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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



(Mark One)

|þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the three month period ended September 30, 2003



OR



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



For the transition period from
 to



Commission file number 000-30741



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OCCAM NETWORKS, INC.

(Exact name of registrant as specified in its charter)



|Delaware                                                      |  | 77-0442752                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



|77 Robin Hill RoadSanta Barbara, California |  | 93117     
|------------------------------------------- |  | ----------
|(Address of principal executive office)     |  | (Zip Code)



(805) 692-2900

(Registrants telephone number, including area code)



N/A

(Former name, former address and former fiscal year, if changed since last report)



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Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ̈



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ̈No x



Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date.



Number of shares of Common Stock outstanding as of October 31, 2003: 266,701,284 shares.



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INDEX



|                             |  | Page                                                                                 
|---------------------------- |  | -------------------------------------------------------------------------------------
|                             | 
|Part I Financial Information |  |                                                                                      
|                             |  |                                                                                      
|Item 1.                      |  | Consolidated Balance Sheets                                                          
|                             |  |                                                                                      
|                             |  | Consolidated Statements of Operations                                                
|                             |  |                                                                                      
|                             |  | Consolidated Statements of Cash Flows                                                
|                             |  |                                                                                      
|                             |  | Notes to Consolidated Financial Statements                                           
|                             |  |                                                                                      
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             |  |                                                                                      
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                           
|                             |  |                                                                                      
|Item 4.                      |  | Controls and Procedures                                                              
|                             | 
|Part II Other Information    |  |                                                                                      
|                             |  |                                                                                      
|Item 1.                      |  | Legal Proceedings                                                                    
|                             |  |                                                                                      
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                            
|                             |  |                                                                                      
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                     
|                             |  |                                                                                      
|                             |  | A. Exhibits                                                                          
|                             |  |                                                                                      
|                             |  | B. Reports on Form 8-K                                                               
|                             | 
|Signatures                   |  | 26                                                                                   



In this Report, the
Company refers to Occam Networks, Inc., a Delaware corporation.





i



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PART I. FINANCIAL INFORMATION



|ITEM 1. |  | FINANCIAL STATEMENTS
|------- |  | --------------------



OCCAM NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                                                                                                                                                       |  | September 302003 |         |   | December 312002 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | --------------- | -
|                                                                                                                                                                       |  | (unaudited)      |         |   |                 |  
|ASSETS                                                                                                                                                                 |  |                  |         |   |                 |  
|Current assets:                                                                                                                                                        |  |                  |         |   |                 |  
|Cash and cash equivalents                                                                                                                                              |  | $                | 2,596   |   |                 | $
|Restricted cash                                                                                                                                                        |  |                  | 935     |   |                 |  
|Accounts receivable                                                                                                                                                    |  |                  | 1,515   |   |                 |  
|Inventory                                                                                                                                                              |  |                  | 2,430   |   |                 |  
|Prepaid expenses and other current assets                                                                                                                              |  |                  | 1,127   |   |                 |  
|                                                                                                                                                                       |  |                  |         |   |                 |  
|Total current assets                                                                                                                                                   |  |                  | 8,603   |   |                 |  
|                                                                                                                                                                       |  |                 
|Property and equipment, net                                                                                                                                            |  |                  | 2,243   |   |                 |  
|Other assets                                                                                                                                                           |  |                  | 330     |   |                 |  
|                                                                                                                                                                       |  |                  |         |   |                 |  
|Total assets                                                                                                                                                           |  | $                | 11,176  |   |                 | $
|                                                                                                                                                                       |  |                  |         |   |                 |  
|                                                                                                                                                                       |  |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                   |  |                  |         |   |                 |  
|Current liabilities:                                                                                                                                                   |  |                  |         |   |                 |  
|Accounts payable                                                                                                                                                       |  | $                | 3,474   |   |                 | $
|Accrued payroll and related liabilities                                                                                                                                |  |                  | 665     |   |                 |  
|Accrued expenses                                                                                                                                                       |  |                  | 1,506   |   |                 |  
|Deferred revenue                                                                                                                                                       |  |                  |        |   |                 |  
|Capital lease obligations and notes payable, current portion                                                                                                           |  |                  | 755     |   |                 |  
|                                                                                                                                                                       |  |                  |         |   |                 |  
|Total current liabilities                                                                                                                                              |  |                  | 6,400   |   |                 |  
|                                                                                                                                                                       |  |                 
|Capital lease obligations and notes payable, noncurrent portion                                                                                                        |  |                  | 1,093   |   |                 |  
|                                                                                                                                                                       |  |                  |         |   |                 |  
|Total liabilities                                                                                                                                                      |  |                  | 7,493   |   |                 |  
|                                                                                                                                                                       |  |                 
|Common stock potentially subject to rescission                                                                                                                         |  |                  |        |   |                 |  
|Commitments and contingencies (notes 5 and 7)                                                                                                                          |  |                  |         |   |                 |  
|                                                                                                                                                                       |  |                 
|Stockholders equity:                                                                                                                                                  |  |                  |         |   |                 |  
|                                                                                                                                                                       |  |                 
|Preferred stock, no par value  5,000 and 3,000 shares authorized; none issued and outstanding at September 30, 2003 and
December 31, 2002, respectively               |  |                  |        |   |                 |  
|Series A preferred stock, no par value  0 and 2,000 shares authorized; 0 and 1,472 issued and outstanding at September 30,
2003 and December 31, 2002, respectively   |  |                  |        |   |                 |  
|Common stock, $0.001 par value, 400,000 shares authorized; 266,013 and 140,859 shares issued and outstanding at September 30, 2003
and December 31, 2002, respectively |  |                  | 266     |   |                 |  
|Additional paid-in capital                                                                                                                                             |  |                  | 87,366  |   |                 |  
|Warrants                                                                                                                                                               |  |                  | 454     |   |                 |  
|Deferred compensation                                                                                                                                                  |  |                  | (2,118  | ) |                 |  
|Cumulative translation adjustment                                                                                                                                      |  |                  | 64      |   |                 |  
|Accumulated deficit                                                                                                                                                    |  |                  | (82,349 | ) |                 |  
|                                                                                                                                                                       |  |                  |         |   |                 |  
|Total stockholders equity                                                                                                                                             |  |                  | 3,683   |   |                 |  
|                                                                                                                                                                       |  |                  |         |   |                 |  
|Total liabilities and stockholders equity                                                                                                                             |  | $                | 11,176  |   |                 | $
|                                                                                                                                                                       |  |                  |         |   |                 |  



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



1



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OCCAM NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                                                                                             |  | Three Months EndedSeptember 30 |         |   | Nine Months EndedSeptember 30 |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ----------------------------- | -
|                                                                                                                             |  | 2003                           |         |   | 2002                          |  
|Sales                                                                                                                        |  | $                              | 1,476   |   |                               | $
|Cost of revenue                                                                                                              |  |                                | 1,851   |   |                               |  
|                                                                                                                             |  |                                |         |   |                               |  
|Gross margin                                                                                                                 |  |                                | (375    | ) |                               |  
|Operating expenses(1):                                                                                                       |  |                                |         |   |                               |  
|Research and product development                                                                                             |  |                                | 2,696   |   |                               |  
|Sales and marketing                                                                                                          |  |                                | 1,481   |   |                               |  
|General and administrative                                                                                                   |  |                                | 533     |   |                               |  
|                                                                                                                             |  |                                |         |   |                               |  
|Total operating expenses                                                                                                     |  |                                | 4,710   |   |                               |  
|                                                                                                                             |  |                                |         |   |                               |  
|Loss from operations                                                                                                         |  |                                | (5,085  | ) |                               |  
|Interest income (expense), net                                                                                               |  |                                | (88     | ) |                               |  
|                                                                                                                             |  |                                |         |   |                               |  
|Loss before income taxes                                                                                                     |  |                                | (5,173  | ) |                               |  
|Provision for income tax                                                                                                     |  |                                |        |   |                               |  
|                                                                                                                             |  |                                |         |   |                               |  
|Net loss                                                                                                                     |  |                                | (5,173  | ) |                               |  
|Interest attributable to common stock potentially subject to rescission, net of reversal                                     |  |                                |        |   |                               |  
|Beneficial conversion feature                                                                                                |  |                                |        |   |                               |  
|Warrants issued with series C preferred stock                                                                                |  |                                |        |   |                               |  
|                                                                                                                             |  |                                |         |   |                               |  
|Net loss attributable to common stockholders                                                                                 |  | $                              | (5,173  | ) |                               | $
|                                                                                                                             |  |                                |         |   |                               |  
|Basic and diluted net loss per share attributable to common stockholders                                                     |  | $                              | (0.02   | ) |                               | $
|                                                                                                                             |  |                                |         |   |                               |  
|Weighted average shares outstanding used to compute basic and diluted net loss per share attributable to common
stockholders |  |                                | 264,455 |   |                               |  
|                                                                                                                             |  |                                |         |   |                               |  
|(1)Amortization of deferred stock-based compensation and other stock-based compensation expense included in:                 |  |                                |         |   |                               |  
|Research and product development                                                                                             |  | $                              | 241     |   |                               | $
|Sales and marketing                                                                                                          |  |                                | 38      |   |                               |  
|General and administrative                                                                                                   |  |                                | 26      |   |                               |  
|                                                                                                                             |  |                                |         |   |                               |  
|                                                                                                                             |  | $                              | 305     |   |                               | $
|                                                                                                                             |  |                                |         |   |                               |  



