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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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(Mark One)

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



For the three month period ended March 31, 2004



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)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0442752                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|77 Robin Hill Road Santa 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)



---



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 May 11, 2004: 267,775,534 shares.



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##### Table of Contents

INDEX



|                             |  |                                                                                       |  |     
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                             |  |                                                                                       |  | Page
|Part I
Financial Information |  |                                                                                      
|                             |  |                                                                                      
|Item 1.                      |  | Consolidated Balance Sheets                                                           |  | 2   
|                             |  |                                                                                      
|                             |  | Consolidated Statements of Operations                                                 |  | 3   
|                             |  |                                                                                      
|                             |  | Consolidated Statements of Cash Flows                                                 |  | 4   
|                             |  |                                                                                      
|                             |  | Consolidated Statement of Stockholders Equity (Deficit)                              |  | 5   
|                             |  |                                                                                      
|                             |  | Notes to Consolidated Financial Statements                                            |  | 6   
|                             |  |                                                                                      
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10  
|                             |  |                                                                                      
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 21  
|                             |  |                                                                                      
|Item 4.                      |  | Controls and Procedures                                                               |  | 21  
|                             | 
|Part II
Other Information    |  |                                                                                      
|                             |  |                                                                                      
|Item 1.                      |  | Legal Proceedings                                                                     |  | 21  
|                             |  |                                                                                      
|Item 2.                      |  | Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities     |  | 22  
|                             |  |                                                                                      
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                      |  | 25  
|                             |  |                                                                                      
|                             |  | A.
Exhibits                                                                           |  | 25  
|                             |  |                                                                                      
|                             |  | B.
Reports on Form 8-K                                                                |  | 25  
|                             | 
|Signatures                   |  | 25                                                                                   



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



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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



OCCAM NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)



|                                                                                                                                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                                                                                                  |  | March 31 2004 |         |   | December 31 2003 |  
|ASSETS                                                                                                                                                                                                                                                                            |  |               |         |   |                  |   |         |  
|Current assets:                                                                                                                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                                                         |  | $             | 15,266  |   |                  | $ | 14,586  |  
|Restricted cash                                                                                                                                                                                                                                                                   |  |               | 935     |   |                  |   | 935     |  
|Accounts receivable                                                                                                                                                                                                                                                               |  |               | 2,443   |   |                  |   | 2,342   |  
|Inventory                                                                                                                                                                                                                                                                         |  |               | 2,275   |   |                  |   | 2,254   |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                                         |  |               | 1,335   |   |                  |   | 1,077   |  
|                                                                                                                                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                                                                                                                                                                              |  |               | 22,254  |   |                  |   | 21,194  |  
|                                                                                                                                                                                                                                                                                  |  |              
|Property and equipment, net                                                                                                                                                                                                                                                       |  |               | 1,857   |   |                  |   | 1,937   |  
|Other assets                                                                                                                                                                                                                                                                      |  |               | 247     |   |                  |   | 273     |  
|                                                                                                                                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                                                                                                      |  | $             | 24,358  |   |                  | $ | 23,404  |  
|                                                                                                                                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                                                                                                                              |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                                                                                                                                  |  | $             | 3,579   |   |                  | $ | 3,001   |  
|Accrued expenses                                                                                                                                                                                                                                                                  |  |               | 2,902   |   |                  |   | 2,377   |  
|Capital lease obligations and notes payable, current portion                                                                                                                                                                                                                      |  |               | 696     |   |                  |   | 708     |  
|                                                                                                                                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                                                                                                                         |  |               | 7,177   |   |                  |   | 6,086   |  
|                                                                                                                                                                                                                                                                                  |  |              
|Capital lease obligations and notes payable, non current portion                                                                                                                                                                                                                  |  |               | 809     |   |                  |   | 998     |  
|                                                                                                                                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                                                                                                                 |  |               | 7,986   |   |                  |   | 7,084   |  
|                                                                                                                                                                                                                                                                                  |  |              
|Commitments and contingencies (notes 5 and 7)                                                                                                                                                                                                                                     |  |               |         |   |                  |   |         |  
|                                                                                                                                                                                                                                                                                  |  |              
|Preferred Stock                                                                                                                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Series A-2 convertible preferred stock, no par value, authorized  3,000 shares, 2,071 and 1,650 issued and outstanding at March 31, 2004
and December 31, 2003, respectively, liquidation preference of $61,127 and $49,527 at March 31, 2004 and December 31, 2003 respectively |  |               | 19,712  |   |                  |   | 16,381  |  
|Series A-2 convertible preferred stock warrant                                                                                                                                                                                                                                    |  |               | 71      |   |                  |   |        |  
|Stockholders equity (deficit):                                                                                                                                                                                                                                                   |  |               |         |   |                  |   |         |  
|Common stock, $0.001 par value, 400,000 shares authorized; 267,758 and 266,988 shares issued and outstanding at March 31, 2004 and December
31, 2003, respectively                                                                                                                |  |               | 268     |   |                  |   | 267     |  
|Additional paid-in capital                                                                                                                                                                                                                                                        |  |               | 87,714  |   |                  |   | 87,238  |  
|Warrants                                                                                                                                                                                                                                                                          |  |               | 454     |   |                  |   | 454     |  
|Deferred compensation                                                                                                                                                                                                                                                             |  |               | (1,339  | ) |                  |   | (1,627  | )
|Accumulated deficit                                                                                                                                                                                                                                                               |  |               | (90,508 | ) |                  |   | (86,393 | )
|                                                                                                                                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|Total stockholders equity (deficit)                                                                                                                                                                                                                                              |  |               | (3,411  | ) |                  |   | (61     | )
|                                                                                                                                                                                                                                                                                  |  |               |         |   |                  |   |         |  
|Total liabilities, preferred stock and stockholders equity (deficit)                                                                                                                                                                                                             |  | $             | 24,358  |   |                  | $ | 23,404  |  
|                                                                                                                                                                                                                                                                                  |  |               |         |   |                  |   |         |  



