ** | **June 30, 2010**    | ** ** | **June 30, 2009**                               | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** ** | ** ** | ** **                     | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue    |       | $                              | 46,120     |                                                      | $          | 40,447 |   | $ | 5,673 |   | 14 | % |
|            |            |                                |            |                                                           |            |  |  |  |  |  |  |  |

 

Revenue increased by $5.7 million or 14% to $46.1million for the six months ended June 30, 2010 as compared to revenue of$40.4 million for the six months ended June 30, 2009.  The increase in revenue is primarily due tothe recognition of revenue associated with certain orders related to the broadbandfunding initiatives and the recognition of $1.7 million of FairPoint revenuethat was deferred in the third quarter of 2009.

 

In the first half of 2010, we experienced anincrease in customer bookings activity. We believe this increase was primarilydue to a slight improvement in economic conditions. We expect however that anycontinuation of current macroeconomic conditions may have an adverse impact onour business. We believe IOCs will continue to carefully evaluate theirspending decisions for the rest of 2010 although government broadband fundinginitiatives could have a favorable impact on capital spending trends amongtelecommunications carriers. In the short term, we expect that booking activitymay vary depending on our customers’ ability to make capital investments usingtheir own funds, and their access to credit facilities or other loan programfunds. We have experienced and believe we may continue to experience supplyconstraints as demand increases or as we introduce our newest products.

 

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

 
| ** **              | ** ** | **Six Months Ended** | ** ** | **Increase (Decrease) 2010 vs. 2009** | ** ** |
|-------------------------|------------|--------------------------------|------------|-----------------------------------------------------------|------------|
| ** **              | ** ** | **June 30, 2010**    | ** ** | **June 30, 2009**                               | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | ** **                     | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of revenue         |       | $                              | 26,518     |                                                      | $          | 24,245 |   | $ | 2,273 |   | 9 | % |
| Gross margin            |       | $                              | 19,602     |                                                      | $          | 16,202 |   | $ | 3,400 |   | 21 | % |
| Gross margin percentage |       | 43                             | %          | 40                                                        | %          |   |   |   |   |

 

Costof revenue increased by $2.3 million or 9% to $26.5 million for the six monthsended June 30, 2010 as compared to $24.2 million for the six months endedJune 30, 2009. The increase in cost of revenue during the six months endedJune 30, 2010 was primarily attributable to increased revenue shipments.

 

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Grossmargin increased to 43% of revenue in the six months ended June 30, 2010compared to gross margin of 40% of revenue for the six months endedJune 30, 2009. The increase in gross margin was primarily attributable toproduct mix and decreased unit cost of our blades and ONT products.

 

We expect that our gross margin will vary fromquarter-to-quarter due in part to product mix, average selling price changesand manufacturing cost changes.  To theextent that lower margin products represent an increased percentage of ourtotal revenue in any period, it will tend to reduce our gross margin.  Additionally, as we introduce new productsinto the market, we anticipate our gross margin may fluctuate.

 

*Research and product-development expenses**(inthousands, except percentages)*

 
| ** **                                                    | ** ** | **Six Months Ended** | ** ** | **Increase (Decrease) 2010 vs. 2009** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                    | ** ** | **June 30, 2010**    | ** ** | **June 30, 2009**                               | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                                                    | ** ** | ** **                     | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and  product-development                             |       | $                              | 7,600      |                                                      | $          | 8,424 |   | $ | (824 | ) | (10 | )% |
| Research and product*-*development as a percentage of revenue |       | 16                             | %          | 21                                                        | %          |   |   |   |   |
|                                                               |            |                                |            |                                                           |            |  |  |  |  |  |  |  |

 

Researchand product-development expenses decreased by $0.8 million or 10% to $7.6million for the six months ended June 30, 2010 as compared to$8.4 million for the six months ended June 30, 2009. The decrease inresearch and product-development expenses was primarily attributable to thedecrease in personnel related costs related to the reduction in force anddecreased contract development expenses.

 

Wecurrently expect research and product-development expenses in future periods tobe largely consistent with current expense levels but may vary with theintroduction of new products or any changes to salary levels.

 

*Sales and marketing expenses**(inthousands, except percentages)*

 
| ** **                                      | ** ** | **Six Months Ended** | ** ** | **Increase (Decrease) 2010 vs. 2009** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                      | ** ** | **June 30, 2010**    | ** ** | **June 30, 2009**                               | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                                      | ** ** | ** **                     | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and marketing                             |       | $                              | 9,118      |                                                      | $          | 8,945 |   | $ | 173 |   | 2 | % |
| Sales and marketing as a  percentage of revenue |       | 20                             | %          | 22                                                        | %          |   |   |   |   |
|                                                 |            |                                |            |                                                           |            |  |  |  |  |  |  |  |

 

Sales and marketing expenses increased by$0.2 million or 2% to $9.1 million for the six months ended June 30,2010 as compared to $8.9 million for the six months ended June 30,2009. This increase was primarily due to higher sales commissions due to theincrease in bookings activity, partially offset by lower personnel relatedcosts.

 

We currently expect sales and marketing expenses infuture periods to be consistent with current expense levels but may vary withthe level of customer bookings and the level of spending on new or expandedmarketing programs or any changes to salary levels.

 

*General and administrative expenses**(inthousands, except percentages)*

 
| ** **                                             | ** ** | **Six Months Ended** | ** ** | **Increase (Decrease) 2010 vs. 2009** | ** ** |
|--------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                             | ** ** | **June 30, 2010**    | ** ** | **June 30, 2009**                               | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                                             | ** ** | ** **                     | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative                             |       | $                              | 3,804      |                                                      | $          | 4,419 |   | $ | (615 | ) | (14 | )% |
| General and administrative  as a percentage of revenue |       | 8                              | %          | 11                                                        | %          |   |   |   |   |
|                                                        |            |                                |            |                                                           |            |  |  |  |  |  |  |  |

 

Generaland administrative expenses decreased by $0.6 million or 14% to $3.8 millionfor the six months ended June 30, 2010 as compared to $4.4 million for thesix months ended June 30, 2009. General and administrative expensesdecreased primarily due to lower legal and professional fees and lowerpersonnel related costs.

 

Wecurrently expect general andadministrative expenses in future periods to be largely consistent withcurrent expense levels but may vary with any changes to salary levels.

 

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*Restructuring charges*

 

On May 7, 2009, we implemented areduction-in-force that resulted in the termination of approximately 10% of ourwork force. We substantially completed the reduction-in-force by the end of thesecond quarter of 2009. The purpose of the workforce reduction was to reducecosts, streamline operations, and improve the cost structure in light of theeconomic and operating environment.

 

Duringthe quarter ended June 30, 2009, we recorded approximately $213,000 ofrestructuring charges related to termination benefits in connection with thereduction- in- force. There were no such restructuring charges incurred duringthe quarter ended June 30, 2010.

 

*Stock-based compensation**(inthousands)*

 
| ** **                      | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **June 30,  2010**        | ** ** | **June 30,  2009** | ** ** |
| ** **                      | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cost of revenue                 |       | $                              | 171        |   | $ | 193 |   |
| Research and development        |       | 448                            |       | 481 |   |
| Sales and marketing             |       | 404                            |       | 444 |   |
| General and administrative      |       | 467                            |       | 516 |   |
| Total stock-based  compensation |       | $                              | 1,490      |   | $ | 1,634 |   |

 

Stock-basedcompensation expenses decreased by approximately $0.1 million or 9% to $1.5million for the six months ended June 30, 2010 as compared toapproximately $1.6 million for the six months ended June 30, 2009.This net decrease was primarily attributable to the completion of four years ofvesting of certain higher value grants during the initial months of the secondquarter coupled with a slight increase in the forfeiture rate.

 

We anticipate that the stock-based compensationexpense calculated under FASB Accounting Standards Codification Topic718 will continue to have a material effect on our consolidated statementof operations.