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



2



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OCCAM NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                         |  | Nine Months Ended September 30 |        
|---------------------------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                                         |  | 2003                           |        
|Operating activities:                                                                    |  |                                |        
|Net loss                                                                                 |  | $                              | (16,388
|Adjustments to reconcile net loss to net cash used in operating activities:              |  |                                |        
|Depreciation and amortization                                                            |  |                                | 1,661  
|Provision for excess and obsolete inventory                                              |  |                                |       
|Amortization of deferred stock compensation                                              |  |                                | 946    
|Charge for acceleration of stock options of employee                                     |  |                                |       
|Amortization of deferred financing costs                                                 |  |                                | 45     
|Other assets                                                                             |  |                                | 27     
|Changes in current assets and liabilities:                                               |  |                                |        
|Accounts receivable                                                                      |  |                                | (502   
|Inventories                                                                              |  |                                | (1,634 
|Prepaid and other current assets                                                         |  |                                | (586   
|Accounts payable, accrued expenses and deferred revenue                                  |  |                                | 1,188  
|Accrued payroll and related liabilities                                                  |  |                                | (588   
|                                                                                         |  |                                |        
|Net cash used in operating activities                                                    |  |                                | (15,831
|                                                                                         |  |                               
|Investing activities:                                                                    |  |                                |        
|Net purchases of property and equipment                                                  |  |                                | (613   
|Restricted cash                                                                          |  |                                | (935   
|Net cash received from merger                                                            |  |                                |       
|                                                                                         |  |                                |        
|Net cash provided by (used in) investing activities                                      |  |                                | (1,548 
|                                                                                         |  |                               
|Financing activities:                                                                    |  |                                |        
|Proceeds from issuance of series A preferred stock                                       |  |                                | 1,035  
|Proceeds from issuance of series C preferred stock                                       |  |                                |       
|Proceeds from exercise of stock options, net of repurchases of unvested common stock     |  |                                | 165    
|Proceeds from notes payable                                                              |  |                                | 921    
|Repayments of capital lease obligations                                                  |  |                                | (642   
|Proceeds of loan from Accelerated Networks                                               |  |                                |       
|                                                                                         |  |                                |        
|Net cash provided by financing activities                                                |  |                                | 1,479  
|                                                                                         |  |                                |        
|Increase (decrease) in cash and cash equivalents                                         |  |                                | (15,900
|Cash and cash equivalents at beginning of period                                         |  |                                | 18,496 
|                                                                                         |  |                                |        
|Cash and cash equivalents at end of period                                               |  | $                              | 2,596  
|                                                                                         |  |                                |        
|                                                                                         |  |                               
|Supplemental disclosure of non-cash transactions:                                        |  |                                |        
|Conversion of series A preferred stock to common stock                                   |  | $                              | 11,846 
|                                                                                         |  |                                |        
|Conversion of series B and B-1 preferred stock to common stock                           |  | $                              |       
|                                                                                         |  |                                |        
|Conversion of series C preferred stock to common stock potentially subject to rescission |  | $                              |       
|                                                                                         |  |                                |        
|Conversion of common stock potentially subject to rescission to common stock             |  | $                              | 10,000 
|                                                                                         |  |                                |        
|Interest paid                                                                            |  | $                              | 179    
|                                                                                         |  |                                |        



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



3



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OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All interim information relating to the three- and nine-month periods ended

September 30, 2003 and 2002 is unaudited)



1. BUSINESS AND BASIS OF PRESENTATION



The Company



Occam Networks, Inc. (the
Company) develops and markets a suite of broadband loop carriers (BLCs), innovative Ethernet and IP-based loop carrier platforms that enable Incumbent Local Exchange Carriers (ILECs) to deliver a variety of traditional and packet voice,
broadband and IP services from a single, converged all-packet access network. Through September 2002, the Company also marketed a complete line of integrated access devices (IADs), customer premise equipment that provided Local Area Network (LAN)
and legacy voice services to business customers from a converged access network. Due to the minimal revenue contribution of the IAD products, the Company substantially discontinued marketing these products.



On May 14, 2002, Accelerated Networks, Inc. a Delaware corporation
(Accelerated Networks), acquired Occam Networks Inc., a California corporation (Occam CA) (see Note 8  Merger and Related Events). After the completion of the merger, Accelerated Networks filed a certificate of
amendment to its amended and restated certificate of incorporation in order to change the name of the corporation to Occam Networks, Inc. Occam CA also filed an amendment to its articles of incorporation following the merger to change its name to
Occam Networks (California), Inc.



The accompanying
financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company
has incurred significant operating losses and negative cash flows since its inception, and it has funded its operations primarily through the sale of equity securities and debt borrowings.



In connection with the merger, Occam CA received $10 million from an offering
of series C preferred stock, and a $10 million financing commitment from existing Occam CA investors. During December 2002 and January 2003, the Company sold shares of series A preferred stock to certain existing investors for gross proceeds of
$12.2 million, discharged those investors who purchased series A preferred stock from their respective obligations under the $10 million financing commitment, and, during May 2003, converted the series A preferred stock into common stock. During
June 2003, the Company received $500,000 and issued a note payable to one existing investor pursuant to the terms of the original financing commitment. During September 2003, the Company reduced the amount of the financing commitment from the final
investor to $254,000, which was discharged in October 2003 as the Company issued a note payable to the investor in exchange for that investors guarantee of a financial commitment of the Company. Also, during June 2003, the Company signed a
loan and security agreement with a bank for a revolving line of credit for an amount up to $2,500,000 and an equipment financing facility for an amount up to $500,000. A covenant of this agreement requires the Company to maintain a minimum cash
balance of $750,000, which has been classified as restricted cash in the accompanying consolidated balance sheet.



The Companys viability as a going concern is dependent upon its ability to successfully carry out its business plan. Since inception, the Company
has devoted substantial effort and capital resources to developing its products. Based on the Companys current operating plans, management believes that in addition to existing available cash resources, cash available under the Companys
$2,500,000 revolving line of credit, $79,000 of cash available under an equipment financing facility, and anticipated revenues from operations, additional cash which management intends to raise through future equity or debt financing will be
required to meet working capital and capital requirements through September 30, 2004.



On November 4, 2003 the Company announced that it has finalized a memorandum of terms with certain existing investors concerning the sale and issuance of up to an anticipated maximum of $20 million of its Series A
Preferred Stock. The Companys existing investors have agreed in principle to purchase more than $15 million of the offering. Completion of the financing transaction is subject to negotiation of definitive agreements between the Company and the



4



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investors. The Company further announced that, assuming successful negotiations, it expected the initial closing of the sale and issuance of the Series A
Preferred to occur within 30 days. The Series A Preferred Stock would be convertible into shares of the Companys Common Stock, subject to stockholder approval of an increase in the number of authorized shares of the Companys Common
Stock. The Company and the investors have agreed that it will be sold at a common-equivalent price of $0.11 per share. Following the initial closing of the Series A Preferred Stock financing, the Company intends to offer holders of all outstanding
shares of Common Stock the right to purchase shares of Series A Preferred Stock on terms substantially similar to the terms under which shares are sold to existing investors. Applicable subscription ratios, record dates, issuance dates, and
subscription periods have not yet been determined. In connection with the rights offering, the Company intends to file a registration statement with the Securities and Exchange Commission covering the offer and sale of Series A Preferred Stock to
common stockholders pursuant to the rights offering.



Also,
managements plans to attain profitability and generate additional cash flows include increasing revenues from new and existing customers, focus on cost reductions, and the launch of additional products. There is no assurance that management
will be successful with these plans. If events and circumstances occur such that the Company does not meet its current operating plan as expected, and the Company is unable to raise additional financing, the Company may be required to reduce certain
discretionary spending, which could have a material adverse effect on the Companys ability to achieve its intended business objectives. The financial statements do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.



Basis of Presentation



The accompanying consolidated financial statements are unaudited, other than the consolidated balance sheet at December 31, 2002, and reflect all material
adjustments, consisting only of normal recurring adjustments which, in the opinion of management, are necessary to fairly state the Companys financial position, results of operations and cash flows for the interim periods. The results of
operations for the current interim periods are not necessarily indicative of results to be expected for the entire year. Certain prior period amounts previously reported have been reclassified to conform to the current presentation.



These consolidated financial statements have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of
America have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2002.



The Company reports quarterly results based on a thirteen-week accounting calendar. Previously, the Companys quarter ended on the last Friday in each calendar quarter. In order to allow for more efficient shipment of orders received
late in the period, during the third quarter of 2003, the Company changed its actual quarter end to the last Sunday in each calendar quarter. Accordingly, the actual quarter end for the third quarter of fiscal 2003 was September 28. Had the Company
not changed its fiscal calendar, net revenue would have been $197,000 lower and net loss and net loss attributable to common stockholders would have been $81,000 greater during the three- and nine-month periods ended September 30, 2003. Net revenue,
net loss, and net loss attributable to common stockholders for the 2002 periods, and basic and diluted net loss per share attributable to common stockholders for all periods presented were not affected by this change. For financial presentation
purposes, the Company reports its quarterly results as of the last calendar day of the last month within each quarterly period.



Use of Estimates



In the normal course of preparing financial statements in conformity with generally accepted accounting principles in the United States of America,
management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates.



5



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2. INVENTORIES



Inventories consist of the following (in thousands):



|                |  | September 302003 |       | December 312002
|--------------- |  | ---------------- | ----- | ---------------
|Raw materials   |  | $                | 325   |                
|Work-in-process |  |                  | 55    |                
|Finished goods  |  |                  | 2,050 |                
|                |  |                  |       |                
|                |  | $                | 2,430 |                
|                |  |                  |       |                



3. FINANCING ARRANGEMENTS



Capital Lease Lines of Credit



In December 2000, Occam secured a capital lease line of credit from a
financial institution, which allows financing of up to $2,000,000 for certain equipment, software, and tenant improvements. The capital lease line of credit bears interest of 14.5% or 17.7% based on the type of asset financed, and is collateralized
by the purchased equipment. In connection with the $2,000,000 capital lease line of credit, Occam issued a warrant to purchase 203,700 shares of series B preferred stock at an exercise price of $0.49 per share (see Note 8). As of September 30, 2003,
the outstanding principal was approximately $931,000, of which approximately $586,000 was current.