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



2



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OCCAM NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                                                                                             |  |                    |         |   |               |   |         |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------- | - | ------- | -
|                                                                                                                             |  | Three Months Ended |        
|                                                                                                                             |  | March 31 2004      |         |   | March 31 2003 |  
|Sales                                                                                                                        |  | $                  | 3,240   |   |               | $ | 1,451   |  
|Cost of revenue                                                                                                              |  |                    | 3,375   |   |               |   | 1,187   |  
|                                                                                                                             |  |                    |         |   |               |   |         |  
|Gross profit (loss)                                                                                                          |  |                    | (135    | ) |               |   | 264     |  
|                                                                                                                             |  |                   
|Operating expenses(1):                                                                                                       |  |                    |         |   |               |   |         |  
|Research and product development                                                                                             |  |                    | 2,057   |   |               |   | 3,380   |  
|Sales and marketing                                                                                                          |  |                    | 1,361   |   |               |   | 1,645   |  
|General and administrative                                                                                                   |  |                    | 527     |   |               |   | 694     |  
|                                                                                                                             |  |                    |         |   |               |   |         |  
|Total operating expenses                                                                                                     |  |                    | 3,945   |   |               |   | 5,719   |  
|                                                                                                                             |  |                    |         |   |               |   |         |  
|Loss from operations                                                                                                         |  |                    | (4,080  | ) |               |   | (5,455  | )
|Interest expense, net                                                                                                        |  |                    | (35     | ) |               |   | (20     | )
|                                                                                                                             |  |                    |         |   |               |   |         |  
|Loss before income taxes                                                                                                     |  |                    | (4,115  | ) |               |   | (5,475  | )
|Provision for income tax                                                                                                     |  |                    |        |   |               |   | 5       |  
|                                                                                                                             |  |                    |         |   |               |   |         |  
|Net loss                                                                                                                     |  |                    | (4,115  | ) |               |   | (5,480  | )
|Beneficial conversion feature on Series A-2 preferred stock and warrants                                                     |  |                    | (2,510  | ) |               |   |         |  
|Interest attributable to common stock potentially subject to rescission                                                      |  |                    |        |   |               |   | (200    | )
|                                                                                                                             |  |                    |         |   |               |   |         |  
|Net loss attributable to common stockholders                                                                                 |  | $                  | (6,625  | ) |               | $ | (5,680  | )
|                                                                                                                             |  |                    |         |   |               |   |         |  
|Basic and diluted net loss per share attributable to common stockholders                                                     |  | $                  | (0.02   | ) |               | $ | (0.04   | )
|                                                                                                                             |  |                    |         |   |               |   |         |  
|Weighted average shares outstanding used to compute basic and diluted net loss per share attributable to common stockholders |  |                    | 267,139 |   |               |   | 139,306 |  
|                                                                                                                             |  |                    |         |   |               |   |         |  
|(1)Amortization of deferred stock-based compensation and other stock-based compensation expense included
in:                 |  |                    |         |   |               |   |         |  
|Research and product development                                                                                             |  | $                  | 201     |   |               | $ | 244     |  
|Sales and marketing                                                                                                          |  |                    | 37      |   |               |   | 49      |  
|General and administrative                                                                                                   |  |                    | 24      |   |               |   | 27      |  
|                                                                                                                             |  |                    |         |   |               |   |         |  
|                                                                                                                             |  | $                  | 262     |   |               | $ | 320     |  
|                                                                                                                             |  |                    |         |   |               |   |         |  



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



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OCCAM NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                     |  |                    |        |   |               |   |        |  
|------------------------------------------------------------------------------------ |  | ------------------ | ------ | - | ------------- | - | ------ | -
|                                                                                     |  | Three Months Ended |       
|                                                                                     |  | March 31 2004      |        |   | March 31 2003 |  
|Operating activities:                                                                |  |                    |        |   |               |   |        |  
|Net loss                                                                             |  | $                  | (4,115 | ) |               | $ | (5,480 | )
|Adjustments to reconcile net loss to net cash used in operating activities:          |  |                    |        |   |               |   |        |  
|Depreciation and amortization                                                        |  |                    | 378    |   |               |   | 603    |  
|Amortization of deferred stock compensation                                          |  |                    | 288    |   |               |   | 320    |  
|Amortization of deferred financing costs                                             |  |                    | 27     |   |               |   | 9      |  
|Changes in current assets and liabilities:                                           |  |                    |        |   |               |   |        |  
|Accounts receivable                                                                  |  |                    | (101   | ) |               |   | (456   | )
|Inventories                                                                          |  |                    | (21    | ) |               |   | 147    |  
|Prepaid and other current assets                                                     |  |                    | (264   | ) |               |   | (22    | )
|Accounts payable                                                                     |  |                    | 578    |   |               |   | 160    |  
|Accrued expenses                                                                     |  |                    | 525    |   |               |   | (1,404 | )
|                                                                                     |  |                    |        |   |               |   |        |  
|Net cash used in operating activities                                                |  |                    | (2,705 | ) |               |   | (6,123 | )
|                                                                                     |  |                   
|Investing activities:                                                                |  |                    |        |   |               |   |        |  
|Purchases of property and equipment                                                  |  |                    | (298   | ) |               |   | (264   | )
|Decrease in other assets                                                             |  |                    | 5      |   |               |   | 4      |  
|                                                                                     |  |                    |        |   |               |   |        |  
|Net cash used in investing activities                                                |  |                    | (293   | ) |               |   | (260   | )
|                                                                                     |  |                   
|Financing activities:                                                                |  |                    |        |   |               |   |        |  
|Proceeds from issuance of preferred stock                                            |  |                    | 3,331  |   |               |   | 1,035  |  
|Proceeds from Series A-2 preferred stock warrant                                     |  |                    | 512    |   |               |   |        |  
|Proceeds from exercise of stock options, net of repurchases of unvested common stock |  |                    | 36     |   |               |   | (4     | )
|Repayments of capital lease obligations                                              |  |                    | (201   | ) |               |   | (231   | )
|                                                                                     |  |                    |        |   |               |   |        |  
|Net cash provided by financing activities                                            |  |                    | 3,678  |   |               |   | 800    |  
|                                                                                     |  |                    |        |   |               |   |        |  
|Increase (decrease) in cash and cash equivalents                                     |  |                    | 680    |   |               |   | (5,583 | )
|Cash and cash equivalents at beginning of period                                     |  |                    | 14,586 |   |               |   | 18,496 |  
|                                                                                     |  |                    |        |   |               |   |        |  
|Cash and cash equivalents at end of period                                           |  | $                  | 15,266 |   |               | $ | 12,913 |  
|                                                                                     |  |                    |        |   |               |   |        |  
|Supplemental disclosure of non-cash transactions:                                    |  |                    |        |   |               |   |        |  
|Interest paid                                                                        |  | $                  | 40     |   |               | $ | 61     |  
|                                                                                     |  |                    |        |   |               |   |        |  