 

*Interest income (expense), net**(inthousands, except percentages)*

 
| ** **                            | ** ** | **Six Months Ended** | ** ** | **Increase (Decrease) 2010 vs. 2009** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                            | ** ** | **June 30, 2010**    | ** ** | **June 30, 2009**                               | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | ** **                     | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                       |       | $                              | 7          |                                                      | $          | 240 |   | $ | (233 | ) | (97 | )% |
| Interest expense                      |       | (1                             | )          | (4                                                        | )          | 3 |   | 75 | % |
| Total interest income  (expense), net |       | $                              | 6          |                                                      | $          | 236 |   | $ | (230 | ) | (97 | )% |

 

Interestincome and expense, net decreased by $230,000 or 97% to $6,000 for the sixmonths ended June 30, 2010, as compared to $236,000 for the six monthsended June 30, 2009. The decrease was primarily attributable to loweraverage restricted cash balances earning interest and lower interest rates.

 

*Provision for income taxes (in thousands)*

 

Forincome tax purposes, we consider our projected annual income and the utilizationof our net operating loss carryforwards among other factors. For the six monthsended June 30, 2010 and 2009, we recorded an income tax expense of $16,000and an income tax benefit of $14,000, respectively, for federal and stateincome taxes.

 

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**Liquidityand Capital Resources**

 

Asof June30, 2010, we had cash and cash equivalents of $41.9 million, restricted cashof $1.8 million, stockholders’ equity of $54.3 million, and working capital of$46.8 million, compared with cash and cash equivalents of $39.3 million,restricted cash of $5.7 million, stockholders’ equity of $52.9 million, andworking capital of $45.5 million as of December 31, 2009.  The increase in our cash and cash equivalentswas primarily related to a decrease in restricted cash.

 

Net cash used in operating activities for the sixmonths ended June 30, 2010, was $0.6 million compared to $0.8 millionduring the same period ended June 30, 2009. The sum of our net loss andcertain non-cash expenses, such as stock-based compensation, depreciation andamortization, accounts receivable reserves and inventory reserves resulted inan inflow of $2.0 million in the 2010 period, compared to an outflow of $2.6million in the six months ended June 30, 2009. The overall impact ofchange in certain operating assets and liabilities on total operating cashflows resulted in a cash outflow of $2.6 million in the six months endedJune 30, 2010 compared to a cash inflow of $1.8 million in the six monthsended June 30, 2009.

 

Netcash provided by investing activities for the six months ended June 30,2010, was $2.4 million compared to $3.6 million provided by investing activities,during the same period ended June 30, 2009. Cash provided by investingactivities for the six months ended June 30, 2010, was primarily due to adecrease of $3.9 million in restricted cash required for performance bonds inconnection with our Rural Utility Service, or RUS, contracts offset by $1.5million for purchases of property and equipment, as compared to a decrease of$4.0 million in restricted cash, offset by $0.4 million for purchases ofproperty and equipment in the six months ended June 30, 2009.

 

Netcash provided by financing activities for the six months ended June 30,2010, was $0.9 million compared to $0.3 million for the same period in2009.  Cash provided by financingactivities for the six months ended June 30, 2010, was mainly due toproceeds from the exercise of stock options of $0.9 million and sale of commonstock under the ESPP of $0.2 million partially offset by payment of payrolltaxes for vested restricted stock units of $0.3 million and payment of capitallease obligations of approximately $12,000, as compared to proceeds ofapproximately $0.4 million related to the exercise of stock options, which wasoffset by the payment of approximately $10,000 for capital lease obligationsfor the six months ended June 30, 2009.

 

**WorkingCapital**

 

Workingcapital increased to $46.8 million as of June 30, 2010, as compared to$45.5 million as of December 31, 2009. The increase in the working capital is primarily attributable to adecrease in deferred revenue and accrued liabilities partially offset by adecrease in inventories and accounts receivable balances and an increase inaccounts payable balance.

 

Ourfuture liquidity and capital 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 whichfunds are restricted due to performance bonds required in connection with ourRUS contracts; and

 

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

 

Webelieve that our cash and cash equivalents will be sufficient to finance ouroperations over the next 12 months. Although we believe these funds will be sufficient to maintain andexpand our operations in accordance with our business strategy, we may need additionalfunds in the future.  If we are unable toraise additional financing when and if needed, we may be required to reducecertain discretionary spending, which could have a material adverse effect onour ability to achieve our intended business objectives.

 

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**ContractualObligations**

 

Welease our facilities and certain assets under non-cancelable operating leasesexpiring through 2015, excluding various renewal options. We lease certainoffice 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 June 30, 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)    |       | $                                         | 23,685     |   | $ | 23,685 |   | $ | — |   | $ | — |   | $ | — |   |
| Operating leases            |       | $                                         | 6,210      |   | $ | 726 |   | $ | 4,517 |   | $ | 967 |   | $ | — |   |
| Capital leases              |       | $                                         | 34         |   | $ | 15 |   | $ | 19 |   | $ | — |   | $ |   |   |
| Licensing agreements        |       | $                                         | 73         |   | $ | 63 |   | $ | 10 |   | $ | — |   | $ | — |   |

 

----

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

 

Of the unrecognized taxbenefit liability of approximately $9.3 million, unrecognized tax benefitsof only $0.1 million would require a cash settlement and is not included in thetable above due to our significant tax net loss and research tax credit carryforward position. If some or all of the unrecognized tax benefit liability becamea recognized tax liability, it would generally result in reduction of these netoperating losses and tax credits and would not result in the use of cash tosatisfy the tax liability.

 

*Off-Balance Sheet Arrangements*

 

Asof June 30, 2010, we did not have any material off-balance sheetarrangements, other than operating leases and certain purchase commitmentsdescribed in the contractual 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 the Evaluation Date, we did not have any material accruedliability related to these indemnification agreements.

 

RecentAccounting Pronouncements

 

Therewere no new accounting updates for the three months ended June 30, 2010,that would have a material impact on our financial position, results ofoperations and cash flows.

 

**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.

 

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

 

***Evaluation of Disclosure Controls and Procedures***

 

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we conducted an evaluation of the effectiveness ofthe design and operation of our disclosure controls and procedures, as definedin Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of June 30,2010, which we refer to as the Evaluation Date or the end of the period coveredby this Quarterly Report on Form 10-Q.

 

The purpose of thisevaluation was to determine whether as of the Evaluation Date our disclosurecontrols and procedures were effective to provide reasonable assurance that theinformation we are required to disclose in reports that we file or submit underthe Exchange Act, (i) is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms and(ii) is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure.

 

Based on this evaluation,our Chief Executive Officer and Chief Financial Officer have concluded that asof the Evaluation Date, our disclosure controls and procedures were effective.

 

***Changes in Internal Control OverFinancial Reporting***

 

There have been no changes in our internal controlover financial reporting during the three months ended June 30, 2010 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

***Limitations of Internal Control Procedures***

 

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.

 

**PART II—OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

***IPO Allocation Litigation***

 

In June 2001, threeputative stockholder class action lawsuits were filed against AcceleratedNetworks, certain of its then officers and directors and several investmentbanks that were underwriters of Accelerated Networks’ initial public offering.The cases, which were later consolidated, were filed in the United StatesDistrict Court for the Southern District of New York, and the operativeComplaint was filed on April 19, 2002. The Complaint was filed on behalfof 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) andRule 10b-5 of the 1934 Act against one or both of Accelerated Networks andthe individual defendants. The claims were based on allegations that theunderwriter defendants agreed to allocate stock in Accelerated Networks’initial public offering to certain investors in exchange for excessive andundisclosed commissions and agreements by those investors to make additionalpurchases in the aftermarket at pre-determined prices. Plaintiffs alleged thatthe prospectus for Accelerated Networks’ initial public offering was false andmisleading in violation of the securities laws because it did not disclosethese arrangements.