The Company has secured capital lease financing from two lenders for $179,000 of furniture and computer and other equipment, which bears interest at rates
from 10% to 15.8%, and is collateralized by the purchased equipment. At December 31, 2002, the outstanding principal was approximately $29,000, all of which was current.



Revolving Line of Credit and Equipment Financing Facility



During June 2003, the Company signed a loan and security agreement with a bank for a revolving line of credit for an amount
up to $2,500,000, at a floating interest rate of prime plus 3⁄4 percent and a 1⁄2 percent per annum unused line fee, with maturity in one year, and an equipment financing facility for an amount up to $500,000, at a floating interest rate of
prime plus one percent, to be repaid in 36 monthly payments of principal plus accrued interest. Both facilities are secured by all available assets of the Company, and are subject to certain financial and reporting covenants. During October 2003 the
Company violated two financial covenants of this agreement, and has since received a waiver from the bank for these violations. A covenant of this agreement requires the Company to maintain a minimum cash balance of $750,000, which has been
classified as restricted cash in the accompanying consolidated balance sheet. As of September 30, 2003, no amounts were outstanding under the revolving line of credit, and approximately $388,000 was outstanding under the equipment financing
facility, of which $140,000 was current.



Notes Payable to Stockholder



During June 2003 the Company issued a $500,000 unsecured
subordinated promissory note payable to an investor pursuant to the terms of the investors financing commitment. The note bears interest at the prime rate and principal and accrued interest is due in June 2006.



As of September 30, 2003, the Company was party to a note and warrant
purchase agreement with an investor to (a) provide financing through the purchase of unsecured subordinated promissory notes for a committed financing amount in an aggregate principal amount of approximately $422,000, or (b) guarantee a loan, letter
of credit or other similar instrument from a financial institution or other third party. Pursuant to the terms of the note and warrant purchase agreement, the board of directors made a resolution, and the Company provided written notice to the
investor, demanding that the investor deliver to the Company the committed principal amount. During October 2003, the investor agreed to provide and the Company agreed to accept a letter of credit in the amount of $254,000 as partial security for a
financial commitment made by the Company. In exchange for the letter of credit, the Company provided to the investor



6



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an unsecured promissory note, which could be drawn upon at the time and to the extent of any draws made upon the investors letter of credit. Upon
execution of this letter of credit by the investor, the obligation of the investor to provide the committed financing amount was deemed by the Company to have been satisfied.



4. NET LOSS PER SHARE



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



|                                                                             |  | Three Months Ended September 30 |         |   | Nine Months Ended September 30 |  
|---------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | -
|                                                                             |  | 2003                            |         |   | 2002                           |  
|Numerator:                                                                   |  |                                 |         |   |                                |  
|Net loss attributable to common stockholders                                 |  | $                               | (5,173  | ) |                                | $
|                                                                             |  |                                 |         |   |                                |  
|Denominator (basic and diluted):                                             |  |                                 |         |   |                                |  
|Weighted average shares outstanding                                          |  |                                 | 265,266 |   |                                |  
|Less: Weighted average common shares subject to repurchase                   |  |                                 | 811     |   |                                |  
|                                                                             |  |                                 |         |   |                                |  
|Weighted average shares used to compute basic and diluted net loss per share |  |                                 | 264,455 |   |                                |  
|                                                                             |  |                                 |         |   |                                |  
|Basic and diluted net loss per share attributable to common stockholders     |  | $                               | (0.02   | ) |                                | $
|                                                                             |  |                                 |         |   |                                |  



The following table
presents common stock equivalents (potential common stock) that are not included in the diluted net loss per share calculation above because their effect would be antidilutive for the periods indicated (shares in thousands):



|                                                      |  | September 30
|----------------------------------------------------- |  | ------------
|                                                      |  | 2003        
|Unvested shares of common stock subject to repurchase |  | 612         
|Warrants                                              |  | 1,745       
|Stock options                                         |  | 40,807      
|                                                      |  |             
|Common stock equivalents                              |  | 43,164      
|                                                      |  |             



5. COMMITMENTS AND CONTINGENCIES



At September 30, 2003, the Company had included in
accrued expenses approximately $482,000 in purchase commitments and outstanding payments due to one of its former principal contract manufacturers, which it expects to settle and pay in 2004.



|6. | STOCK OPTIONSFAIR VALUE DISCLOSURES
|-- | ------------------------------------



Had the Company recognized employee stock option-related compensation expense in accordance with SFAS 123 using the minimum-value method for determining
the weighted-average fair value of options granted prior to the merger with Accelerated Networks and using the Black-Scholes option valuation model for determining the weighted-average fair value of options granted subsequent to the merger, its pro
forma net loss and net loss per share attributable to common stockholders would not be materially different from reported net loss and net loss per share attributable to common stockholders.



7



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The effects of applying SFAS 123 in the above pro forma disclosure are not indicative of future amounts,
and additional awards in future years are anticipated. For purposes of pro forma disclosures, the estimated fair value of the options was amortized ratably over the options vesting period and the following assumptions were used:



|                          |  | September30 |  
|------------------------- |  | ----------- | -
|                          |  | 2003        |  
|Risk free interest rate   |  | 4.0         | %
|Expected lives (in years) |  | 5.0         |  
|Dividend yield            |  | 0.0         | %
|Expected volatility       |  | 80.0        | %



7. LEGAL PROCEEDINGS



Securities Litigation



Following Accelerated Networks April 17, 2001 announcement that it
would restate its financial results, seven putative securities class action lawsuits were filed in the United States District Court for the Central District of California against the Company and certain of its current and former officers and
directors. The cases were consolidated by the Honorable Judge Ronald S. W. Lew as In Re Accelerated Networks Securities Litigation in a court order dated June 15, 2001. Plaintiffs filed a consolidated amended complaint on October 30, 2001. The
amended complaint generally alleges that the defendants made materially false and/or misleading statements regarding Accelerated Networks financial condition and prospects during the period of June 22, 2000 through April 17, 2001 in violation
of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 (1934 Act) and that the registration statement and prospectus issued by defendants in connection with the Companys June 23, 2000 initial public
offering contained untrue statements of material fact and omitted to state material facts in violation of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (1933 Act). Accelerated Networks previously filed two motions to dismiss
the plaintiffs amended complaints. The plaintiffs opposed the motions and a hearing on each motion took place. At both hearings, the Court granted the motion as to the plaintiffs 1934 Act claims, and denied the motion as to
plaintiffs 1933 Act claims. In each instance the plaintiffs were given 30 days leave to amend their 1934 Act claims. The plaintiffs filed their third amended complaint and the Company filed a motion to dismiss the third amended
complaint. The plaintiffs opposed the motion and a hearing took place on February 3, 2003. At that hearing, the Court denied the motion to dismiss the 1934 Act claims. Subsequently, the parties agreed to enter into mediation that occurred on October
1, 2003. At the mediation the parties reached a tentative settlement that is subject to Court and shareholder class approval. The Company has not recorded any accrual related to this proposed settlement because it expects any settlement amounts to
be covered by its insurance policies.



IPO Allocation Cases



In June 2001, three putative stockholder class action lawsuits were filed
against Accelerated Networks, certain of its then officers and directors and several investment banks that were underwriters of Accelerated Networks initial public offering. The cases, which have now been consolidated, were filed in the United
States District Court for the Southern District of New York. The Court appointed a lead plaintiff on April 16, 2002, and plaintiffs filed a Consolidated Amended Class Action Complaint (the Complaint) on April 19, 2002. The Complaint was
filed on behalf of investors who purchased Accelerated Networks stock between June 22, 2000 and December 6, 2000 and alleges violations of Sections 11 and 15 of the 1933 Act and Sections 10(b) and 20(a) and Rule 10b-5 of the 1934 Act against
one or both of Accelerated Networks and the individual defendants. The claims are based on allegations that the underwriter defendants agreed to allocate stock in Accelerated Networks initial public offering to certain investors in exchange
for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for Accelerated Networks initial public offering was
false and misleading in violation of the securities laws because it did not disclose these arrangements. These lawsuits are part of the massive IPO allocation litigation involving the conduct of underwriters in allocating shares of
successful initial public offerings. The Company believes that over three hundred other companies have been named in more than one thousand similar lawsuits that have been filed by some of the same plaintiffs law firms. In October 2002 the
plaintiffs voluntarily dismissed the individual defendants without prejudice. On February 19, 2003 a



8



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motion to dismiss filed by the issuer defendants was heard and the court dismissed the 10(b), 20(a) and Rule 10b-5 claims against the Company. On July 31,
2003, the Company agreed, together with over three hundred other companies similarly situated, to settle with the Plaintiffs. A Memorandum of Understanding (MOU), along with a separate agreement and a performance bond of $1 billion
issued by the insurers, for these companies guarantees, allocated pro rata amongst all issuer companies, to the plaintiffs as part of an overall recovery against all defendants including the underwriter defendants who are not a signatory to
the MOU. Any recovery by the plaintiffs against the underwriter defendants reduces the amount to be paid by the issuer companies. The settlement documents are in process and it is anticipated that the Company will execute the settlement documents on
or before November 30, 2003. The Company has not recorded any accrual related to this proposed settlement because it expects any settlement amounts to be covered by its insurance policies.