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



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STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)

(In thousands)



Three months ended March 31, 2004



|                                                                           |        |                            |        |   |                                  |   |        |              |      |          |  |                         |   |  |                            |     |  |                       |     |  |       |        |   |  |   |        |   |  |   |         |   |  |   |        |  
|-------------------------------------------------------------------------- | ------ | -------------------------- | ------ | - | -------------------------------- | - | ------ | ------------ | ---- | -------- |  | ----------------------- | - |  | -------------------------- | --- |  | --------------------- | --- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | - |  | - | ------ | -
|                                                                           |        | Series A-2 Preferred Stock |        |   | Series A-2PreferredStockwarrants |   |        | Common Stock |      | Warrants |  | Deferred Comp- ensation |   |  | Additional Paid in Capital |     |  | Accumu- lated Deficit |     |  | Total |       
|                                                                           | Shares |                            | Amount |   |                                  |   | Shares |              |      | Amount   |  |                         |   |  |                           
|Balance at December 31, 2003                                               |        | 1,651                      |        | $ | 16,381                           |   |        | $            |     |          |  | 266,988                 |   |  | $                          | 267 |  | $                     | 454 |  | $     | (1,627 | ) |  | $ | 87,238 |   |  | $ | (86,393 | ) |  | $ | (61    | )
|Exercise of stock options                                                  |        |                           |        |   |                                 |   |        |              |     |          |  | 848                     |   |  |                            | 1   |  |                       |    |  |       |       |   |  |   | 32     |   |  |   |        |   |  |   | 33     |  
|Shares repurchased                                                         |        |                            |        |   |                                  |   |        |              |     |          |  | (78                     | ) |  |                            |     |  |                       |     |  |       |        |   |  |   |        |   |  |   |         |   |  |   |        |  
|Amortization of deferred stock-based compensation                          |        |                           |        |   |                                 |   |        |              |     |          |  |                        |   |  |                            |    |  |                       |    |  |       | 262    |   |  |   |       |   |  |   |        |   |  |   | 262    |  
|Adjustments to deferred stock compensation terms                           |        |                            |        |   |                                  |   |        |              |     |          |  |                         |   |  |                            |     |  |                       |     |  |       | 26     |   |  |   |        |   |  |   |         |   |  |   | 26     |  
|Issuance of series A-2 preferred stock and warrants, net of issuance costs |        | 420                        |        |   | 3,331                            |   |        |              | 516  |          |  |                        |   |  |                            |    |  |                       |     |  |       |       |   |  |   |       |   |  |   |        |   |  |   |        |  
|Record beneficial conversion feature                                       |        |                            |        |   | (2,475                           | ) |        |              | (480 | )        |  |                         |   |  |                            |     |  |                       |     |  |       |       |   |  |   | 2,955  |   |  |   |        |   |  |   | 2,955  |  
|Amortize beneficial conversion feature                                     |        |                           |        |   | 2,475                            |   |        |              | 35   |          |  |                        |   |  |                            |    |  |                       |     |  |       |       |   |  |   | (2,511 | ) |  |   |        |   |  |   | (2,511 | )
|Net loss                                                                   |        |                           |        |   |                                 |   |        |              |     |          |  |                        |   |  |                            |    |  |                       |    |  |       |       |   |  |   |       |   |  |   | (4,115  | ) |  |   | (4,115 | )
|                                                                           |        |                            |        |   |                                  |   |        |              |      |          |  |                         |   |  |                            |     |  |                       |     |  |       |        |   |  |   |        |   |  |   |         |   |  |   |        |  
|Balance at December 31, 2003                                               |        | 2,071                      |        | $ | 19,712                           |   |        |              | 71   |          |  | 267,758                 |   |  | $                          | 268 |  | $                     | 454 |  | $     | (1,339 | ) |  | $ | 87,714 |   |  | $ | (90,508 | ) |  | $ | (3,411 | )
|                                                                           |        |                            |        |   |                                  |   |        |              |      |          |  |                         |   |  |                            |     |  |                       |     |  |       |        |   |  |   |        |   |  |   |         |   |  |   |        |  



See accompanying notes.



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OCCAM NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All interim information relating to the three month period ended

March 31, 2004 and 2003 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.



On May 14,
2002, Accelerated Networks, Inc. a Delaware corporation (Accelerated Networks) acquired Occam Networks Inc., a California corporation (Occam CA). 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 we 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. Occam 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.



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 recent financings and 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 through June 30, 2004, $59,000 of cash available under an equipment financing facility, proceeds of $1.5 million from the issuance of Series A-2 stock in April
2004, and anticipated revenues from operations, that additional financing may be required to meet working capital and capital requirements through March 31, 2005.



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, the Company may be required to reduce certain discretionary spending, which could have a material adverse effect on its 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, 2003, and reflect all material adjustments, consisting only of normal recurring adjustments which, in the opinion of management, are necessary to fairly state our 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



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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 our Annual Report on Form 10-K for the year ended December 31, 2003.



