##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2003                                             
|          
|OR        
|          
|o          |  | 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: 000-24597



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CARRIER ACCESS CORPORATION

(Exact name of registrant as specified in its
charter)


|                                                                            |  |                                         
|--------------------------------------------------------------------------- |  | ----------------------------------------
|DELAWARE                                                                    |  | 84-1208770                              
|(State or other jurisdiction of
    incorporation or organization)          |  | (I.R.S. Employer
    Identification No.)
|                                                                           
|5395 Pearl Parkway, Boulder, CO(Address of principal executive
    offices) |  | 80301(Zip Code)                         

(303) 442-5455

(Registrants telephone number, including
area code)




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Securities registered pursuant to 12(b) of the
Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, par value $0.001 per
share

(Title of Class)



---

Indicate
by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the Act) 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 þ         No o

Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or
any amendment to this
Form 10-K.    o

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

As
of June 30, 2003 there were 24,798,060 shares of the
Registrants common stock outstanding, and the aggregate
market value of such shares held by non-affiliates of the
Registrant (based upon the closing sale price of such shares on
the Nasdaq National Market on June 30, 2003, the last
business day of the second quarter of 2003) was $23,922,882.
Shares of the Registrants common stock held by each
executive officer and director and by each entity that owns 10%
or more of the Registrants outstanding common stock have
been excluded in that such persons or entities may be deemed to
be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

On
March 1, 2004, there were 33,667,236 shares of the
Registrants common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain
sections of the Registrants definitive Proxy Statement for
the 2004 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Form 10-K to the extent
stated herein.



---






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CARRIER ACCESS CORPORATION

INDEX TO ANNUAL REPORT ON FORM 10-K


For the Fiscal Year Ended December 31,
2003


|                                         |  |                                                                                                        |    |          |    | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------ | -- | -------- | -- | 
|                                         |  |                                                                                                        |    | Page No.
|                                         |  |                                                                                                        |    |         
|PART I                                  
|Item 1.                                  |  | Business                                                                                               |    |          | 2  | 
|                                         |  | Risk Factors                                                                                           |    |          | 11 | 
|Item 2.                                  |  | Properties                                                                                             |    |          | 22 | 
|Item 3.                                  |  | Legal Proceedings                                                                                      |    |          | 22 | 
|Item 4.                                  |  | Submission of Matters to a
    Vote of Security Holders                                                |    |          | 23 | 
|                                         |  | Executive Officers of the
    Registrant                                                               |    |          | 24 | 
|PART II                                 
|                                        
|Item 5.                                  |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |    |          | 25 | 
|Item 6.                                  |  | Selected Financial Data                                                                                |    |          | 26 | 
|Item 7.                                  |  | Managements Discussion
    and Analysis of Financial Condition and Results  of
    Operations         |    |          | 26 | 
|                                         |  | Overview                                                                                               |    |          | 26 | 
|                                         |  | Recent Developments                                                                                    |    |          | 28 | 
|                                         |  | Results of Operations                                                                                  |    |          | 28 | 
|                                         |  | Liquidity and Capital
    Resources                                                                    |    |          | 31 | 
|                                         |  | Contractual Obligations                                                                                |    |          | 32 | 
|                                         |  | Off Balance Sheet
    Arrangements                                                                     |    |          | 33 | 
|                                         |  | Critical Accounting
    Policies                                                                       |    |          | 33 | 
|Item 7A.                                 |  | Quantitative and Qualitative
    Disclosures about Market Risk                                         |    |          | 34 | 
|Item 8.                                  |  | Consolidated Financial
    Statements and Supplementary Data                                           |    |          | 35 | 
|Item 9.                                  |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |    |          | 55 | 
|Item 9A.                                 |  | Controls and Procedures                                                                                |    |          | 55 | 
|PART III                                
|                                        
|Item 10.                                 |  | Directors and Executive
    Officers of the Registrant                                                 |    |          | 56 | 
|Item 11.                                 |  | Executive Compensation                                                                                 |    |          | 56 | 
|Item 12.                                 |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |    |          | 56 | 
|Item 13.                                 |  | Certain Relationships and
    Related Transactions                                                     |    |          | 56 | 
|Item 14.                                 |  | Principal Accountant Fees
    and Services                                                             |    |          | 56 | 
|PART IV                                 
|                                        
|Item 15.                                 |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                   |    |          | 57 | 
|Signatures                               |  |                                                                                                        | 58 |         
|Certifications                           |  |                                                                                                        | 61 |         
|Subsidiaries of the Registrant          
|Consent of KPMG LLP                     
|Certification of Chief Executive Officer
|Certification of Chief Financial Officer
|Certification of CEO & CFO              



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PART I






|        |         
|------- | --------
|ITEM 1. | BUSINESS

General

Carrier Access designs, manufactures and sells
broadband access equipment to communications service providers.
Our products are used to upgrade capacity of wireline and
wireless communications networks. Our products also enable our
customers to offer voice and data services, which historically
have been offered on separate networks, on a single converged
network. We design our products to enable our customers to
deploy new revenue-generating voice and data services, while
lowering capital and operating costs.