Florida IPO Allocation Case



On February 28, 2003 a stockholder class action lawsuit was filed against
Accelerated Networks, certain of its officers and directors and several investment banks that were underwriters of Accelerated Networks initial public offering. This case was filed in the United States District Court, Southern District of
Florida. The complaint was filed on behalf of investors who purchased Accelerated Networks stock between June 22, 2000 and January 8, 2001 and alleges violations of Section 12(a)(2) and Section 15 of the 1933 Act of Section 10(b) and Section 20(a)
and Rule 10b-5 of the 1934 Act and of the Florida Blue Sky Law. The claims are based on allegations that the underwriter defendants and Accelerated Networks effectuated an IPO offering price that was inaccurate based on false expectations about
Accelerated Networks prospective financial performance, including expected revenues and earnings and made selective inaccurate disclosures of same to the investing public. Plaintiffs allege that these fraudulent disclosures are in violation of
the securities laws. There are fifty issuer defendants named in the lawsuit. The Plaintiffs filed an amended complaint and have dismissed the Company from the lawsuit. The Company has not recorded any accrual related to this claim.



Supplier Litigation



On December 3, 2001, a supplier filed a lawsuit against Accelerated Networks in the Los Angeles Superior Court, demanding
payment in full of certain amounts alleged to be due and owing under, and in regards to, that certain Value-Added Product Sales Agreement, by and between the supplier and Accelerated Networks, dated March 12, 1999, which agreement was terminated
effective as of May 20, 2001. The supplier alleged it was owed approximately $3,000,000. The Company entered into a settlement agreement with the supplier, and on November 5, 2002, the parties filed with the Los Angeles Superior Court a Notice of
Settlement and a Stipulation and Proposed Order re: Settlement and a Setting of Order to Show Cause re: Dismissal with Prejudice. The settlement called for the Company to pay the supplier $1,200,000 immediately, and $800,000 on February 15, 2003 in
exchange for shipment to the Company of certain inventory held in the suppliers warehouse. As a result of this settlement, the trial date of December 17, 2002 was vacated. All payments have been made and the case has been dismissed. The
Company had previously accrued the amount of the payments.



8. MERGER AND
RELATED EVENTS



On November 9, 2001, Accelerated Networks
entered into a definitive merger agreement with Occam CA pursuant to which the parties agreed to a merger transaction involving the merger of a wholly-owned subsidiary of Accelerated Networks with and into Occam CA, with Occam CA surviving as a
wholly-owned subsidiary of Accelerated Networks. The transaction, which closed on May 14, 2002, has been accounted for using the purchase method of accounting. The results of operations of Accelerated Networks have been included in the accompanying
statement of operations from May 14, 2002. The following unaudited pro forma information presents a summary of the consolidated results of the combined organization had the acquisition occurred on January 1, 2002 (in thousands, except per share
data):



|                                                                         |  | Three Months Ended September 30 |        |   | Nine Months Ended September 30 |  
|------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | -
|                                                                         |  | 2003                            |        |   | 2002                           |  
|Net revenue                                                              |  | $                               | 1,476  |   |                                | $
|Net loss                                                                 |  | $                               | (5,173 | ) |                                | $
|Net loss attributable to common stockholders                             |  | $                               | (5,173 | ) |                                | $
|Basic and diluted net loss per share attributable to common stockholders |  | $                               | (0.02  | ) |                                | $
|                                                                         |  |                                 |        |   |                                |  





9



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These unaudited pro forma results have been prepared for comparative purposes only and include
adjustments for reduction in depreciation charges resulting from the negative goodwill adjustment to Accelerated Networks non-current assets. The results do not purport to be indicative of the results of operations which actually would have
resulted had the combination been in effect on January 1, 2002, or the future results of operations of the combined organization.



|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



This report on Form 10-Q contains forward-looking statements based on current expectations, estimates and projections about
the Companys industry, managements beliefs and certain assumptions made by the Company. Words such as anticipates, expects, intends, plans, believes, may,
will or similar expressions are intended to identify forward-looking statements. These statements include, but are not limited to, those statements concerning the Companys beliefs and expectations regarding its financial
statements, cost structure and amortization expenses, the Companys beliefs and expectations regarding its recent merger and the benefits from the acquisition, the Companys beliefs regarding litigation matters and legal proceedings, its
defenses to such matters and its contesting of such matters, and the Companys beliefs about the telecommunications industry. In addition, any statements that refer to expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore,
actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors.



Overview



On November 9, 2001, Occam CA entered into a definitive merger agreement with Accelerated Networks pursuant to which the parties agreed to a merger
transaction involving the merger of a wholly-owned subsidiary of Accelerated Networks with and into Occam CA, with Occam CA surviving as a wholly-owned subsidiary of Accelerated Networks. The merger agreement was approved by the boards of directors
of both Accelerated Networks and Occam CA, and by a special committee of the board of directors of Accelerated Networks. The respective stockholders of each company approved the merger on May 13, 2002. The transaction, which closed on May 14, 2002,
was accounted for using the purchase method of accounting.



Upon the completion of the merger, stockholders of Occam CA received 2.037 shares of Accelerated Networks common stock for each share of their Occam CA stock, and option holders and warrant holders of Occam CA received options and warrants
in Accelerated Networks, collectively representing approximately 64% of the diluted equity of the combined organization. In connection with the merger, Occam CA received $10 million in cash through the sale of its series C preferred stock and a $10
million financing commitment (all of which has been satisfied as of October 15, 2003) from certain of Occam CAs existing investors.



The merger was treated as a reverse acquisition, pursuant to which Occam CA was treated as the acquirer of Accelerated Networks for financial accounting
purposes. As such, following the consummation of the merger, the historical financial statements of Occam CA serve as the principal historical financial statements of the combined organization.



From its inception through September 30, 2003, the Company has incurred
cumulative net losses of approximately $82.3 million. We expect to continue to incur substantial operating losses and to experience substantial negative cash flow as we expand our business. Our financial statements have been prepared on a basis
which assumes that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.



10



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Critical Accounting Policies and Estimates



Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going
basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, litigation and valuation of deferred income tax assets. We base our estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial
statements.



Our sales are generated from sales arrangements,
which require revenue recognition judgments particularly in the area of customer acceptance. We recognize revenue when persuasive evidence of a sales arrangement exists, delivery has occurred or services have been rendered, the buyers price is
fixed or determinable and collectibility is reasonably assured. We allow credit for products returned within our policy terms. Such returns are estimated and an allowance is provided, if required, at the time of sale. To date, no such allowance has
been required. We provide customer training and post-sales warranty to our customers as needed to assist them in installation or use of our products, and make provisions for these costs in the period of sale.



Our inventories are stated at the lower of cost or market. In assessing the
ultimate realization of inventories, we are required to make judgments as to future demand and market conditions and compare that with current inventory levels. If actual future demand or market conditions are less favorable than those projected by
us, additional inventory write-downs may be required.



We
record a valuation allowance to reduce our deferred tax asset to the amount we believe is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, should we determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax assets would increase income in the period such
determination was made.



We evaluate our estimated potential
financial exposure for loss contingencies, particularly the pending litigation matters discussed in Note 7 to the financial statements. We accrue an estimated loss related to a contingency if (a) it is probable that a liability had been incurred and
future events will occur confirming the fact of the loss at the date of the financial statements; and (b) the amount of the loss can be reasonably estimated. When a reasonable estimate of the loss is a range and no amount within the range is a
better estimate than any other amount, we accrue the minimum amount in the range. As additional information becomes available, we assess the potential liability related to pending litigation and revise our estimates. Such revisions in the estimated
potential liability could materially impact our results of operations and financial position. We have not recorded an accrual for losses, if any, for the securities litigation or IPO allocation cases because we expect the proposed settlement amounts
for these matters to be covered by our insurance policies.



Results of
Operations



Three- and Nine-Month Periods Ended September 30, 2003 and
2002



Sales



Sales were $1.5 million and $1.0 million for the three-month periods ended
September 30, 2003 and 2002, and $4.2 million and $1.1 million for the nine-month periods ended September 30, 2003 and 2002, respectively. The increase in sales for the period ended September 30, 2003 over the prior year period is due to growth in
shipments of BLC products, related accessories and cabinets. Sales for the first and second quarters of 2002 were amounted to $112,000 and were comprised primarily of revenue recognized from the acceptance by customers of BLC products previously
shipped on a trial or evaluation basis.



11



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Cost of revenue



Cost of revenue was $1.9 million and $3.9 million for the three-month periods ended September 30, 2003 and 2002, and $4.3 million and $4.1 million for the
nine-month periods ended September 30, 2003 and 2002, respectively. Cost of revenue for these periods included the cost of products shipped for which revenue was recognized and the costs of manufacturing yield problems, field replacements, rework
costs, underabsorption of manufacturing overhead, and provisions for obsolete inventory. Cost of revenue for the three-month period ended September 30, 2002 included a provision of $3.1 million for excess and obsolete inventory of the integrated
access device line of products acquired from Accelerated Networks. The integrated access device line of products had made only a minimal contribution to the Companys net revenue, and accordingly, the Company had substantially discontinued
marketing these products and reduced the carrying value of this inventory.



Research and product development expenses



Research and product development expenses consist primarily of salaries and other personnel-related costs, prototype component and assembly costs, third-party design services and consulting costs, and other costs related to design,
development, and testing of our products. Research and product development costs are expensed as incurred, except for capital expenditures, which are capitalized and depreciated over their estimated useful lives, generally two to five years.
Research and product development expenses were $2.7 million for the three-month period ended September 30, 2003, a decrease of 44% from the $4.8 million for the comparable period in 2002, and $9.8 million for the nine-month period ended September
30, 2003, a decrease of 36% from the $15.4 million for the comparable prior year period. The decrease was primarily due to expense reduction actions we took during 2002 and 2003 as we scaled our activities into a sequential product development plan.
We expect our research and product development expenditures to continue to decrease during the remainder of the 2003 fiscal year and the first quarter of the 2004 fiscal year, as we continue to implement expense reduction actions.