 

We believe that over threehundred other companies have been named in over three hundred similar lawsuitsthat have been coordinated with our case. In October 2002, the plaintiffsvoluntarily dismissed the individual defendants without prejudice. OnFebruary 1, 2003 a motion to dismiss filed by the issuer defendants washeard and the court dismissed the 10(b), 20(a) and rule 10b-5 claimsagainst Occam. On October 13, 2004, the Court certified a class in six ofthe approximately 300 other nearly identical actions (the “focus” cases) andnoted that the decision was intended to provide guidance to all partiesregarding class certification in the remaining cases. The Second Circuit Courtof Appeals vacated the district court’s decision granting class certificationin those six cases on December 5, 2006. Plaintiffs filed a motion forrehearing. On April 6, 2007, the Second Circuit denied the petition, butnoted that Plaintiffs could ask the District Court to certify a more narrowclass than the one that was rejected.

 

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The parties in theapproximately 300 coordinated cases, including ours, reached a settlement. OnOctober 5, 2009, the Court approved the settlement and certified asettlement class. Six notices of appeal of the Second Circuit of the Court’sapproval of the settlement have been filed. Three objectors to the settlementwho filed a notice of appeal also filed a permission to file an appeal on thebasis that the Court purportedly abused its discretion concerning the classcertification on the grounds that it was broader than the class rejected by theSecond Circuit Appeals Court. Plaintiffs filed an opposition to the petition.The Court has not yet ruled on the petition and the briefing on the appeals hasnot yet commenced. The case remains open pending the outcome of the courtruling on the appeals.

 

Due to the inherentuncertainties of litigation, we cannot accurately predict the ultimate outcomeof the matter. We have not recorded any accrual related to the settlementbecause Occam expects any settlement amounts to be covered by its insurancepolicies.

 

***IPO Short Swing Profits Litigation***

 

In late 2007, we received aletter from Vanessa Simmonds, a putative shareholder, demanding that weinvestigate and prosecute a claim for alleged short-swing trading in violationof Section 16(b) of the Securities Exchange Act of 1934,15 U.S.C. § 78p(b), by the underwriter of our initial public offering(“IPO”) and certain unidentified directors, officers and shareholders of us(then known as Accelerated Networks). We evaluated the demand and declined toprosecute the claim. On October 12, 2007, the putative shareholdercommenced a civil lawsuit in the U.S. District Court for the Western Districtof Washington against Credit Suisse Group, the lead underwriter of our IPO,alleging violations of Section 16(b). The complaint alleges that thecombined number of shares of our 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). We were named as a nominaldefendant in the action, but have no liability for the asserted claims. None ofour directors or officers of Occam are named as defendants in this action.

 

On October 29, 2007,the case was reassigned to Judge James L. Robart along with fifty-four otherSection 16(b) cases seeking recovery of short-swing profits fromunderwriters in connection with various IPOs. The Underwriters and Issuers havefiled a motion to dismiss the case and reply briefs have been filed. The Courtheard oral argument on January 19, 2009 from all parties. OnMarch 12, 2009, the Court dismissed the 16 (b) complaint against theissuer defendants including Occam on both jurisdictional and statute oflimitation grounds. On March 31, 2009, the Plaintiffs filed a Notice ofAppeal and their opening brief on August 26, 2009. The Issuers includingOccam and the underwriters filed their responses on October 2, 2009. Eachparty’s reply briefs have been filed as of November 17, 2009. To date theAppellate Court for the Ninth Circuit has not set a date of oral argument.

 

Due to the inherentuncertainties of threatened litigation, we cannot accurately predict theultimate outcome of the matter. We have not recorded any accruals related tothe demand letters or Section 16(b) litigation because we expect anyresulting resolution to be covered by our insurance policies.

 

**Other Matters**

 

From time to time, we aresubject to threats of litigation or actual litigation in the ordinary course ofbusiness, some of which may be material. We believe that, except as describedabove, there are no currently pending matters that, if determined adversely tous, would have a material effect on our business or that would not be coveredby our existing liability insurance maintained by us.

 

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**ITEM 1A.  RISK FACTORS**

 

*ThisQuarterly Report on Form 10-Q, or Form 10-Q, including anyinformation incorporated by reference herein, contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, asamended, referred to as the Securities Act, and Section 21E of theSecurities Exchange Act of 1934, as amended, referred to as the Exchange Act.  In some cases, you can identify forward-lookingstatements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,”“forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue”or the negative of these terms or other comparable terminology.  The forward-looking statements contained inthis Form 10-Q involve known and unknown risks, uncertainties andsituations that may cause our or our industry’s actual results, level ofactivity, performance or achievements to be materially different from anyfuture results, levels of activity, performance or achievements expressed orimplied by these statements.  Thesefactors include those listed below in this Item 1A and those discussedelsewhere in this Form 10-Q.  Weencourage investors to review these factors carefully.  We may from time to time make additionalwritten and oral forward-looking statements, including statements contained inour filings with the SEC.  However, we donot undertake to update any forward-looking statement that may be made fromtime to time by or on behalf of us.*

* *

*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.*

 

**RisksRelated to Current Economic Environment and Our Future Revenues**

 

***Our business is substantially dependent on the capital spendingpatterns of telecom operators and has recently been adversely affected byreductions and delays in capital spending by our customers, primarily due tothe economic recession. Any continued reductions in spending or delays incustomer orders in response to macroeconomic conditions, availability offunding under government economic stimulus programs, or otherwise, wouldadversely affect our business, operating results, and financial condition. Wecannot predict the timing or impact, if any, of government economic stimulusprograms on capital spending by telecom operators.***

 

Demand for our productsdepends on the magnitude and timing of capital spending by telecom serviceproviders as they construct, expand and upgrade their networks. In the fourthquarter of 2008, we identified a weakening in new order activity that continuedthroughout 2009 and into 2010. We believe this weakening relates to reductionsin capital expenditures and capital equipment investment budgets resulting fromthe worldwide financial crisis and economic downturn. In addition, we believethat many of our customers, particularly those that participate in governmentfunding initiatives such as the United States Department of Agriculture’s RUSloan program, may be delaying investment and purchase activity pending theiranalysis of the availability of funding under recently announced governmenteconomic stimulus programs. We cannot accurately predict the timing or theextent of financial impact, if any, that government economic stimulus programsmay have on our business. In addition, these programs may not result in a netincrease in capital spending activity if telecom operators substitute spendingunder government stimulus programs for capital spending they would otherwisehave made or if private capital spending decreases by more than the incrementalincrease attributable to government programs. Continued reductions, delays, orcancellations in order activity by our customers would be expected to adverselyaffect our future revenues by reducing the revenue we recognize in any quarterfrom orders booked and shipped in that quarter and by reducing the amount ofdeferred revenues that may become recognizable in future periods uponsatisfaction of revenue recognition criteria.

 

In addition to the impact ofmacroeconomic factors, we believe capital expenditures among IOCs have alsobeen adversely affected as our customers consider their investment and capitalexpenditure decisions in light of the industry transition from copper wire tofiber.

 

Other factors affecting thecapital spending patterns of telecom service providers include the following:

 

·                  competitive pressures,including pricing pressures;

 

·                  consumer demand for newservices;

 

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

 

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·                  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 governmentfunding programs can also affect capital expenditures by IOCs. Because many ofour customers are IOCs, their revenues are particularly dependent uponintercarrier payments (primarily interstate and intrastate access charges) andfederal and state universal service subsidies. The Federal CommunicationsCommission, or FCC, and some states are considering changes to bothintercarrier payments and universal service subsidies, and such changes couldreduce IOC revenues, which would be expected to have an adverse impact oncapital spending budgets. Furthermore, many IOCs use government supported loanprograms or grants to finance capital spending. Changes to those programs, suchas the Department of Agriculture’s RUS loan program, could reduce the abilityof IOCs to access capital. Any decision by telecom service providers to reducecapital expenditures, whether caused by the economic downturn, changes ingovernment regulations and subsidies, or other reasons, would have a materialadverse effect on our business, consolidated financial condition and results ofoperations.