Reclassifications



Certain amounts in the consolidated condensed financial statements have been reclassified to conform with the current presentation.



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.



2. INVENTORIES



Inventories consist of the following (in thousands):



|                |  |               |       |                  |   |      
|--------------- |  | ------------- | ----- | ---------------- | - | -----
|                |  | March 31 2004 |       | December 31 2003
|Raw materials   |  | $             | 487   |                  | $ | 716  
|Work-in-process |  |               | 94    |                  |   | 465  
|Finished goods  |  |               | 1,694 |                  |   | 1,073
|                |  |               |       |                  |   |      
|                |  | $             | 2,275 |                  | $ | 2,254
|                |  |               |       |                  |   |      



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. As of March 31, 2004, the outstanding principal was approximately $672,000, of which approximately $542,000 was current.



We have 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 March 31, 2004, the outstanding principal was approximately $15,000, all of which was current.



Revolving Line of Credit and Equipment Financing Facility



During 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. As of March 31, 2004, no amounts were outstanding under the revolving line of credit, and approximately $317,000
was outstanding under the equipment financing facility, of which $139,000 was current.



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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):



|                                                                       |  |          |         |   |      |   |         |  
|---------------------------------------------------------------------- |  | -------- | ------- | - | ---- | - | ------- | -
|                                                                       |  | March 31 |        
|                                                                       |  | 2004     |         |   | 2003 |  
|Numerator:                                                             |  |          |         |   |      |   |         |  
|Net loss attributable to common stockholders                           |  | $        | (6,625  | ) |      | $ | (5,680  | )
|                                                                       |  |          |         |   |      |   |         |  
|Denominator:                                                           |  |          |         |   |      |   |         |  
|Weighted-average common shares outstanding                             |  |          | 267,302 |   |      |   | 140,814 |  
|Adjustment for common shares issued subject to repurchase              |  |          | (163    | ) |      |   | (1,508  | )
|                                                                       |  |          |         |   |      |   |         |  
|Denominator for basic and diluted calculations                         |  |          | 267,139 |   |      |   | 139,306 |  
|                                                                       |  |          |         |   |      |   |         |  
|Basic and diluted net loss per share applicable to common stockholders |  | $        | (0.02   | ) |      | $ | (0.04   | )
|                                                                       |  |          |         |   |      |   |         |  



The following table
presents 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):



|                                                      |  |          |  |       
|----------------------------------------------------- |  | -------- |  | ------
|                                                      |  | March 31
|                                                      |  | 2004     |  | 2003  
|Unvested shares of common stock subject to repurchase |  | 94       |  | 1,389 
|Warrants                                              |  | 2,125    |  | 1,245 
|Stock options                                         |  | 46,948   |  | 34,073
|                                                      |  |          |  |       
|Common stock equivalents                              |  | 49,167   |  | 36,707
|                                                      |  |          |  |       



The Series A-2 preferred stock becomes
convertible on the approval of the stockholders to increase the number of authorized shares of the Company. Upon the approval of the stockholders, 272,727,000 shares of common stock will be reserved for the conversion of the Series A-2 preferred
stock.



5. COMMITMENTS AND CONTINGENCIES



The Company leases its office facilities and certain equipment under
noncancelable lease agreements, which expire at various dates through 2006. Certain operating leases contain escalation clauses with annual base rent adjustments of 3% or a cost of living adjustment. Rent expense for the quarter ended March 31, 2004
are $196,000. The Company also leased certain equipment and software under noncancelable capital lease agreements. Approximate minimum commitments under noncancelable operating and capital leases and equipment financing are as follows (in
thousands):



|                                  |  |                                     |       |   |                 |   |      
|--------------------------------- |  | ----------------------------------- | ----- | - | --------------- | - | -----
|Period ending December 31         |  | CapitalLeases andEquipmentFinancing |       |   | OperatingLeases
|2004                              |  | $                                   | 561   |   |                 | $ | 549  
|2005                              |  |                                     | 441   |   |                 |   | 628  
|2006                              |  |                                     | 73    |   |                 |   | 471  
|                                  |  |                                     |       |   |                 |   |      
|Total minimum lease payments      |  |                                     | 1,078 |   |                 | $ | 1,648
|                                  |  |                                     |       |   |                 |   |      
|Less amount representing interest |  |                                     | (74   | ) |                 |   |      
|                                  |  |                                     |       |   |                 |   |      
|Present value of lease payments   |  | $                                   | 1,004 |   |                 |   |      
|                                  |  |                                     |       |   |                 |   |      



Purchase
Commitments



As of December 31, 2002, the Company had
$482,000 included in accrued expenses for purchase commitments and outstanding payments due to one of its former principal contract manufacturers, which it expects to resolve in 2004.



Royalties



The Company licenses certain technology for incorporation into its products. Under the terms of these agreements, royalty payments will be made based on
per-unit sales of certain of the Companys products.



Indemnifications and Guarantees



The Company
enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with its contractors, customers, landlords and (ii) its agreements with investors. Under these provisions the Company
generally indemnifies and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Companys activities or, in some cases, as a result of the indemnified partys activities under the
agreement. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is generally
unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnifications agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the
Company has no liabilities recorded for these agreements as of March 31, 2004 and December 31, 2003.



Purchase Orders



Under the terms of the Companys contract manufacturer agreement, the Company is required to place orders with its contract manufacturer to meet the
estimated sales demand. The contract manufacturer agreement includes certain lead-time and cancellation provisions. As of March 31, 2004, open purchases orders with the contract manufacturer were $3,755,000.