Sales and marketing expenses



Sales and marketing expenses consist primarily of salaries and other
personnel-related costs, development and distribution of promotional materials, and other costs related to marketing, sales, public relations, and customer support activities. Sales and marketing expenses were $1.5 million for the three-month period
ended September 30, 2003, a decrease of 15% from the $1.7 million for the comparable period in 2002, and $4.6 million for the nine-month period ended September 30, 2003, a decrease of 12% from the $5.2 million for the comparable prior year period.
The decrease is primarily due to discontinuation of the integrated access device product line during 2002 and to other expense reduction actions we have implemented since the merger with Accelerated Networks. We expect our sales and marketing
expenditures, excluding amortization of deferred stock-based compensation, to continue to decrease during the remainder of the 2003 fiscal year due to continued expense reduction actions, and increase during the first two quarters of the 2004 fiscal
year as we apply additional sales resources to further expand our markets.



General and administrative expenses



General
and administrative expenses consist primarily of salaries and other personnel-related costs for executive, finance, human resources, and administrative personnel. Additionally, general and administrative expenses include professional fees, liability
insurance and other costs of a general corporate nature. General and administrative expenses were $533,000 for the three-month period ended September 30, 2003, a decrease of 46% from the $988,000 for the comparable prior year period, and $1.8
million for the nine-month period ended September 30, 2003, a decrease of 37% from the $2.8 million for the comparable prior year period. The decrease in the 2003 period was due primarily to the costs incurred in 2002 related to the separation of a
former chief executive officer from the Company and expense reduction actions taken in 2003, offset partially by an increase in insurance and other costs of being a publicly held company. We expect our general and administrative expenditures during
the remainder of the 2003 fiscal year and the first two quarters of the 2004 fiscal year to remain relatively consistent with those of the third quarter of 2003.



12



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Stock-based compensation



Through September 30, 2003, we recorded total deferred stock compensation of approximately $10.5 million, representing the difference between the
deemed value of our common stock for accounting purposes and the exercise price of the options at their date of grant. We are amortizing remaining deferred stock-based compensation over the vesting periods of the applicable options, or repurchase
periods for the exercised options, generally over four years. Through September 30, 2003, we had reversed deferred stock compensation of approximately $4.4 million, resulting from stock option cancellations and repurchase of unvested common shares
from employees. Amortization of deferred stock-based compensation included amortization of deferred stock-based compensation, net of reversals related to expense previously recorded on options which were unvested and subsequently cancelled. Such
amortization expense is included in operating expenses in the accompanying consolidated statements of operations as follows:



|                                                                                                          |  | Three Months EndedSeptember 30 |     | Nine Months EndedSeptember 30
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------ | --- | -----------------------------
|                                                                                                          |  | 2003                           |     | 2002                         
|Amortization of deferred stock-based compensation and other stock-based compensation expense included in: |  |                                |     |                              
|Research and product development                                                                          |  | $                              | 241 |                              
|Sales and marketing                                                                                       |  |                                | 38  |                              
|General and administrative                                                                                |  |                                | 26  |                              
|                                                                                                          |  |                                |     |                              
|                                                                                                          |  | $                              | 305 |                              
|                                                                                                          |  |                                |     |                              



At September 30, 2003,
we had $2.1 million of unamortized deferred stock compensation, which we will amortize over the remaining vesting period of the underlying options.



Interest expense, net



Interest expense, net was $88,000 for the three-month period ended September 30, 2003 as compared to interest income, net of $1,000 for the comparable
period in 2002, and $140,000 for the nine-month period ended September 30, 2003 as compared to $73,000 for the comparable prior year period. The fluctuations in interest expense, net were due to the issuance of notes payable by the Company, offset
partially by varying average balances of cash and cash equivalents held during 2003 as compared to 2002 as a result of the timing of cash provided from the merger with Accelerated Networks and the proceeds of the issuance of our series C preferred
stock in May 2002 and the issuance of our series A preferred stock during December 2002 and January 2003, offset partially by consumption of cash balances for working capital purposes.



Net operating loss carryforwards



As of September 30, 2003, our net operating loss carryforwards were approximately $189 million for federal tax purposes, expiring commencing in 2011, and
$120 million for state tax purposes, expiring commencing in 2006. Under the change in ownership provisions of Section 382 of the Internal Revenue Code, utilization of the net operating loss carryforwards may be limited.



Interest attributable to common stock potentially subject to rescission



We are aware that the sale of 5,899,755 shares of Occam CA series C
preferred stock to 18 Occam CA stockholders may have been in violation of Section 5 of the 1933 Act. If such a violation did in fact occur, the stockholders who purchased these shares would have had a right to rescind their purchases. In the event a
stockholder successfully asserts a rescission right, the combined organization would have been obligated to repurchase the common stock into which that stockholders Occam CA series C preferred stock had been converted in connection with the
merger for the full price paid for the Occam CA series C preferred stock purchased by such stockholder, plus interest. The Company may thus have had a contingent liability to the Occam CA series C preferred stock investors in the aggregate amount of
approximately $10 million plus interest. The 1933 Act requires that any claim brought for a violation of Section 5 be brought within one year of the violation. Until this one-year period elapsed on May 14, 2003,



13



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the amount paid for these shares was presented on the consolidated balance sheet of the Company outside of total stockholders equity. We believe that
the sale of the Occam CA series C preferred stock was not in violation of Section 5 of the 1933 Act and no such claims have been made. Interest of $300,000 was accrued during the nine-month period ended September 30, 2003 relating to this matter. We
have reversed $800,000 of interest that had been accrued during the one-year claim period and have reclassified common stock potentially subject to rescission into stockholders equity.



Liquidity and Capital Resources



As of September 30, 2003, we had cash and cash equivalents of $2.6 million
as compared to $18.5 million as of December 31, 2002. The decrease in cash and cash equivalents was primarily due to cash used in operations of $15.8 million partially offset by the proceeds from our offering of series A preferred stock of $1.0
million, and proceeds from notes payable of $921,000.



We used
$15.8 million of cash in operating activities during the nine-month period ended September 30, 2003, a decrease of $7.2 million or 31% from the $23.0 million used during the comparable prior year period. The decrease was due primarily to a decrease
in operating expenses for the nine-month period ended September 30, 2003 as compared to the comparable prior year period, offset partially by a payment of $800,000 as a settlement with one of our former contract manufacturers in exchange for a
shipment to us of certain inventory held in the suppliers warehouse (see Note 7Legal ProceedingsSupplier Litigation in Item 1Financial Statements).



We used $1.5 million in cash in investing activities during the nine-month period ended September 30, 2003, a decrease of
$17.4 million from the $15.9 million provided by investing activities during the comparable prior year period. Of the cash used in investing activities during the nine-month period ended September 30, 2003, $935,000 was for cash restrictions imposed
from a covenant to our loan and security agreement with a bank for a revolving line of credit and to secure a letter of credit provided by the Company, and $613,000 was for purchases of property and equipment. Cash provided from investing activities
during the nine-month period ended September 30, 2002 was from the $16.5 million of cash received from the merger with Accelerated Networks in May 2002.



We generated $1.5 million in cash from financing activities during the nine-month period ended September 30, 2003, as compared to $14.8 million for the
comparable prior year period. The cash provided during the nine-month period ended September 30, 2003 was from the net proceeds of $1.0 million from our offering of series A preferred stock during January 2003 and the proceeds of notes payable of
$921,000 during June and July 2003. The cash provided during the nine-month period ended September 30, 2002, was primarily from the proceeds of $10.0 million from our offering of series C preferred stock during May 2002 and a loan of $5.2 million
from Accelerated Networks to Occam CA prior to the merger.



As
of September 30, 2003, we had approximately $482,000 in accrued expenses on our balance sheet for purchase commitments and outstanding payments due to one of our former principal contract manufacturers, which we expect to settle and pay in 2004.



14



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We lease our facilities and certain assets under noncancelable leases expiring through 2006, excluding
various renewal options, and have notes payable outstanding with a bank and with an investor. The following table summarizes our minimum annual lease commitments under noncancelable operating leases, capital leases and notes payable as of September
30, 2003 (in thousands):



|                               |  | Payments Due By Period
|------------------------------ |  | ----------------------
|                               |  | Total                 
|Contractual Obligations (1)    |  |                       
|Capital leases(2)              |  | $                     
|Note payable to stockholder(2) |  |                       
|Note payable to bank(2)        |  |                       
|Operating leases               |  |                       



|(1) | Contractual obligations consist of long-term debt and future minimum lease payments under capital and operating leases used in the normal course of business.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Less amount representing interest of $289,000 for capital leases, note payable to stockholder and note payable to bank.
|--- | -----------------------------------------------------------------------------------------------------------------------



|                       |  | Amount of Commitment Expiration Per Period
|---------------------- |  | ------------------------------------------
|                       |  | Total                                     
|Commercial Commitments |  |                                           
|Letter of credit       |  | $                                         



During June 2003, we
signed a loan and security agreement with a bank for a revolving line of credit for an amount up to $2,500,000, at a floating interest rate of prime plus 3⁄4 percent and a 1⁄2 percent per annum unused line fee, with maturity in one year, and
an equipment financing facility for an amount up to $500,000, at a floating interest rate of prime plus one percent, to be repaid in 36 monthly payments of principal plus accrued interest. Both facilities are secured by all available assets of the
Company, and are subject to certain financial and reporting covenants. During October 2003 we violated two financial covenants of this agreement, and have since received a waiver from the bank for these violations. As of September 30, 2003, no
amounts were outstanding under the revolving line of credit, and approximately $388,000 was outstanding under the equipment financing facility. A covenant of this agreement requires the Company to maintain a minimum cash balance of $750,000, which
has been classified as restricted cash in the accompanying consolidated balance sheet.