 

***Our focus on independent telephone operating companies limits our salesvolume with individual customers and makes our future operating resultsdifficult to predict.***

 

We currently focus our salesefforts on IOCs in North America. These customers generally operate relativelysmall networks with limited capital expenditure budgets. Accordingly, webelieve the total potential sales volume for our products at any individual IOCis limited, and we must identify and sell products to new IOC customers eachquarter to continue to increase our sales. In addition, the spending patternsof many IOCs are characterized by small and sporadic purchases. Moreover,because our sales to IOCs are predominantly based on purchase orders ratherthan long-term contracts, our customers may stop purchasing equipment from uswith little advance notice. As a result, we have limited backlog, our futureoperating results are difficult to predict and we will likely continue to havelimited visibility into future operating results.

 

***We have had limited experience selling to larger telecommunicationcompanies, and our ability to recognize revenue, if any, from contracts withthese companies may be difficult to predict. In addition, FairPointCommunications, our only Tier-2 customer, recently filed for bankruptcyprotection.***

 

In early 2008, we announcedthat we had been selected as the lead access equipment provider for asubstantial broadband upgrade by FairPoint Communications, Inc. in itsnetwork in Vermont, New Hampshire, and Maine. FairPoint acquired these networksthrough its acquisition of certain assets of Verizon Communications, Inc.FairPoint represented our first customer who is considered Tier 2 based onthe number of telephone lines serviced. We have limited experience selling orservicing Tier 2 customers, and our ability to recognize substantialrevenue from the FairPoint relationship or any other relationships we mayestablish with Tier 2 customers will depend on several factors, including,among others, the timing of orders and the terms and conditions of the orders,which can affect our ability to satisfy revenue recognition criteria. We cannotcurrently predict with any accuracy the timing of orders from FairPoint, andany delays or termination of FairPoint’s anticipated upgrade of its northernNew England network could have a material adverse effect on our future revenuesand operating results.

 

On October 26, 2009,FairPoint announced that it had filed a bankruptcy petition underchapter 11 of the United States Bankruptcy Code. And on February 7,2010, FairPoint filed its bankruptcy reorganization plan. Since filing forreorganization on October 26, 2009, FairPoint has operated under thesupervision of the bankruptcy court.  Asof June 30, 2010, we had an outstanding receivable balance from FairPointof approximately $0.4 million. As of March 31, 2010, we had an outstandingreceivable balance from FairPoint of $2.1 million. Of this amount,$1.7 million related to transactions that occurred before FairPoint filedits bankruptcy petition. FairPoint has remitted the entire balance of $1.7million and we have recognized revenue and related cost of revenue in thequarter ended, June 30, 2010.

 

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***Fluctuations in our quarterly and annual operating results mayadversely affect our business and prospects.***

 

A number of factors, many ofwhich are outside our control, may cause or contribute to significantfluctuations in our quarterly and annual operating results. These fluctuationsmay make financial planning and forecasting more difficult. In addition, thesefluctuations may result in unanticipated decreases in our available cash, whichcould limit our growth and delay implementation of our expansion plans. Factorsthat may cause or contribute to fluctuations in our 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 or enhancementsof products, services and technologies by us or our competitors, and marketacceptance of these new or enhanced products, services and technologies;

 

·                  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, operatingresults for a particular future period are difficult to predict and priorresults are not necessarily indicative of results to be expected in the future.Any of the foregoing factors may have a material adverse effect on ourconsolidated results of operations.

 

***We have a history of losses and negative cash flow, and we may not beable to generate positive operating income and cash flows in the future tosupport the expansion of our operations.***

 

We have incurred significantlosses since our inception. As of June30, 2010, we had an accumulated deficitof $136.4 million. We incurred substantial losses in 2009. We may continue toincur losses in 2010. We cannot assure you that we will not continue to incurlosses or experience negative cash flow in the future. We have only generatedoperating income in the quarters ended December 25, 2005,September 24, 2006, December 31, 2006 and December 31, 2008. Ourinability to generate positive operating income and cash flow would materiallyand adversely affect our liquidity, consolidated results of operations andconsolidated financial condition.

 

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A significant portion of ourexpenses is fixed, and we expect to continue to incur significant expenses forresearch and development, sales and marketing, customer support, and generaland administrative functions. Given the rate of growth in our customer base,our limited operating history and the intense competitive pressures we face, wemay be unable to adequately control our operating costs. In order to achieveand maintain profitability, we must increase our sales while maintainingcontrol over our expense levels.

 

**RisksRelated to Internal Controls**

 

***If we fail to maintain proper and effective internal controls, ourability to produce accurate financial statements on a timely basis could beimpaired, which would adversely affect our consolidated operating results, ourability to operate our business and our stock price.***

 

In connection with the 2007audit committee review of our revenue recognition practices and our resultingfinancial restatement, we determined that we did not have adequate internalfinancial and accounting controls to produce accurate and timely financial statements.Among weaknesses and deficiencies identified in our review, we determined thatwe had a material weakness with respect to revenue recognition. The materialweakness continued to exist at December 31, 2008. Since the restatementwas completed in October 2007, we have implemented new processes andprocedures to improve our internal controls and have expanded our finance andaccounting staff. We believe that these actions have remediated the identifiedweaknesses and deficiencies, including the material weakness. As ofDecember 31, 2009, our chief executive officer and chief financial officerdetermined that our internal controls over financial reporting were effectiveto provide reasonable assurance regarding the reliability of our financial reportingand the preparation of financial statements for external reporting inaccordance with generally accepted accounting principles in the United States.

 

Ensuring that we haveadequate internal financial and accounting controls and procedures in place toproduce accurate financial statements on a timely basis is a costly andtime-consuming effort that needs to be re-evaluated frequently. Our managementis responsible for establishing and maintaining adequate internal control overfinancial reporting to provide reasonable assurance regarding the reliabilityof our financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principlesin the United States. Our management does not expect that our internal controlover financial reporting will prevent or detect all errors and all fraud. Acontrol system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives will bemet. Because of the inherent limitations in all control systems, no evaluationof controls can provide absolute assurance that misstatements due to error orfraud will not occur or that all control issues and instances of fraud, if any,within our company will have been detected. As discussed in our Annual Reporton Form 10-K for our 2009 fiscal year and our Quarterly Reports onForm 10-Q for our 2009 fiscal quarters, our audit committee andmanagement, together with our current and former independent registered publicaccounting firms, have identified numerous control deficiencies in the past andmay identify additional deficiencies in the future. Failure on our part to haveeffective internal 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 requiredto comply with Section 404 of the Sarbanes Oxley Act of 2002 in connectionwith our Annual Report on Form 10-K for our year ended December 31,2007. We have expended significant resources in developing the necessarydocumentation and testing procedures required by Section 404 of theSarbanes Oxley Act. We cannot be certain that the actions we have taken and aretaking to improve our internal controls over financial reporting will besufficient to maintain effective internal controls over financial reporting insubsequent reporting periods or that we will be able to implement our plannedprocesses and procedures in a timely manner. In addition, we may be unable toproduce accurate financial statements on a timely basis. Any of the foregoingcould cause investors to lose confidence in the reliability of our consolidatedfinancial statements, which could cause the market price of our common stock todecline and make it more difficult for us to finance our operations and growth.