Warranty



The Company provides standard warranties with the sale of products generally
for up to 5 years from date of shipment. The estimated cost of providing the product warranty is recorded at the time revenue is recognized. The Company maintains product quality programs and processes including actively monitoring and evaluating
the quality of its suppliers. The Company quantifies and records an estimate for warranty related costs based on the Companys actual history, projected return and failure rates and current repair costs. A summary of changes in the
Companys accrued warranty liability that is included in accrued liabilities is as follows:



|                                        |  |   |      |  
|--------------------------------------- |  | - | ---- | -
|Warranty liability on December 31, 2003 |  | $ | 331  |  
|Accruals during quarter                 |  |   | 389  |  
|Warranty utilization                    |  |   | (350 | )
|                                        |  |   |      |  
|Warranty liability at March 31, 2004    |  | $ | 370  |  



6. STOCK OPTIONSFAIR VALUE
DISCLOSURES



Had we 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, our 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.





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The effects of applying SFAS 123 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:



|                          |  |          |   |  |      |  
|------------------------- |  | -------- | - |  | ---- | -
|                          |  | March 31 |  
|                          |  | 2004     |   |  | 2003 |  
|Risk free interest rate   |  | 4.0      | % |  | 4.0  | %
|Expected lives (in years) |  | 5.0      |   |  | 5.0  |  
|Dividend yield            |  | 0.0      | % |  | 0.0  | %
|Expected volatility       |  | 80.0     | % |  | 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 Occam 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 our 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 and the Companys
insurance carrier reached a tentative settlement that is subject to Court and shareholder class approval. The members of the shareholder class have approved the settlement and the Court preliminarily approved the settlement on April 20, 2004. The
Company anticipates final approval by June 30, 2004. The Company does not believe it will be required to make any payments as a result of the settlement and accordingly has not recorded an accrual.



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



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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 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 September 30, 2004. The settlement must be approved
by the members of the class of plaintiffs and by the Court. 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. The amount that the
Companys insurance carrier will pay cannot be determined as it is contingent on the case against the underwriter defendants.



8. SERIES A-2 PREFERRED STOCK



On March 8, 2004, we sold 420,000 shares of series A-2 preferred stock raising gross proceeds of $4.2 million and issued a warrant to purchase up to
an additional 380,000 shares of Series A-2 preferred stock. The net proceeds from the issuance of the series A-2 preferred stock and warrant of $3.85 million, was allocated $516,000 and $3,331,000, based on the estimated relative fair market value,
to the warrant and the series A-2 preferred stock, respectively. The series A-2 preferred stock sold is entitled to the same rights and preferences as existing series A-2 preferred stock as disclosed in our 10-K for the year ended December 31,
2003. The series A-2 preferred stock issuable under the warrant was reduced to $2,268,000 in April 2004 as we sold an additional $1,532,000 in series A-2 preferred stock to existing investors in accordance with the terms of the warrant. The warrant
terminates if the Company raises additional proceeds in excess of $3.8 million no later than September 8, 2005. The series A-2 preferred stock and warrant have been presented in mezzanine equity, outside of stockholders equity.



Currently, we do not have a sufficient number of authorized shares of common
stock to permit conversion of the series A-2 preferred stock. During the first half of 2004, we intend to seek stockholder approval of an amendment to our existing certificate of incorporation to increase the number of authorized shares of common
stock that we may issue. No holder of series A-2 preferred stock will be entitled to convert any shares of series A-2 preferred into common stock until stockholder approval has been obtained. Upon receipt of stockholder approval, each outstanding
share of series A-2 preferred stock will be convertible at a conversion price of $0.11, subject to adjustments, as defined. In addition, all outstanding shares of series A-2 preferred stock will automatically convert into common stock upon the
written consent of holders of not less than sixty-six and two-thirds percent (66.66%) of the then outstanding shares of series A-2 preferred stock.



Certain existing stockholders and each of our officers and directors who are stockholders have executed a voting agreement and have agreed to vote their
shares of capital stock now held or hereafter acquired in favor of an amendment to the Companys existing certificate of incorporation to increase the number of authorized shares of common stock that it may issue. The voting agreement generally
prohibits the signatories from transferring any shares of the Companys common stock and will terminate upon the approval of the amendment to the certificate of incorporation increasing the authorized shares of common stock.



We believe that the vote to increase the number of shares of authorized
common stock to allow for conversion of the series A-2 preferred stock is perfunctory, as sufficient votes have been obtained as a result of these voting agreements. Accordingly, the Company further believes it is perfunctory that the series A-2
preferred stock will become convertible. Therefore during the three months ended March 31, 2004 we recorded a beneficial conversion feature (BCF) charge to net loss attributable to common stockholders of $2,475,000 relating to the
issuance of the series A-2 preferred stock. The BCF was calculated using the fair value of the common stock on date of issuance, subtracting the accounting conversion price and then multiplying the resulting amount by the sum of the number of shares
of common stock into which the series A-2 preferred stock is convertible. We also recorded a BCF on the preferred stock warrant (the warrant BCF) of $480,000 (as an adjustment to the warrant and additional paid in capital) that is being
amortized using the interest method over the life of the warrant. During the first quarter ended March 31, 2004, we recorded $35,000 of amortization of the warrant BCF. The warrant BCF of $480,000 was calculated by subtracting the sum of the
relative proceeds allocated to the warrant and the exercise price from the fair value of the common stock underlying the warrant.



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 our industry,
managements beliefs and certain assumptions made by us. 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 our beliefs and expectations regarding its financial statements, cost structure and amortization expenses, our beliefs and
expectations regarding its recent merger and the benefits from the acquisition, our beliefs regarding litigation matters and legal proceedings, its defenses to such matters and its contesting of such matters, and our 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



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.



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From our inception through March 31, 2004, we have incurred cumulative net losses of approximately $90.5
million. We expect to continue to incur substantial operating losses and to experience substantial negative cash flow as we expand our business. Our Auditors report on our financial statements for the year ended December 31, 2003 included an
explanatory paragraph which states that since inception we have incurred net operating losses and negative cash flow and working capital and stockholder deficits that raise substantial doubt about our ability to continue as a going concern.