We are party to a note and warrant purchase agreement with certain of our existing investors to (a) finance us through the purchase of unsecured subordinated promissory notes for a committed financing amount in an
aggregate amount of approximately $422,000, or (b) guarantee a loan, letter of credit or other similar instrument from a financial institution or other third party. Pursuant to the terms of the note and warrant purchase agreement, we may, at any
time prior to the fourth anniversary of the completion of the merger with Accelerated Networks, upon an affirmative vote of a majority of our board of directors, provide written notice to the investors demanding that each investor deliver to us the
principal amount each investor originally committed to deliver to us as specified in the note and warrant purchase agreement. Our board of directors has voted to make such demand. Upon execution of this guarantee, the obligation of each investor to
provide the committed financing amount to us will be suspended for the period starting on the date the investor signs the guarantee documents and ending on the date the lender ceases to provide the alternative debt financing.



During June 2003 we received $500,000 and issued an unsecured subordinated
promissory note payable to one existing investor pursuant to the terms of the original financing commitment, and reduced the remaining amount of the guarantee to $422,000. The note bears interest at the prime rate and principal and accrued interest
is due June 2006. During September 2003, we reduced the amount of the financing commitment from the final investor to $254,000. This commitment was discharged in October 2003 as we issued a note payable to the investor in exchange for that
investors guarantee of a financial commitment of the Company.



We expect to continue to devote substantial capital resources to research and development activities, as well as our sales, marketing, and customer service organizations, and other general corporate activities. Our consolidated financial



15



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statements have been prepared on the assumption that we will continue as a going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The independent accountants report on our financial statements as of and for the fiscal year ended December 31, 2002 included an explanatory paragraph which states that since inception we have
incurred net operating losses and negative cash flows, and working capital and stockholders deficits, that raise substantial doubt about our ability to continue as a going concern. We believe that in addition to cash on hand, cash available
under the $2,500,000 revolving line of credit, $79,000 of cash available under an equipment financing facility, and anticipated revenues from operations, additional cash which we intend to raise through future equity or debt financing will be
required to fund our operations through September 30, 2004.



On
November 4, 2003 we announced that we have finalized a memorandum of terms with certain of our existing investors concerning the sale and issuance of up to an anticipated maximum of $20 million of our Series A Preferred Stock. Our existing investors
have agreed in principle to purchase more than $15 million of this offering. Completion of the financing transaction is subject to our negotiation of definitive agreements with the investors. We further announced that, assuming successful
negotiations, we expected the initial closing of the sale and issuance of the Series A Preferred to occur within 30 days. The Series A Preferred Stock would be convertible into shares of our Common Stock, subject to stockholder approval of an
increase in the number of authorized shares of our Common Stock, and we have reached agreement with the investors that it will be sold at a common-equivalent price of $0.11 per share. Following the initial closing of the Series A Preferred Stock
financing, we intend to offer holders of all outstanding shares of Common Stock the right to purchase shares of Series A Preferred Stock on terms substantially similar to the terms under which shares are sold to existing investors. We havent
yet determined applicable subscription ratios, record dates, issuance dates, and subscription periods. In connection with the rights offering, we intend to file a registration statement with the Securities and Exchange Commission covering the offer
and sale of Series A Preferred Stock to common stockholders pursuant to the rights offering.



However, there can be no assurance that such additional capital will be available when required or on terms acceptable to us. In particular, we are finalizing the definitive agreements of the proposed Series A
financing with our existing investors, and there can be no assurance that we will be able to complete the financing. The memorandum of terms is not binding. If events and circumstances occur such that we do not meet our current operating plan and
are unable to raise additional financing, we may be required to further reduce spending, which could have a material adverse effect on our ability to achieve our intended business objectives.



RISK FACTORS



If we are unable to complete the proposed financing we recently announced,
it would have a material adverse effect on our financial condition and business operations.



As of September 30, 2003, we had approximately $2.6 million in available cash and cash equivalents. We are currently unprofitable and require substantial
additional financing in order to continue our business and operations. On November 4, 2003, we announced that we had finalized a memorandum of terms with certain of our existing investors concerning a Series A preferred stock financing. Our existing
investors have tentatively committed to invest more than $15 million of the offering. The parties have agreed that the preferred shares will be sold, assuming completion of the financing, at a common-equivalent price of $0.11 per share. If
completed, the financing will result in substantial dilution to our existing stockholders. The memorandum of terms is not binding, however, and the existing investors are not required to invest. The Company and the investors are in the process of
finalizing the definitive agreements relating to the financing. If we are unable to enter definitive agreements and close the financing in the time frame we anticipate, our financial condition and ability to continue our operations will be
materially impaired.



To date, sales of our BLC 1200 and BLC
6000 series products have been limited and greater demand may not develop in the future.



Currently we have few customers for our BLC 1200 and BLC 6000 series products and a small number of prospective customers. We cannot be certain that there will be a demand for its products once our products are more
widely available, or that the demand will grow. Demand for our product will depend on the continued growth of data traffic volume and our prospective customers need to expand the capacity of existing local distribution networks. We do not know
if the volume of data traffic or the requirement for increased bandwidth in existing local distribution networks



16



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will continue to grow, or that the growth will create a demand for our products. It is difficult to predict how the market for our products will develop and
at what rate it will grow, if at all.



We may invest a
significant amount of our resources to develop, market and sell our products and may not realize any return on this investment.



We may invest a significant amount of our resources to develop, market and sell our products. If our products do not quickly achieve market acceptance,
they may become obsolete before enough revenue has been generated from the sales of these products to realize a sufficient return on investment. Furthermore, the rapidly changing technological environment in which we operate can require the frequent
introduction of new products, resulting in short product lifecycles. In addition, we may need to write-down inventories to reduced values or write-off excess and obsolete inventory. If we incur substantial development, sales, marketing and inventory
expenses that we are unable to recover, and are unable to compensate for such expenses, our business, financial condition and results of operations could be materially and adversely affected.



We have a limited operating history, which makes it difficult or
impossible to predict future results of operations and the results of operations.



We have a very limited operating history. Accelerated Networks was incorporated in October 1996 and did not begin shipping products in significant volume until September 1999. Occam CA was incorporated in July 1999
and has not begun shipping products in significant volume. Due to this limited operating history, it is difficult or impossible to predict future results of operations.



We operate in a market that has experienced a prolonged and significant economic slowdown, which will make it difficult
or impossible to predict the future results of our operations.



The current market for telecommunications equipment is characterized by a continued drastic reduction in the spending patterns of our current and prospective customers. This reduction in spending has led to an overall decrease in demand for
our products and has caused significant shortfalls in our revenues. In addition, we cannot predict whether there will be a market for our products in the future. As a result, our revenues and the market for our products may not be sufficient to
support our ongoing operations in the foreseeable future.



We have a history of losses, and as a result we may not be able to generate sufficient net revenue in the future to achieve or sustain profitability.



We have incurred significant losses since inception, and expect that we will experience net losses and negative cash flow
for the foreseeable future. As of September 30, 2003, we had an accumulated deficit of approximately $82.3 million. We expect our net revenue to be unpredictable in the near future. Accordingly, there can be no assurances that we will ever generate
sufficient net revenue to achieve or sustain profitability.



We
have large fixed expenses and that will continue to incur significant expenses for research and development, sales and marketing, customer support and general and administrative expenses. In particular, given the deteriorating market conditions in
the telecommunications equipment industry, our expected significant operating expenses, and the rate at which competition in the telecommunications equipment industry is intensifying, we may be unable to adequately control our costs and expenses or
achieve or maintain adequate operating margins. As a result, our ability to achieve and sustain profitability will depend on our ability to generate and sustain substantially higher revenue while maintaining reasonable cost and expense levels.



Our financial statements have been prepared on the assumption
that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The independent accountants report on our financial statements as of and for the fiscal
year ended December 31, 2002 included an explanatory paragraph which states that since inception we have incurred net operating losses and negative cash flows, and working capital and stockholders deficits, that raise substantial doubt about
our ability to continue as a going concern.



17



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The long sales and implementation cycles for our products may cause our revenue and operating results
to vary significantly.



A customers decision to
purchase our products often requires a significant commitment of resources from the customer and usually involves a lengthy product evaluation and qualification process prior to any firm purchase commitment. As a result, we may incur substantial
sales and marketing expenses and expend significant management effort without any guarantee of a sale. In addition, our sales cycles may be lengthy, the length of which will vary depending on the type of customer to whom we are selling. Because of
the recent economic downturn in the telecommunications market and resulting slowdown in spending for telecommunications equipment, it is currently difficult or impossible to predict the length of a typical sales cycle for any of our prospective
customers. As a result of the above factors, our quarterly revenue and operating results may vary significantly.



Our customers may sporadically place large orders with short lead times, which may cause our quarterly revenue and operating results to vary
significantly.



Our current and prospective customers often
deploy their networks in large increments and on a sporadic basis. Accordingly, we may receive purchase orders for significant dollar amounts on an irregular basis. These orders may have short lead times. As a result, we may not have sufficient
inventory to fulfill these orders and may incur significant costs in attempting to expedite and fulfill these orders. The foregoing may also cause our quarterly revenue and operating results to vary significantly and unexpectedly.



We may fail to meet our revenue targets or experience significant
quarterly revenue fluctuations if we fail to maintain and manage a consistent order backlog or if we experience product shipment delays.



We do not expect our order backlog to be significant at the beginning of each quarter for the foreseeable future. Accordingly, in order to achieve our
revenue objectives, we will need to obtain additional orders in each quarter for shipment in that quarter. In addition, due in part to factors such as the timing of product release dates, purchase orders and product availability, we may experience
delays in our ability to ship our products. We may incur additional costs and expenses if we allow customers to cancel orders within negotiated time frames or delay scheduled delivery dates without significant penalty. If we fail to ship products by
the end of a quarter, our operating results would be materially and adversely affected for that quarter.



Our prospective customers may have financial constraints, which may limit their ability to purchase new products.