 

**RisksRelated to Our Business and Industry**

 

***Because our markets are highly competitive and dominated by large,well-financed participants, we may be unable to compete effectively.***

 

Competition in our market isintense, and we expect competition to increase. The market for broadband accessequipment is dominated primarily by large, established suppliers such asAlcatel Lucent SA, Motorola, Tellabs and ADTRAN Inc. While thesesuppliers focus primarily on large service providers, they have competed, andmay increasingly compete, in the IOC market segment. In addition, a number ofcompanies, including Calix, Inc., have developed, or are developing,products that compete with ours, including within our core IOC segment.

 

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Our ability to competesuccessfully 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 potentialcompetitors are larger than we are with longer operating histories, and havesubstantially greater financial, technical, marketing or other resources;significantly greater name recognition; and a larger installed base ofcustomers than we do. Unlike many of our competitors, we do not provideequipment financing to potential customers. In addition, many of ourcompetitors have broader product lines than we do, so they can offer bundledproducts, which may appeal to certain customers.

 

Because the products that weand our competitors sell require a substantial investment of time and funds toinstall, customers are typically reluctant to switch equipment suppliers once aparticular supplier’s product has been installed. As a result, competitionamong equipment suppliers to secure contracts with potential customers isparticularly intense and will continue to place pressure on product pricing.Some of our competitors have in the past and may in the future resort tooffering substantial discounts to win new customers and generate cash flows. Ifwe are forced to reduce prices in order to secure customers, we may be unableto sustain gross margins at desired levels or achieve profitability.

 

***We have relied, and expect to continue to rely, on our BLC 6000 productline for the substantial majority of our sales, and a decline in sales of ourBLC 6000 line would cause our overall sales to decline proportionally.***

 

We have derived asubstantial majority of our sales in recent years from our BLC 6000 productline. We expect that sales of this product line will continue to account for asubstantial majority of our sales for the foreseeable future. Any factorsadversely affecting the pricing of, or demand for, our BLC 6000 line, includingcompetition or technological change, could cause our sales to declinematerially and our business to suffer.

 

***If we fail to enhance our existing products and develop new productsand features that meet changing customer requirements and support newtechnological advances, our sales would be materially and adversely affected.***

 

Our market is characterizedby rapid technological advances, frequent new product introductions, evolvingindustry standards and recurring changes in end-user requirements. Our futuresuccess will depend significantly on our ability to anticipate and adapt tosuch changes and to offer, on a timely and cost-effective basis, products andfeatures that meet changing customer demands and industry standards. The timelydevelopment of new or enhanced products is a complex and uncertain process, andwe may not be able to accurately anticipate market trends or have sufficientresources to successfully manage long development cycles. We may alsoexperience design, manufacturing, marketing and other difficulties that could delayor prevent the development, introduction or marketing of new products andenhancements. The introduction of new or enhanced products also requires thatwe manage the transition from older products to these new or enhanced productsin order to minimize disruption in customer ordering patterns and ensure thatadequate supplies of new products are available for delivery to meetanticipated customer demand. If we are unable to develop new products orenhancements to our existing products on a timely and cost-effective basis, orif our new products or enhancements fail to achieve market acceptance, ourbusiness, consolidated financial condition and consolidated results ofoperations would be materially and adversely affected.

 

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We have enhanced our BLC6000 platform to support active Gigabit Ethernet fiber-to-the-premises, orFTTP, services. Although we have invested significant time and resources todevelop this enhancement, these FTTP-enabled products are relatively new, withlimited sales to date, and market acceptance of these products may fall belowour expectations. The introduction of new products is also expected to placepressure on our gross margins as most new products require time and increasedsales volumes to achieve cost-saving efficiencies in production. To the extentour new products and enhancements do not achieve broad market acceptance, wemay not realize expected returns on our investments, and we may lose currentand potential customers.

 

***If our products contain undetected defects,including errors and interoperability issues, we could incur significantunexpected expenses to remedy the defects, which could have a material adverseeffect on our sales, results of operations or financial condition.***

 

Although our products are tested prior to shipment,they may contain software or hardware errors, defects or interoperabilityissues (collectively described as “defects”) that may only be detected whendeployed in live networks that generate high amounts of communicationstraffic.  In addition, defects or othermalfunctions or quality control issues may not appear until the equipment hasbeen deployed for an extended period of time. We also continue to introduce new products that may have undetectedsoftware or hardware defects.  Ourcustomers may discover defects in our products at any time after deployment oras their networks are expanded and modified. Any defects in our products discovered in the future, or failures of ourcustomers’ networks, whether caused by our products or those of another vendor,could result in lost sales and market share and negative publicity regardingour products. In 2007, we experienced higher than average failures of certainassemblies that were fabricated between October 2005 and January 2006and identified design issues associated with a transistor that resulted inequipment disruption and that required a rework effort. Recently, we haveidentified malfunctions or defects in specific customer deployments related tocapacitor power function failures in equipment that had been in service forextended periods of time that we were required to repair under applicablewarranties or elected to repair for customer relations purposes.

 

Defects, malfunctions, or other performance issuesrelating to our products could increase our warranty accruals and operatingexpenses, could have an adverse effect on market perceptions of our products,and could have a material adverse effect on our business, consolidated resultsof operations, and consolidated financial condition.  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 basedon an estimate of products that may be returned for warranty repair, estimatedcosts of repair, including parts and labor, depending on the type of servicerequired.  These estimates require us toexamine past and current warranty issues and consider their continuing impactin the future.  Our estimates of futurewarranty 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.

 

***Our efforts to increase our sales and marketing efforts to largertelecom operators, which may require us to broaden our reseller relationships,may be unsuccessful.***

 

To date, our sales andmarketing efforts have been focused on small and mid-sized IOCs. A key elementof our long-term strategy is to increase sales to large IOCs, competitive localexchange carriers, regional Bell operating companies and international telecomservice providers. We may be required to devote substantial technical,marketing and sales resources to the pursuit of these customers, who havelengthy equipment qualification and sales cycles. In particular, sales to thesecustomers may require us to upgrade our products to meet more stringentperformance criteria, develop new customer specific features or adapt ourproduct to meet international standards. We may incur substantial technical,sales and marketing expenses and expend significant management effort withoutany assurance of generating sales. Because we have limited resources and largetelecom operators may be reluctant to purchase products from a relatively smallsupplier like us, we plan to target these customers in cooperation withstrategic resellers. These reseller relationships may not be available to us,and if formed, may include terms, such as exclusivity and non-competitionprovisions, that restrict our activities or impose onerous requirements on us.Moreover, in connection with these relationships, we may forego direct salesopportunities in favor of forming relationships with strategic resellers. If weare unable to successfully increase our sales to larger telecom operators orexpand our reseller relationships, we may be unable to implement our long-termgrowth strategy.

 

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***If we were to experience payment problems with either resellers orcustomers for whom we are unable to assess creditworthiness, it could have anadverse impact on our business, operating results, or financial condition.***

 

Value added resellers, orVARs, account for a substantial portion of our revenue in a quarter. Some ofthese VARs are not well capitalized, making collection of receivables from themuncertain. In addition, in certain instances, we are limited in our ability toevaluate the creditworthiness of direct customers who decline to provide uswith financial information. In 2007, in connection with the restatement of ourconsolidated financial statements, we adopted a revenue recognition policy thatwe would not recognize revenue from those resellers who lacked an independentability to pay us until we received cash payment. Sales to VARs for whom we arenot able to recognize revenue until we receive cash payment are reflected asdeferred revenue. Any material collection issues we may experience with theseresellers or direct customers could have an adverse impact on our business,operating results, or financial condition and could result in increases in baddebt expense or collection costs, inventory impairments, or adjustments to ourreported revenues or deferred revenues. Any of these could result in a declinein our stock price.