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 a certain amount of revenue recognition judgments, particularly in the area of customer acceptance. The terms and conditions of acceptance of the product for each sales agreement will
dictate when sales revenue will be recognized. 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 or replacement 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
post-sales technical training on a fee basis. We provide hardware warranty for our products for 5 years and make provisions for that expense at the time of sale. We provide customer support and software maintenance for one year at no cost. After
that time it is done on a fee basis. We record an estimate of warranty costs when revenue is recognized based on actual history and projected returns and failure rates and repair costs.



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 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.



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Results of Operations



Three Month Periods Ended March 31, 2004 and 2003



Sales



Sales were $3.2 million and $1.5 million for the three-month periods ended March 31, 2004 and 2003, respectively. The increase in sales for the period ended March 31, 2004 over the prior year period is due to growth
in shipments of BLC products, related accessories and cabinets.



Cost of
revenue



Cost of revenue was $3.4 million and $1.2 million
for the three-month periods ended March 31, 2004 and 2003, 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 sales, and gross profit during the quarter were adversely affected by yield problems on certain new products and unusually high warranty expenses
for those products, which are anticipated to continue to occur in the next two quarters. Cost of revenue for 2004 includes a $480,000 additional accrual being management best estimate of the costs attributable to these new product yield problems
which the Company intends to incur to rectify in order to maintain customer satisfaction. There have been no returns related to these product issues and upon delivery they meet customer and industry quality specifications.



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 $2.1 million for the three-month period ended March
31, 2004, a decrease of 39% from the $3.4 million for the comparable period in 2003. 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 next quarter.



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 $1.4 million for the three-month period ended March 31, 2004, a decrease of 17% from the $1.6 million for the comparable period in 2003. The decrease is primarily due to expense reduction actions we have
implemented over the past two years. We expect our sales and marketing expenditures, excluding amortization of deferred stock-based compensation, to increase as our revenue continues to grow.



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 $527,000 for the three-month period ended March 31, 2004, a decrease of 24% from the $694,000 expense for 2003. We expect our general and administrative expenditures during the first two quarters of the 2004 fiscal
year to remain relatively constant.



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Stock-based compensation



From inception through March 31, 2004 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. From inception through March 31, 2004, we had reversed deferred stock compensation of approximately $4.6 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 Ended March 31
|                                                                                                          |  | 2004                        |     | 2003
|Amortization of deferred stock-based compensation and other stock-based compensation expense included in: |  |                             |     |      |   |    
|Research and product development                                                                          |  | $                           | 201 |      | $ | 244
|Sales and marketing                                                                                       |  |                             | 37  |      |   | 49 
|General and administrative                                                                                |  |                             | 24  |      |   | 277
|                                                                                                          |  |                             |     |      |   |    
|                                                                                                          |  | $                           | 262 |      | $ | 320
|                                                                                                          |  |                             |     |      |   |    



At March 31, 2004, we
had $1.3 million of unamortized deferred stock compensation, which we will amortize over the remaining vesting period of the underlying options.



Provision for income taxes



As of March 31, 2004, our net operating loss carryforwards were approximately $196 million for federal tax purposes, expiring through 2023, and $102
million for state tax purposes, expiring through 2013. Under the change in ownership provisions of Section 382 of the Internal Revenue Code, utilization of the net operating loss carryforwards may be limited. The amount of such limitation, if any,
has not been determined.



Liquidity and Capital Resources



As of March 31, 2004, we had cash and cash equivalents of $15.3 million as
compared to $14.6 million as of December 31, 2003. The increase in cash and cash equivalents was primarily due to $3.8 million proceeds from the close of the Series A-2 preferred stock offering, partially offset by the $2.7 million cash used in
operations.



The $2.7 million cash we used in operating
activities during the three-month period ended March 31, 2004 was a decrease of $3.4 million, a 56% reduction from the $6.1 million used during the comparable prior year period. The decrease was due primarily to a decrease in operating expenses for
the quarter ended March 31, 2004 as compared to the comparable prior year quarter.



We used $293,000 in cash for investing activities during the three-month period ended March 31,2004, an increase of $33,000 from the $260,000 used by investing activities during the comparable prior year period.



We generated $3.7 million in cash from financing activities
during the three-month period ended March 31, 2004 as compared to $800,000 for the comparable prior year period. The cash provided during the three-month period ended March 31, 2004 was from the $3.8 million net proceeds of the closing of our
offering of Series A-2 Preferred Stock and warrants, less approximately $200,000 used for repayments of our capital leases.



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As of March 31, 2004, 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



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 collateralized by all of our available assets, and are subject to certain financial and reporting covenants, and approximately $317,000 was outstanding under the
equipment financing facility. A covenant of this agreement requires us to maintain a minimum cash balance of $750,000, which has been classified as restricted cash in the accompanying consolidated balance sheet.



We expect to continue to devote substantial capital resources to research and
development activities, as well as our sales, marketing, customer service, and other general corporate activities. Our consolidated 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 auditors report on our financial statements as of and for the fiscal year ended December 31, 2003. included an explanatory
paragraph which states that since inception we have incurred net operating losses and negative cash flows, and working capital and stockholder deficit 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 through June 30, 2004, $59,000 of cash available under an equipment financing facility, the $1,500,000 of proceeds from the sale of Series A-2 preferred stock in
April 2004 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 March 31, 2005. However, at March 31, 2004 and December 31, 2003,
there can be no assurance that if that additional capital is required in the future that such additional capital will be available when required or on terms that are acceptable to us.



Working capital



Working capital was $15.1 million for 2004 and 2003. Current assets increased $1.1 million to $22.3 million for 2004 from $21.2 million for 2003. The
increase consisted of a $680,000 increase in cash, due to the Series A-2 financing, an increase in accounts receivable of $101,000 and a $258,000 increase in prepaid expenses and other current assets due to increased activity. Current liabilities
increased by $1.1 million also with the increase due a $578,000 increase in accounts payable and a $525,000 increase in accrued expenses. The increase in accrued expenses was largely due to the $480,000 additional warranty provision for new product
yield problems.