Telecommunications service providers make considerable capital expenditures
to expand their networks and to purchase, install and maintain their equipment. If some of these service providers are unable to secure financing for these expenditures, they may not have the funds necessary to purchase our products. Budgetary
constraints or economic cycles may also impact when or if a prospective customer will purchase our products. Some telecommunications service providers have recently implemented significant capital expenditure reductions, which may reduce their
ability or willingness to purchase new products. Our customers may also include smaller, start-up companies that could experience cash flow problems, resulting in our being unable to collect amounts due.



If we fail to accurately predict our manufacturing requirements, we could
incur additional costs or experience manufacturing delays.



Lead times for the materials and components that we order from our contract manufacturers will vary significantly and depend on numerous factors, including the specific supplier, contract terms and demand for a component at a given time. If
we overestimate our component requirements, our contract manufacturers may purchase excess inventory. If the contract manufacturers purchase excess inventory that is unique to our products, we could be required to pay for these excess parts and
recognize related inventory write-down costs. If we underestimate our component requirements, our contract manufacturers may have an inadequate inventory, which could interrupt manufacturing of our products and result in delays in shipments and
revenue.



18



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Furthermore, we do not have a long-term supply contract with our primary contract manufacturers.
Consequently, these manufacturers will not be obligated to supply products to us for any specific period, in any specific quantity or at any certain price, except as may be provided in a particular purchase order. As a result, we will not be able to
guarantee that our contract manufacturers will be able to provide enough products to meet our requirements at a commercially reasonable price. If the components we require are not unique to our products, and such components are in high demand, we
cannot guarantee that our contract manufacturers will be able to fulfill our demand. As a result, we may experience shortages of certain components from time to time, which could delay the manufacturing of our products and recognition of revenue.



Because we will depend upon a small number of outside
contractors to manufacture our products, our operations could be delayed or interrupted if we encounter problems with any of these contractors.



We do not have internal manufacturing capabilities, and rely upon a small number of outside contractors to build our products. This reliance involves a
number of risks, including the possible absence of adequate capacity and reduced control over component availability, delivery schedules, manufacturing yields and costs. If any of our current or previous manufacturers are unable or unwilling to
continue manufacturing our products in required volumes and at high quality levels, we will have to identify, qualify and select acceptable alternative manufacturers. It is possible that an alternate source may not be available to us when needed or
may not be in a position to satisfy our production requirements at commercially reasonable prices and quality. Any significant interruption in manufacturing would require us to reduce our supply of products to our customers, which in turn could have
a material adverse effect on our customer relations, business, financial condition and results of operations.



We depend on sole source and limited source suppliers for key components, and if we are unable to buy these components on a timely basis, we will not
be able to deliver our products to our customers.



We
depend on sole source and limited source suppliers for key components of our products. Any of the sole source suppliers upon which we rely could stop producing the components, cease operations entirely, or be acquired by, or enter into exclusive
arrangements with, our competitors. As a result, these sole source suppliers may stop selling their products or components to us at commercially reasonable prices, if at all. Any such interruption or delay and the inability to obtain these
components from alternate sources at acceptable prices and within a reasonable amount of time would adversely affect our ability to meet scheduled product deliveries to our customers and would materially adversely affect our business, results of
operations and financial condition.



If we fail to enhance
our existing products or develop and introduce new products that meet changing customer requirements and technological advances, our ability to sell our products would be materially and adversely affected.



The markets for our products are characterized by rapid technological
advances, evolving industry standards, changes in end user requirements, frequent new product introductions and changes in voice and data service offerings by service providers. Our future success will significantly depend on our ability to
anticipate or adapt to such changes and to offer, on a timely and cost effective basis, products that meet changing customer demands and industry standards. The timely development of new or enhanced products is a complex and uncertain process and we
may not have sufficient resources to successfully and accurately anticipate technological and market trends, or to successfully manage long development cycles. We may also experience design, manufacturing, marketing and other difficulties that could
delay or prevent product development, introduction or marketing of new products and enhancements. The introduction of new or enhanced products also requires that we manage the transition from older products to these new or enhanced products in order
to minimize disruption in customer ordering patterns and ensure that adequate supplies of new products are available for delivery to meet anticipated customer demand. We may also be required to collaborate with third parties to develop products and
may not be able to do so in the future on a timely and cost-effective basis, if at all. Further, we may change or delay our product road map, which may negatively impact or delay new or improved product advances. If we are not able to develop new
products or enhancements to existing products on a timely and cost-effective basis, or if our new products or enhancements fail to achieve market acceptance, our business, financial condition and results of operations would be materially and
adversely affected.



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If our products contain undetected software or hardware errors, we could incur significant unexpected
expenses and lost sales.



Our products have not yet been
widely deployed. As a result, we cannot be sure that our products do not contain significant software or hardware errors that could only be detected when deployed in live networks that generate high amounts of voice and/or data traffic. Our
customers may discover errors or defects in its products after broad deployment and as the customers networks expand and are modified. Any defects or errors in our products discovered in the future, or failures of our customers networks,
whether caused by our products or those of another vendor, could result in loss of or delay in revenue, loss of market share and negative publicity regarding our products. Any of these occurrences could have a material adverse effect on our
business, results of operations and financial condition.



If
the development and adoption of relevant industry standards do not occur on a timely basis, our products may not achieve market acceptance.



Our ability to achieve market acceptance for our products will depend in part on the timing and adoption of industry standards for new technologies in our
relevant markets. Many technological developments occur prior to the adoption of relevant industry standards. The absence of an industry standard related to a specific technology may prevent widespread market acceptance of products using that
technology. The existence of multiple competing standards may also retard or delay the development of a broad market for our products. We may develop products that use new technologies prior to the adoption of industry standards related to these
technologies. Consequently, our products may not comply with eventual industry standards, which could hurt our ability to sell our products and also require us to quickly design and manufacture new products that meet such standards. Even after
industry standards are adopted, the future success of our products depends upon widespread market acceptance of our underlying technologies.



Our customers are subject to government regulation, and changes in current or future laws or regulations that negatively impact our customers could
harm our business.



The jurisdiction of the Federal
Communications Commission (the FCC) extends to the entire communications industry, including our customers. Future FCC regulations affecting the broadband access industry, our customers, or the service offerings of these customers, may
harm our business. For example, FCC regulatory policies affecting the availability of data and Internet services may impede the penetration of our customers into certain markets or affect the prices that may be charged in such markets. In addition,
international regulatory bodies are beginning to adopt standards and regulations for the broadband access industry. These domestic and foreign standards, laws and regulations address various aspects of Internet, telephony and broadband use,
including issues relating to liability for information retrieved from or transmitted over the Internet, online context regulation, user privacy, taxation, consumer protection, security of data, access by law enforcement, tariffs, as well as
intellectual property ownership, obscenity and libel. Changes in laws, standards and/or regulations, or judgments in favor of plaintiffs in lawsuits against service providers, e-commerce and other Internet companies, could adversely affect the
development of e-commerce and other uses of the Internet. This, in turn, could directly or indirectly materially adversely impact the broadband telecommunications and data industry in which our customers operate. To the extent our customers are
adversely affected by laws or regulations regarding their business, products or service offerings, this could result in a material and adverse effect on our business, financial condition and results of operations.



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



Failure of our products to comply, or delays in compliance, with the various existing, anticipated, and evolving industry regulations and standards could adversely affect sales of our existing and future products.
While we believe that our products comply with all current governmental laws, regulations and standards, we may be unable to continue to design our products to comply with all necessary requirements in the future.



In addition, our key competitors may establish proprietary standards, which
may not be made available to us. As a result, our products may not be interoperable with our customers networks if these networks incorporate technology based on proprietary standards. Furthermore, many of our potential customers will require
that our products be designed to interface with such customers existing networks, each of which may have different specifications, utilize multiple



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protocol standards and contain multiple generations of products from different vendors. If our products cannot operate in such an environment, they may not
achieve market acceptance and our ability to generate revenue would be seriously impaired.



Inability to protect our intellectual property could adversely affect our ability to compete.



We depend on our proprietary technology for our success and ability to compete successfully in our market. We currently hold seven patents and have 16
patent applications pending. We will rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. Existing copyright,
trademark and trade secret laws will afford us only limited protection. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. Any infringement of our proprietary
rights could result in significant litigation costs. Further, any failure by us to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a competitive advantage and
decreased revenue.



Despite our efforts to protect our
proprietary rights, attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may be unable to protect our proprietary rights against unauthorized third
party copying or use. Furthermore, policing the unauthorized use of our products would be difficult for us. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and operating results.



If necessary licenses of third party technology are not available to us,
or are prohibitively expensive, we may be unable to develop new products or product enhancements, which would seriously impair our ability to compete effectively.



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



We could become subject to litigation regarding intellectual property rights
that could seriously harm our business.



We may be subject to
intellectual property infringement claims that are costly to defend and could limit our ability to use some technologies in the future. We are currently a party to a purported patent infringement claim. While we believe that the resolution of this
matter will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, there are no assurances that we will prevail in any such action, given the complex technical issues and inherent
uncertainties of litigation.



Although we carry general
liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed.



Our industry is characterized by frequent intellectual property litigation based on allegations of infringement of intellectual property rights. From
time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies or rights that are important to our business. In addition, in our agreements, we may agree to indemnify our customers for any
expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. Any claims asserting that our products infringe or may infringe on proprietary rights of third parties, with or without merit, could
be time-consuming, resulting in costly litigation and diverting the efforts of technical and management personnel. These claims could also result in product shipment delays or require us to modify our products or enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be available to us on acceptable terms, if at all.



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We may be unable to raise additional capital to fund our future operations.