 

***We rely on resellers to promote, sell, install and support our productsto small customers in North America, and internationally. Their failure to doso or our inability to recruit or retain resellers may substantially reduce oursales and thus seriously harm our business.***

 

We rely on value addedresellers who can provide high quality sales and support services. We competewith other telecommunications systems providers for our resellers’ business asour resellers generally market competing products. If a reseller promotes acompetitor’s products to the detriment of our products or otherwise fails tomarket our products and services effectively, we could lose market share. Inaddition, the loss of a key reseller or the failure of resellers to provideadequate customer service could have a negative effect on customer satisfactionand could cause harm to our business. If we do not properly train our resellersto sell, install and service our products, our business, financial conditionand results of operations will suffer.

 

***We may be unable to successfully expand our international operations.In addition, our international expansion plans, if implemented, will subject usto a variety of risks that may adversely affect our business.***

 

We currently generate almostall of our sales from customers in North America and have very limitedexperience marketing, selling and supporting our products and services outsideNorth America or managing the administrative aspects of a worldwide operation.While we intend to expand our international operations, we may not be able tocreate or maintain international market demand for our products. In addition,regulations or standards adopted by other countries may require us to redesignour existing products or develop new products suitable for sale in thosecountries. If we invest substantial time and resources to expand ourinternational operations and are unable to do so successfully and in a timelymanner, our business, financial condition and results of operations willsuffer. In the course of expanding our international operations and operatingoverseas, 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 to broaden our product line or address newor larger markets. Acquisitions involve a number of risks. If we are unable toaddress and resolve these risks successfully, such acquisitions could have amaterial adverse impact to our business, consolidated results of operations andconsolidated financial condition.***

 

We may make acquisitions ofbusinesses, products or technologies to expand our product offerings andcapabilities, customer base and business. In October 2007, we acquired certainassets and assumed certain liabilities of Terawave Communications and we 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;

 

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·                  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 involveunique risks in addition to those mentioned above, including those related tointegration of operations across different cultures and languages, currencyrisks and the particular economic, political and regulatory risks associatedwith specific countries. We cannot assure that we will be able to address theserisks successfully, or at all, without incurring significant costs, delay orother operating problems. Our inability to resolve any of such risks could havea material adverse impact on our business, consolidated financial condition andconsolidated results of operations.

 

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

 

Our success depends, inlarge part, on the continued contributions of our key management, engineering,sales and marketing personnel, many of whom are highly skilled and would bedifficult to replace. None of our senior management or key technical or salespersonnel is bound by a written employment contract to remain with us for aspecified period. In addition, we do not currently maintain key-man lifeinsurance covering our key personnel. If we lose the services of any keypersonnel, our business, financial condition and results of operations maysuffer.

 

Competition for skilledpersonnel, particularly those specializing in engineering and sales is intense.We cannot be certain that we will be successful in attracting and retainingqualified personnel, or that newly hired personnel will function effectively,either individually or as a group. In particular, we must continue to expandour direct sales force, including hiring additional sales managers, to grow ourcustomer base and increase sales. Even if we are successful in hiringadditional sales personnel, new sales representatives require up to a year tobecome effective, and the recent loss of a senior sales executive could have anadverse impact on our ability to recruit and train additional sales personnel.In addition, our industry is characterized by frequent claims relating tounfair hiring practices. We may become subject to such claims and may incursubstantial costs in defending ourselves against these claims, regardless oftheir merits. If we are unable to effectively hire, integrate and utilize newpersonnel, the execution of our business strategy and our ability to react tochanging market conditions may be impeded, and our business, financialcondition and results of operations could suffer.

 

***We may have difficulty managing growth in our business, if any, whichcould limit our ability to increase sales and cash flow.***

 

We expect to expand ourresearch and development, sales, marketing and support activities, includingour activities outside the U.S. depending on future business and economicconditions. Our historical growth has placed, and is expected to continue toplace, significant demands on our management, as well as our financial andoperational 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;

 

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·                  manage a largerorganization;

 

·                  expand our manufacturing anddistribution capacity;

 

·                  increase our sales and marketingefforts; and

 

·                  broaden our customer supportcapabilities.

 

In addition, if we cannotgrow or manage our business growth effectively, we may not be able to executeour business strategies and our business, consolidated financial condition andconsolidated results of operations would suffer.

 

***Because we depend upon a small number of outside contractors tomanufacture our products, our operations could be disrupted if we encounterproblems with any of these contractors.***

 

We do not have internalmanufacturing capabilities and rely upon a small number of contractmanufacturers to build our products. In particular, we rely on AsteelFlashGroup (formerly Flash Electronics), Inc. for the manufacture of our BLC6000 blade products. Our reliance on a small number of contract manufacturersmakes us vulnerable to possible capacity constraints and reduced control overcomponent availability, delivery schedules, manufacturing yields and costs. Wedo not have long-term supply contracts with our primary contract manufacturers.Consequently, these manufacturers are not obligated to supply products to usfor any specific period, in any specific quantity or at any certain price,except as may be provided by a particular purchase order. If any of ourmanufacturers were unable or unwilling to continue manufacturing our productsin required volumes and at high quality levels, we would have to identify,qualify and select acceptable alternative manufacturers. It is possible that analternate source may not be available to us when needed or may not be in aposition to satisfy our production requirements at commercially reasonableprices and quality. Any significant interruption in manufacturing would requireus to reduce our supply of products to our customers, which in turn could havea material adverse effect on our customer relations, business, consolidatedfinancial condition and consolidated results of operations.

 

A portion of ourmanufacturing was moved to the overseas facilities of our primary contractmanufacturer. This transition presents a number of risks, including thepotential for a supply interruption or a reduction in manufacturing quality orcontrols, any of which would negatively impact our business, customerrelationships and results of operations.

 

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

 

We depend on sole source andlimited source suppliers for key components of our products. We may from timeto time enter into original equipment manufacturer (OEM) and/or original designmanufacturer (ODM) agreements to manufacture and/or design certain products. Anyof the sole source and limited source suppliers, OEM and ODM suppliers uponwhich we rely could stop producing our components, cease operations entirely,or be acquired by, or enter into exclusive arrangements with, our competitors.We do not have long-term supply agreements with our suppliers, and our purchasevolumes are currently too low for us to be considered a priority customer bymost of our suppliers. We have recently experienced supply constraints withrespect to certain components as demand has increased and expect that we maycontinue to experience supply constraints in near-term periods. As a result,these suppliers could stop selling components to us at commercially reasonableprices, or at all. Any such interruption or delay may force us to seek similarcomponents from alternate sources, if available at all. Switching suppliers mayrequire that we redesign our products to accommodate the new component and maypotentially require us to re-qualify our products with our customers, which wouldbe costly and time-consuming. Any interruption in the supply of sole source orlimited source components would adversely affect our ability to meet scheduledproduct deliveries to our customers and would materially and adversely affectour business, consolidated financial condition and consolidated results ofoperations.

 

Periodically, we may berequired to license technology from third parties to develop new products orproduct enhancements. These third party licenses may be unavailable to us oncommercially reasonable terms, if at all. Our inability to obtain necessarythird party licenses may force us to obtain substitute technology of lowerquality or performance standards or at greater cost, any of which couldseriously harm the competitiveness of our products and which would result in amaterial and adverse effect on our business, consolidated financial conditionand consolidated results of operations.

 

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***If we fail to accurately predict our manufacturing requirements andmanage our inventory, we could incur additional costs, experience manufacturingdelays, or lose revenue.***

 

Lead times for the materialsand components that we order through our contract manufacturers may varysignificantly and depend on numerous factors, including the specific supplier,contract terms and market demand for a component at a given time. If weoverestimate our production requirements, our contract manufacturers maypurchase excess components and build excess inventory. If our contractmanufacturers purchase excess components that are unique to our products orbuild excess products, we could be required to pay for these excess parts orproducts and recognize related inventory write-down costs. If we underestimateour product requirements, our contract manufacturers may have inadequatecomponent inventory, which could interrupt manufacturing of our products andresult in delays or cancellation of sales. In prior periods we have experiencedexcess and obsolete inventory write downs which impact our cost of revenue.This may continue in the future, which would have an adverse effect on ourgross margins, consolidated financial condition and consolidated results ofoperations.