RISK FACTORS



To date, sales of our BLC 1200 and BLC 6000 system 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 system products and a small number of prospective customers. We cannot be certain that there will be a demand for our products once they are more widely available or that demand
for our products will grow. Demand for our products 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 will continue to grow or if any growth in bandwidth requirements 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 have a limited operating history, which makes it difficult or impossible to predict future 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 Networks CA was incorporated in July 1999 and has not begun shipping products in significant volume. Due to the limited operating history of our historic businesses, it is difficult or impossible to predict our future
results of operations.



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.



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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 rapid technological advances, evolving industry standards, recurring changes in end user requirements characterize the markets we face for our products.
In addition, these markets involve 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.



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 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 March 31,
2004, we had an accumulated deficit of approximately $90.5 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 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
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.



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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, 2003 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.



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 any 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



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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. 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 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. Primarily these parts are semiconductor components. While parts from another vendor could replace any of these components, we would need to
redesign the board and it would cost both time and money.



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



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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 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 issued patents and have several 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.



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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.



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



We continue to operate at a loss and could require a further infusion of cash in the future. There is no guarantee that we would be able to
raise the additional funding if it is required.



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.



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



Our 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.



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.



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



Competition in the communications networking equipment market is intense and we expect competition to increase. Primarily manufacturers of legacy digital loop carrier equipment, such as Nortel Networks Corporation,
Lucent Technologies Inc., Alcatel SA, and Advanced Fibre Communications, Inc, dominate the market for networking equipment. 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 be unable to recoup our 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.



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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 March 31, 2004, 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 March 31, 2004.



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 our Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-30741), except as disclosed in Note 7Legal Proceedings.



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ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES



Recent Sales of Unregistered Securities



On November 18, 2003, a special committee of our board of directors authorized 3,000,000 shares of a new series of preferred stock, designated as our series A-2 preferred
stock. In 2003, we sold 1,650,910 shares of series A-2 preferred stock for net proceeds of $16.4 million.



During the quarter ended March 31, 2004, we sold 420,000 shares of Series A-2 Preferred Stock for $4,200,000.



The rights, preferences, and privileges of our series A-2 preferred stock are described in the Current Reports on Form 8-K that we filed with the Securities and Exchange
Commission on November 21, 2003 and March 12, 2004, in each case with all attached exhibits



Subsequent Financing Event



On April 1,
2004, we completed the final closing of the private placement portion of our series A-2 preferred stock financing with the investment of approximately $1.5 million from existing investors. Details of the final closing are described in our Current
Report on Form 8-K filed on April 2, 2004.



Purchase agreement amendment;
termination of convertible note negotiations; decrease of the new investor Warrants



Amendments to previously filed series A-2 preferred stock transaction agreements



In March, 2004, we entered into amendments to the original Series A-2 Preferred Stock Purchase Agreement executed in 2003. The amendments:



| |  | Increased the number of shares of Series A-2 preferred stock that we were entitled to sell under the original purchase agreement from 2,000,000 to 2,070,910.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Made investors purchasing at the final closing of the financing parties to the original purchase agreement.
| | - | -----------------------------------------------------------------------------------------------------------



| |  | Each of the other investors in the financing agreed that we would grant a new investor a warrant to acquire additional shares of series A-2 preferred stock on the terms described
below.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We agreed to file with the SEC a registration statement covering the resale of shares of common stock issuable upon conversion of the series A-2 preferred stock (including the
shares issuable upon exercise of the new investors warrant discussed below) and the convertible notes and upon exercise of the convertible note commitment warrants described below. In addition, the registration statement would seek to register
for resale shares of common stock that were issued in 2003 upon the automatic conversion of a series of preferred stock that was sold in December 2002.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Holders of our series A-2 preferred stock agreed not to consent to any automatic conversion of the series A-2 preferred stock and not to waive the application of the liquidation
rights of the series A-2 preferred stock set forth in our certificate of incorporation unless the new investor also agrees.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Additional rights granted to the new investor:
| | - | ----------------------------------------------



The new investors warrant



In March 2004, Occam has issued a new investor a warrant to acquire up to an additional $4 million of series A-2 preferred stock at an exercise
price of $10.00 per share. In accordance with the terms of the warrant, the amount of the series A-2 preferred stock subject to the warrant was reduced to $2.268 million in April 2004 following the sales of an additional $1.532 million of series A-2
preferred stock to existing investors. The amount that the new investor may acquire will be further reduced by an amount equal to the amount in excess of $1.5 million that Occam raises in the contemplated rights offering. If the proceeds of the
rights offering are in excess of $1.5 million equals or exceeds $2.2684.0 million, then the warrant will immediately terminate. To the extent that the warrant does become exercisable, it will permit the new investor to acquire additional series A-2
preferred shares at any time during the period beginning on the first business day after the rights offering has closed and ending on September 8, 2005.



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The series A-2 preferred stock warrants issued to the new investor are more completely described in the
April 2, 2004 Current Report on Form 8-K.



| |  | Board rights agreement
| | - | ----------------------



As an inducement to the new investor to purchase series A-2 preferred stock, we entered a board rights agreement with the new investor. Under the terms
of the agreement, in connection with any meeting of stockholders at which directors will be elected, the new investor may require us to nominate a designee of the new investor for election to the board of directors and to include the nomination in
any stockholder solicitation materials relating to the election. We are then required to use our commercially reasonable efforts to cause the election of the designee and to maintain the designee as a director.



In addition, the new investor may at any time request that our board of
directors appoint a designee of the new investor to serve as a director. In such event, we have agreed to use our commercially reasonable efforts to cause the designee to be appointed to the board, to cause the nomination of the designee in
connection with subsequent stockholder solicitations to elect directors, to recommend election of the new investor designee as part of any such solicitation, and to maintain the status of the designee as a director.