We expect the development and marketing of new products and the expansion of
our direct sales operation and associated support personnel to require a significant commitment of resources. As discussed above, we are currently finalizing a proposed financing with existing investors who have tentatively committed, subject to
completion of definitive agreements and various closing conditions, to purchase more than $15 million of our preferred stock at a common-equivalent price of $0.11. There is no binding agreement relating to this investment, however, and there can be
no assurances that we will be able to complete this financing. Even if we complete the financing, this additional capital, along with other capital resources available, may be insufficient to fund our future operations. In particular, we are
currently seeking to raise $20 million in the financing, which will require us to secure sources of investment other than existing investors. If we are unable to obtain sufficient capital, we may be required to reduce the scope of our planned
product development and marketing and sales efforts, which would harm our business and competitive position. Additional capital, if required, may not be available on acceptable terms, if at all.



To the extent that we raise additional capital through the sale of equity or
securities convertible into equity, the issuance of the securities could result in dilution to our existing stockholders. If we raise additional funds through the issuance of senior debt securities, these securities would have rights, preferences
and privileges senior to holders of our common stock.



If we
are unable to retain and hire qualified personnel, we may not be able to successfully achieve our objectives.



Our success depends upon the continued service of some executive officers and other key personnel and our ability to hire additional key personnel in the
future. The loss of the services of any key management personnel, or key sales personnel and engineers, could materially adversely affect our business, financial condition and results of operations.



If we become subject to unfair hiring claims we could incur substantial
defense costs.



Companies in the telecommunications
equipment industry whose employees and former employees accept positions with competitors frequently claim that such competitors have engaged in unfair hiring practices. For example, we have received claims of this kind in the past, and may receive
claims of this kind in the future. Those claims may result in material litigation costs. We could incur substantial costs in defending ourselves against these claims, regardless of their merits, which would have a material and adverse effect on our
business, financial condition and results of operations.



Our business could be shut down or severely impacted if a natural disaster or other unforeseen catastrophe occurs.



Our business and operations depends on the extent to which our facilities and products are protected against damage from fire, earthquakes, power loss,
and similar events. Despite precautions we have taken, a natural disaster or other unanticipated problem could, among other things, hinder our research and development efforts, delay the shipment of our products and affect our ability to receive and
fulfill orders. For example, because the final assembly and assembled product testing of our product line is performed in one location, any fire or other disaster at this location would have a material adverse effect on our business, results of
operations and financial condition. While we believe that our insurance coverage is comparable to those of similar companies in our industry, it does not cover all natural disasters, in particular, earthquakes or floods.



Potential economic and political instability in India could adversely
affect our financial results.



We have a subsidiary in
India the operations of which were closed during August 2003. As of September 30, 2003, the subsidiary held a cash balance, denominated primarily in U.S. dollars, of approximately $550,000. This subsidiary performed product development and testing
for our Element Management System, which is utilized for potential applications in products currently in development. These functions are now performed at our Santa Barbara, California headquarters. The subsidiary had received favorable tax and
tariff treatment for its product development activities in India. However, if this favorable treatment is unavailable to us for any reason including political instability in India



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resulting in a government adverse to foreign corporate activity, adverse consequences could occur including limitations on our ability to repatriate to the
United States all or a portion of the cash balance from the subsidiary.



Our common stock is currently traded on the over the counter market, and the liquidity of our stock may be seriously limited.



We have been delisted from the Nasdaq National Market. The Companys common stock is currently traded on the over the counter market
(OTC). Trading on the OTC Bulletin Board may adversely impact our stock price and liquidity, and the ability of our stockholders to purchase and sell our shares in an orderly manner. Furthermore, the delisting of our shares could damage
our general business reputation and impair our ability to raise additional funds.



We face certain litigation risks that could harm our business.



We are currently named as a defendant in several securities class action lawsuits. The results of these lawsuits are difficult to predict. An unfavorable
outcome or settlement of one or more of these lawsuits could have a material adverse effect on our financial position, liquidity, or results of operations and seriously harm our financial condition. Even if these lawsuits are not resolved against
us, the uncertainty and expense could seriously harm our business, financial condition and reputation. Litigation can be costly, time-consuming and disruptive to normal business operations. The costs of defending these lawsuits could be significant.
The defense of these lawsuits could also result in continued diversion of managements time and attention away from business operations, which could harm our business. (For additional information regarding our current litigation see Note
7Legal Proceedings in Item 1Financial Statements.)



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



Competition in the communications networking equipment market is intense and we expect competition to increase. The market for networking equipment is
dominated primarily by manufacturers of legacy digital loop carrier equipment, such as Nortel Networks Corporation, Lucent Technologies Inc., Alcatel SA, and Advanced Fibre Communications, Inc. A number of emerging companies have developed or are
developing products that may compete with our products. Many of our competitors and potential competitors have substantially greater name recognition and technical, financial and marketing resources than us. As a result, they may also have a
substantial advantage over us in developing or acquiring new products and technologies and in creating market awareness for those products, services and technologies. Further, many of our competitors have built long-standing relationships with some
of our potential customers, have the ability to provide financing to them and may, therefore, have an inherent advantage in selling network equipment products to these customers. We expect our competitors to continue to improve the performance of
their current products and to introduce new products, services and technologies. To be competitive, we must continue to invest significant resources in research and development, sales, marketing and customer support. We may not have sufficient
resources to make these investments, make the technological advances necessary to be competitive, or be able to effectively sell our products to carriers who have prior relationships with our competitors.



If we cannot compete successfully against our competitors, we could be
materially and adversely affected by:



| |  | significant reductions in demand for any of our products;
| | - | ---------------------------------------------------------



| |  | delays or cancellations of future customer orders;
| | - | --------------------------------------------------



| |  | reductions of the prices on any of our products; or
| | - | ---------------------------------------------------



| |  | increases in our expenses.
| | - | --------------------------



If the integration of Ethernet and Internet Protocol into the local access networks does not develop or is delayed, our results of operations and
financial condition could be materially affected.



Our
strategy includes developing products for the local access network, or local loop, that incorporate Ethernet and Internet Protocol technology. If these technologies are not widely adopted by telecommunications carriers operating in the local loop,
demand for our products based on Ethernet and Internet protocol may never develop. As a result, we may



23



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be unable to recoup its expenses related to the development of these products and our results of operations would be harmed.



If we are unable to collect receivables from our customers we may fail to
meet our revenue targets.



Market conditions in the
telecommunications equipment industry have deteriorated significantly and many of our customers and potential customers have experienced financial difficulties, including bankruptcy, and we may have significant difficulties in collecting accounts
receivables in the future. Accordingly, we may be required to write off a significant amount of our accounts receivable.



If our revenue and operating results fall below analysts and investors expectations, our stock price may decline below its current price
and may not recover from such decline.



Our quarterly
operating results have fluctuated in the past, and future operating results are likely to fluctuate significantly due to a variety of factors, many of which are outside of our control. If our quarterly or annual operating results do not meet the
expectations of investors and securities analysts, the trading price of our common stock could significantly decline.



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



Our executive officers, directors and their affiliates
beneficially own, in the aggregate, in excess of a majority of its common stock. If they were to act together, these stockholders would have significant influence over most matters requiring approval by stockholders, including the election of
directors, any amendments to our certificate of incorporation and certain significant corporate transactions. In addition, without the consent of these stockholders, we could be delayed or prevented from entering into transactions that could be
beneficial to us or our other investors. These stockholders may take these actions even if our other stockholders oppose them.



|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- |  | ----------------------------------------------------------



Because our portfolio of cash equivalents is of a short-term nature, we are not subject to significant market price risk related to investments. However,
our interest income is sensitive to changes in the general level of taxable and short-term U.S. interest rates. We generally invest our surplus cash balances in high credit quality money market funds with contractual maturities of less than 90 days.
We do not hold financial instruments for trading or speculative purposes. Our financial instruments have short maturities and therefore are not subject to significant interest rate risk. We do not use any derivatives or similar instruments to manage
its interest rate risk.



|ITEM 4. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



Evaluation of disclosure controls and procedures.Based upon their evaluation of the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2003, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and
communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.



Changes in internal control over financial reporting. There was no change in our internal control over financial
reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In addition, there were no changes in
our internal controls or in other factors that could have significantly affected those controls subsequent to September 30, 2003.



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PART II. OTHER INFORMATION



|ITEM 1. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



As of the date of this report there have been no material developments to the legal proceedings as described in the Companys Annual Report on Form
10-K for the year ended December 31, 2002 (File No. 000-30741), except as disclosed in Note 7Legal Proceedings.



|ITEM 2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS
|------- |  | -----------------------------------------



Recent Sales of Unregistered Securities



During June 2003 we received $500,000 and issued an unsecured subordinated promissory note payable to one existing investor pursuant. The note bears
interest at the prime rate and principal and accrued interest is due June 2006. This note was not registered under the Securities Act of 1933 and was issued in reliance on the exemption from registration set forth in Regulation D thereof.



|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K
|------- |  | --------------------------------



| | A. | Exhibits
| | -- | --------



|Exhibit 31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                               
|Exhibit 32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|Exhibit 32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



| | B. | Reports on Form 8-K
| | -- | -------------------



On July 25, 2003, the Registrant filed a Current Report on Form 8-K regarding a press release it had filed reporting its second quarter 2003 financial
results (furnished under Item 12 of Form 8-K).



On November 6,
2003, the Registrant filed a Current Report on Form 8-K regarding a press release it had filed reporting its third quarter 2003 financial results (furnished under Item 12 of Form 8-K).



On November 6, 2003, the Registrant filed a Current Report on Form 8-K regarding a press release it had filed reporting the
finalization of a memorandum of terms for a private placement of Series A preferred stock (furnished under Item 5 of Form 8-K).



25



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



OCCAM NETWORKS, INC. (Registrant)By:

/s/    HOWARD M. BAILEYHoward M. BaileyChief Financial Officer(Principal Financial and Accounting Officer)




Dated: November 14, 2003



26



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EXHIBIT INDEX



|Exhibit No. |  | Exhibit Title                                                                                                                                     
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|            | 
|32.1        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.2        |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.