 

***Demand for our products is dependent on the willingness of ourcustomers to deploy new services, the success of our customers in selling newservices to their subscribers, and the willingness of our customers to utilizeIP and Ethernet technologies in local access networks.***

 

Demand for our products isdependent on the success of our customers in deploying and selling services totheir subscribers. Our BLC 6000 platform simultaneously supports IP-basedservices, such as broadband Internet, VoIP, IPTV and FTTP, and traditionalvoice services. If end-user demand for IP-based services does not grow asexpected or declines and our customers are unable or unwilling to deploy andmarket these newer services, demand for our products may decrease or fail togrow at rates we anticipate.

 

Our strategy includesdeveloping products for the local access network that incorporate IP andEthernet technologies. If these technologies are not widely adopted by telecomservice providers for use in local access networks, demand for our products maydecline or not grow. As a result, we may be unable to sell our products torecoup our expenses related to the development of these products and ourconsolidated results of operations would be harmed.

 

***Changes in existing accounting or taxation rules or practices mayadversely affect our consolidated results of operations. In addition, as weexpand our business, we could become subject to taxation in new states orjurisdictions, which will require us to incur additional compliance costs andpotential taxes and fees associated with complying with such tax laws.***

 

We are subject to numeroustax and accounting requirements, and changes in existing accounting or taxationrules or practices, or varying interpretations of current rules orpractices, could have a significant adverse effect on our financial results orthe manner in which we conduct our business. For example, prior to fiscal 2006,we accounted for options granted to employees using the intrinsic value method,which, given that we generally granted employee options with exercise pricesequal to the fair market value of the underlying stock at the time of grant,resulted in no compensation expense. Beginning in fiscal 2006, we beganrecording expenses for our stock based compensation plans, including optiongrants to employees, using the fair value method, under which we expect ourongoing accounting charges related to equity awards to employees to besignificantly greater than those we would have recorded under the intrinsicvalue method. We expect to continue to use stock based compensation as asignificant component of our compensation package for existing and futureemployees.

 

Accordingly, changes inaccounting for stock based compensation expense are expected to have a materialadverse affect on our reported results. Any similar changes in accounting ortaxation rules or practices could have a material impact on ourconsolidated financial results or the way we conduct our business.

 

In recent years, thegeographic scope of our business has expanded, and such expansion requires usto comply with the tax laws and regulations of multiple jurisdictions.Requirements as to taxation vary substantially among states and otherjurisdictions. We have recently expanded our international sales activity andmay become subject to foreign tax laws as well, particularly related to valueadded taxes. Complying with the tax laws of these jurisdictions can be timeconsuming and expensive and could subject us to penalties and fees if weinadvertently fail to comply. In the United States, tax authorities in stateswhere we believed we were not subject to sales tax could assert jurisdictionand seek to collect sales taxes, which could result in increased compliance expenseas well as penalties and could adversely affect our customer relationships ifit is determined we need to collect sales taxes for prior transactions. In theevent we fail inadvertently to comply with applicable tax laws, it could have amaterial adverse effect on our business, results of operations, and financialcondition.

 

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***The amount of our net operating loss (NOL) and credit carryforwards isuncertain. Prior transactions to which we or our stockholders or theiraffiliates have been a party, and future transactions to which we or ourstockholders or their affiliates may become a party, including stock issuancesand certain shareholder stock transactions could jeopardize our ability to usesome or all of our NOLs and tax credits, and the amounts of NOLs or tax creditswe would be precluded from using could be material. In addition, California andcertain states have recently suspended or are considering suspending, theability to use net operating loss carryforwards in future years and this couldadversely affect future operating results.***

 

Based on current tax law, webelieve we have certain NOLs and tax credits for U.S. federal and state incometax purposes to offset future taxable income and related taxes.  As of December 31, 2009, we had incurredsignificant 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 382 and 383 impose an annual limitation, based upon our companyvaluation at the time of the ownership change, on the amount of taxable incomea corporation may offset with NOLs and credits. Any unused annual limitation may be carried over to later years untilthe applicable expiration 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 the extent that these taxattributes become significantly limited, we expect to be taxed on our income,if any, at the U.S. federal and state statutory rates.  As a result, any inability to utilize thesetax attributes would adversely affect future operating results by the amount ofthe federal or state taxes that would not have otherwise been payable, havingan adverse impact on our operating results and financial condition.  In addition, inability to use NOLs andcredits would adversely affect our financial condition relative to ourfinancial condition had these tax attributes been available.  In addition, California and certain stateshave suspended use of NOLs, and other states are considering similarmeasures.  Although the suspension inCalifornia does not currently apply for 2010, it is possible the state couldreinstitute the suspension as it seeks to address budget challenges. As aresult, we may incur higher state income tax expense in the future.  Depending on our future tax position,continued suspension of our ability to use state NOLs could have an adverseimpact on our operating results and financial condition.

 

***Our customers are subject to government regulation, and changes incurrent or future laws or regulations that negatively impact our customerscould harm our business.***

 

The jurisdiction of theFederal Communications Commission, or FCC, extends to the entiretelecommunications industry, including our customers. Future FCC regulationsaffecting the broadband access industry, our customers, or the serviceofferings of our customers, may harm our business. For example, FCC regulatorypolicies affecting the availability of data and Internet services may impede thepenetration of our customers into certain markets or affect the prices they maycharge in such markets. Furthermore, many of our customers are subject to FCCrate regulation of interstate telecommunications services, and are recipientsof federal universal service subsidies implemented and administered by the FCC.In addition, many of our customers are subject to state regulation ofintrastate telecommunications services, including rates for such services, andmay also receive state universal service subsidies. Changes in FCC or staterate regulations or federal or state universal service subsidies or theimposition of taxes on Internet access service, could adversely affect ourcustomers’ revenues and capital spending plans. In addition, international regulatorybodies are beginning to adopt standards and regulations for the telecomindustry. These domestic and foreign standards, laws and regulations addressvarious aspects of VoIP and broadband use, including issues relating toliability for information retrieved from, or transmitted over, the Internet.Changes in standards, laws and regulations, or judgments in favor of plaintiffsin lawsuits against service providers could adversely affect the development ofInternet and other IP-based services. This, in turn, could directly orindirectly materially adversely impact the telecom industry in which ourcustomers operate. To the extent our customers are adversely affected by lawsor regulations regarding their business, products or service offerings, our business,financial condition and results of operations would suffer.

 

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***If we fail to comply with regulations and evolving industry standards,sales of our existing and future products could be adversely affected.***

 

The markets for our productsare characterized by a significant number of laws, regulations and standards,both domestic and international, some of which are evolving as new technologiesare deployed. Our products are required to comply with these laws, regulationsand standards, including those promulgated by the FCC. For example, the FCCrequired that all facilities based providers of broadband Internet access andinterconnect VoIP services meet the capability requirements of theCommunications Assistance for Law Enforcement Act by May 14, 2007. Subjectto certain statutory parameters, we were required to make available to ourcustomers, on a reasonably timely basis and at a reasonable charge, suchfeatures or modifications as are necessary to permit our customers to meetthose capability requirements. In some cases, we are required to obtaincertifications or authorizations before our products can be introduced,marketed or sold. There can be no assurance that we will be able to continue todesign our products to comply with all necessary requirements in the future.Accordingly, any of these laws, regulations and standards may directly affectour ability to market or sell our products.