If the new investor has not designated a director, we have agreed to permit
one representative of the new investor to attend and participate in board meetings in a non-voting observer capacity. We are entitled to exclude the director under circumstances where the attendance of the designee would jeopardize attorney-client
privilege, where the new investor has a conflict-of-interest with respect to the matters being discussed, and where the new investors attendance would result in our violating a confidentiality agreement with a third party.



As part of the letter agreement, the new investor agreed to maintain the
confidentiality of our material non-public information that it may obtain as a result of its rights under the agreement. The new investors rights under the letter agreement will terminate if the new investor and its affiliates no longer hold
at least 50% of the series A-2 preferred stock originally purchased by the new investor or common stock issued on conversion of such number of shares of series A-2 preferred stock The agreement will also terminate upon a merger, acquisition, or
similar transaction involving us where our stockholders do not hold at least a majority of the outstanding voting securities of the surviving or successor entity or its parent.



The board rights agreement between the new investor and us is attached as Exhibit 4.9 to the April 2, 2004 Current Report
on Form 8-K.



| |  | Management rights agreement
| | - | ---------------------------



We have also entered a management rights agreement with the new investor. As part of the management rights agreement, we granted the new investor certain
rights to consult with and advise management and to examine our books, records, and facilities; made representations concerning our activities in certain foreign countries; and agreed to use reasonable efforts to limit the liability of any director
the new investor may designate to the fullest extent permitted by Delaware law.



The management rights agreement between the new investor and us is attached as Exhibit 4.10 to the April 2, 2004 current report on Form 8-K.



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Ownership of our capital stock



The following table sets forth certain information known to us with respect to the beneficial ownership of our common stock immediately
prior to the initial closing of the Series A-2 preferred stock financing on November 19, 2003, as compared to beneficial ownership immediately following the final closing on March 8, 2004, assuming that the 2,070,910 currently outstanding
shares of series A-2 preferred stock are converted into common stock. Based on the current $0.11 conversion price, 2,070,910 shares of series A-2 preferred stock will be convertible into approximately 188,264,546 shares of common stock upon
stockholder approval of the increase in our authorized shares of common stock as described above and in the Prior 8-K. The table also reflects ownership of the series A-2 preferred stock as a separate class. The table reflects beneficial ownership
for the following persons and classes of persons:



| |  | Each person who is the beneficial owner of 5% or more of the outstanding shares of our common stock;
| | - | ----------------------------------------------------------------------------------------------------



| |  | Each of our directors;
| | - | ----------------------



| |  | Each executive officer named in the compensation table of our proxy statement as filed with the SEC on April 30, 2003; and
| | - | --------------------------------------------------------------------------------------------------------------------------



| |  | All current directors and executive officers as a group.
| | - | --------------------------------------------------------



Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Except as
indicated by the footnotes below, we believe, based on information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned
by them, subject to community property laws, where applicable. In computing the number of shares of common stock beneficially owned, shares subject to options or warrants held by a stockholder that are exercisable within sixty days of March 8, 2004
are deemed outstanding for the purpose of determining the percentage ownership of that stockholder. These shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other stockholder. The outstanding
warrant to acquire series A-2 preferred stock held by the new investor is not reflected in the table because it is not anticipated that it will become exercisable within sixty days of March 8, 2004. In addition, the potential issuance of common
stock warrants in connection with convertible note commitments is not reflected because the number of shares cannot be determined unless and until actual commitments, if any, have been made. As of November 19, 2003, we had 266,772,592 shares of
common stock and no shares of series A-2 preferred stock outstanding. As of March 31, 2004, we had 267,757,534 shares of common stock outstanding and 2,070,910 shares of series A-2 preferred stock outstanding. In connection with the sale of
additional shares of series A-2 preferred stock to prior investors, we amended the Series A-2 Preferred Stock Purchase Agreement, which we had previously amended on March 8, 2004 in connection with the new investors investment. Amendment No. 2
to the stock purchase agreement, dated as of April 1, 2004, is filed as Exhibit 4.11 to the April 2, 2004 Current Report on Form 8-K.



The principal changes affected by the second amendment were to increase the number of shares of series A-2 preferred stock we could issue under the purchase agreement by
a sufficient number of shares to permit the additional sales to prior investors and to terminate provisions included in the March 8, 2004 amendment relating to obtaining commitments to purchase our convertible notes. As disclosed in our Current
Report on Form 8-K filed on March 12, 2004, in connection with the issuance of series A-2 preferred stock to the new investor, our existing investors and the new investor agreed to negotiate with us concerning providing commitments to purchase our
convertible promissory notes. The recent additional equity investments from prior investors were made in lieu of the convertible note agreements. The provisions of the first amendment relating to the convertible notes have been terminated, and we do
not currently anticipate entering into any agreement with our existing investors with respect to the convertible promissory notes.



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As previously disclosed in our current report on form 8-k that we filed with the securities and exchange commission on
March 12, 2004, we issued warrants on March 8, 2004 to investment funds affiliated with the new investor to acquire up to $3.8 million of series A-2 preferred, subject to various conditions, including potential reductions in the $3.8 million based
on our ability to obtain additional financing. As a result of the $1.5 million investment from prior investors, the amount currently subject to the new investor warrants has been reduced to approximately $2.3 million.



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
January 28, 2004, the Registrant filed a Current Report on Form 8-K regarding a press release it had filed reporting its fourth quarter 2003 financial results (furnished under Item 12 of Form 8-K).



On March 18, 2004, the Registrant filed a Current Report on Form 8-K
regarding Amendment No. 1 to the Series A-2 Convertible Preferred Stock Purchase Agreement, and the Second Amended and Restated Investors Rights Agreement.



On April 2, 2004, the Registrant filed a Current Report on Form 8-K regarding the final close and Amendment No. 2 to the Series A-2 Convertible Preferred
Stock Purchase Agreement.



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. Bailey Chief Financial Officer
(Principal Financial and Accounting Officer)




Dated: May 14, 2004



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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.



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