 

Some of our operations areregulated under various federal, state and local environmental laws. Ourplanned international expansion will likely subject us to additionalenvironmental and other laws. For example, the European Union Directive2002/96/EC on waste electrical and electronic equipment, known as the WEEEDirective, requires producers of certain electrical and electronic equipment,including telecom equipment, to be financially responsible for the specifiedcollection, recycling, treatment and disposal of past and present coveredproducts 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 regulation of corporate governance and publicdisclosure may result in additional expenses.***

 

Changing laws, regulationsand standards relating to corporate governance and public disclosure may createuncertainty regarding compliance matters. New or changed laws, regulations andstandards are subject to varying interpretations in many cases. As a result,their application in practice may evolve over time. We are committed tomaintaining high standards of corporate governance and public disclosure.Complying with evolving interpretations of new or changed legal requirementsmay cause us to incur higher costs as we revise current practices, policies andprocedures, and may divert management time and attention from revenuegenerating to compliance activities. If our efforts to comply with new orchanged laws, regulations and standards differ from the activities intended byregulatory or governing bodies due to ambiguities related to practice, ourreputation might also be harmed. Further, our board members, chief executiveofficer and chief financial officer could face an increased risk of personalliability in connection with the performance of their duties. As a result, wemay have difficulty attracting and retaining qualified board members andexecutive officers, which could harm our business.

 

***We may not be able to protect our intellectual property, which couldadversely affect our ability to compete effectively.***

 

We depend on our proprietarytechnology for our success and ability to compete. We currently hold 27 issuedpatents and have several patent applications pending. We rely on a combinationof patent, copyright, trademark and trade secret laws, as well asconfidentiality agreements and licensing arrangements, to establish and protectour proprietary rights. Existing patent, copyright, trademark and trade secretlaws will afford us only limited protection. In addition, the laws of someforeign countries do not protect proprietary rights to the same extent, as dothe laws of the U.S. We cannot assure you that any pending patent applicationswill result in issued patents, and issued patents could prove unenforceable.Any infringement of our proprietary rights could result in significantlitigation costs. Further, any failure by us to adequately protect ourproprietary rights could result in our competitors offering similar products,resulting in the loss of our competitive advantage and decreased sales.

 

Despite our efforts toprotect our proprietary rights, attempts may be made to copy or reverseengineer aspects of our products, or to obtain and use information that weregard as proprietary. Accordingly, we may be unable to protect our proprietaryrights against unauthorized third party copying or use. Furthermore, policingthe unauthorized use of our intellectual property would be difficult for us.Litigation may be necessary in the future to enforce our intellectual propertyrights, to protect our trade secrets or to determine the validity and scope ofthe proprietary rights of others. Litigation could result in substantial costsand diversion of resources and could have a material adverse effect on ourbusiness, consolidated financial condition and consolidated results ofoperations.

 

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***We could become subject to litigation regarding intellectual propertyrights that could materially harm our business.***

 

We may be subject tointellectual property infringement claims that are costly to defend and couldlimit our ability to use some technologies in the future. Our industry ischaracterized by frequent intellectual property litigation based on allegationsof infringement of intellectual property rights. From time to time, thirdparties have asserted against us and may assert against us in the futurepatent, copyright, trademark or other intellectual property rights to technologiesor rights that are important to our business. In addition, we have agreed, andmay in the future agree, to indemnify our customers for any expenses orliabilities resulting from claimed infringements of patents, trademarks orcopyrights of third parties. Any claims asserting that our products infringe,or may infringe on, the proprietary rights of third parties, with or withoutmerit, could be time-consuming, resulting in costly litigation and divertingthe efforts of our management. These claims could also result in productshipment delays or require us to modify our products or enter into royalty orlicensing agreements. Such royalty or licensing agreements, if required, maynot be available to us on acceptable terms, if at all.

 

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

 

Our business and operationsdepend on the extent to which our facilities and products are protected againstdamage from fire, earthquakes, power loss and similar events. Some of our keybusiness activities currently take place in regions considered as high risk forcertain types of natural disasters. Despite precautions we have taken, anatural disaster or other unanticipated problem could, among other things,hinder our research and development efforts, delay the shipment of our productsand affect our ability to receive and fulfill orders. While we believe that ourinsurance coverage is comparable to those of similar companies in our industry,it does not cover all natural disasters, in particular, earthquakes and floods.

 

**RisksRelated to Our Common Stock**

 

***Our executive officers, directors and their affiliates hold a largepercentage of our stock and their interests may differ from other stockholders.***

 

As of June 30, 2010,our executive officers, directors and their affiliates beneficially owned, inthe aggregate, approximately 27% of our outstanding common stock, of this 25%is collectively owned by investment funds affiliated with U.S. Venture Partnersand Norwest Venture Partners. Representatives of U.S. Venture Partners andNorwest Venture Partners are directors of Occam. These stockholders havesignificant influence over most matters requiring approval by stockholders,including the election of directors, any amendments to our certificate ofincorporation and significant corporate transactions.

 

***Our stock price may be volatile, and you may not be able to resellshares of our common stock at or above the price you paid.***

 

Our shares of common stockbegan trading on The NASDAQ Global Market in November 2006. An activepublic market for our shares on The NASDAQ Global Market may not be sustained.In particular, limited trading volumes and liquidity may limit the ability ofstockholders to purchase or sell our common stock in the amounts and at thetimes they wish. Trading volume in our common stock tends to be modest relativeto our total outstanding shares, and the price of our common stock mayfluctuate substantially (particularly in percentage terms) without regard tonews about us or general trends in the stock market.

 

In addition, the tradingprice of our common stock could become highly volatile and could be subject towide fluctuations in response to various factors, some of which are beyond ourcontrol. These factors include those discussed in this “Risk Factors” sectionof this Annual Report on Form 10-K and 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;

 

·                  commencement of, orinvolvement in, litigation;

 

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·                  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 stockmarket in general, and the market for technology companies in particular, hasexperienced extreme price and volume fluctuations that have often beenunrelated or disproportionate to the operating performance of those companies.Broad market and industry factors may seriously affect the market price of ourcommon stock, regardless of our actual operating performance. In addition, inthe past, following periods of volatility in the overall market and the marketprice of a particular company’s securities, securities class action litigationhas often been instituted against these companies. Any litigation that may beinstituted against us could result in substantial costs and a diversion of ourmanagement’s attention and resources.

 

***Provisions in our charter documents and under Delaware law coulddiscourage a takeover that stockholders may consider favorable.***

 

Provisions in ourcertificate of incorporation and bylaws, as amended and restated, may have theeffect of delaying or preventing a change of control or changes in ourmanagement. 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 Delaware anti-takeover provisions. UnderDelaware law, a corporation may not engage in a business combination with any holderof 15% or more of its capital stock unless the holder has held the stock forthree years or, among other things, the board of directors has approved thetransaction. Our board of directors could rely on Delaware law to prevent ordelay an acquisition of us.

 

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***We may be unable to raise additional capital to fund our futureoperations, and any future financings or acquisitions could result insubstantial dilution to existing stockholders.***

 

While we anticipate our cashbalances and any cash from operations, will be sufficient to fund ouroperations for at least the next 12 months, we may need to raiseadditional capital to fund operations in the future. There is no guarantee thatwe will be able to raise additional equity or debt funding when or if it isrequired. The terms of any financing, if available, could be unfavorable to usand our stockholders and could result in substantial dilution to the equity andvoting interests of our stockholders. Any failure to obtain financing when andas required would have an adverse and material effect on our business,consolidated financial condition and consolidated results of operations.

 

***If securities or industry analysts do not publish research or publishmisleading or unfavorable research about our business, our stock price andtrading volume could decline.***

 

The trading market for ourcommon stock depends in part on the research and reports that securities orindustry analysts publish about us or our business. If no or few securities orindustry analysts cover our company, the trading price for our stock would benegatively impacted. If one or more of the analysts who covers us downgradesour stock or publishes misleading or unfavorable research about our business,our stock price would likely decline. If one or more of these analysts ceasescoverage of our company or fails to publish reports on us regularly, demand forour stock could decrease, which could cause or stock price or trading volume todecline.

 
| **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**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
| Dated: July 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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