We sell our products directly to communications
service providers and indirectly through a broad channel of
global distributors and original equipment manufacturers, or
OEMs, that provide voice and data communications infrastructure
products. Our wireline and wireless customers include local and
long distance carriers, cable operators, and international
communications providers.

On November 25, 2003, we completed the
acquisition of Paragon Networks International Inc., a provider
of products to wireless service providers. Paragons
products are primarily used for upgrading the capacity of links
between wireless cell sites and the wide network. We believe the
addition of Paragons products complements our own product
portfolio by increasing the breadth of our product offerings, as
well as adding new customers.

Our principal executive offices are located at
5395 Pearl Parkway, Boulder, CO 80301. Our telephone number at
that location is 303-442-5455. Our website is
www.carrieraccess.com; however, the information in, or that can
be accessed through, our web site is not part of this report.
Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments
to such reports are available, free of charge, on our web site
as soon as reasonably practicable after we electronically file
or furnish such materials with the Securities and Exchange
Commission. We were incorporated in Colorado in September 1992
and were reincorporated in Delaware in June 1998.

Industry Overview

The pervasive use of the Internet, the
introduction of new bandwidth-intensive applications, and
widespread adoption of numerous mobile communications devices
capable of connecting to the Internet have fueled demand for
media-rich Internet services, such as picture mail, music
downloads, games, enhanced text messages, wireless web, and
real-time video. Similarly, businesses are demanding new
services customized to meet their personal communications needs,
such as web conferencing, virtual private networks, or VPNs,
which allow companies to extend their secure networks using the
Internet, and voice over IP, or VoIP, which is the transmission
of voice over the Internet. Broadband wireline and wireless
Internet access is experiencing rapid growth as it becomes the
primary means by which these services are enabled.

We believe the rapid increase in broadband
subscriber growth, coupled with widespread adoption of new
media-rich Internet services, is driving service provider
investment in new broadband access technologies. Although
overall telecommunications capital expenditures have declined
over the past three years, service providers continue to make
significant investments to increase capacity at both the
wireline portion of the network that links service providers and
their end-user customers, which we refer to as the access
portion of the network, and the wireless portion of the network
that links cellular sites to the wired network, which we refer
to as the wireless backhaul. In addition, service providers
continue to focus capital expenditures on upgrading to IP-based
technologies and delivering broader geographic coverage. With
constrained capital expenditure budgets, communications service
providers are implementing scalable and cost-efficient
networking technologies.

We believe the growth of Internet-enabled mobile
communications devices and applications are driving a rapid
expansion of the global wireless communications infrastructure.
In response to continued subscriber growth and increasing demand
for media-rich wireless services, we believe broadband service
providers will need to cost-effectively upgrade their networks
to support these new service offerings to remain competitive. In
addition, this expansion is being accelerated by federal
regulation, such as FCC mandated Enhanced 911, or E911, rules,
which require public safety agencies to implement improved
location detection of the wireless user.

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We believe that the disparate networks that
comprise the Internet, including corporate intranets, cable
systems, broadband and wireless networks, and voice and video
networks, will increasingly converge into a unified network. We
also believe that to successfully address this trend, equipment
vendors must be capable of providing a comprehensive suite of
products that support voice and data services, expand network
bandwidth, and reduce wired and wireless network upgrade costs
using a variety of access technologies.

Our Approach

We provide a broad platform of communications
equipment, software, and services that enable wireless and
wireline service providers to cost-effectively upgrade access
capacity and implement converged IP voice and data services.

Our wireless products allow wireless service
providers to reduce the strain on backhaul portions of the
network, which is the portion that links cell sites to the wired
switching center. Our products increase wireless network
capacity at our customers cell sites to enable the
introduction of new wireless data services and provide data
connections needed for cell site equipment management and E911
location identification.

Our wireline products are primarily used to
deliver converged IP voice and data services over broadband
access connections, such as TI or Ethernet connections, to
business or multiple dwelling units, such as apartments and
condominiums. The embedded VoIP software in our products works
in conjunction with certain network application software
providers to deliver IP-based voice and data applications,
including virtual private networks, or VPNs, that fully
integrate voice and data, customized web-controlled voicemail,
call screening and forwarding, and other personalized IP
communications services.

We believe that our products provide the
following benefits to our customers:

Revenue From Existing and Next-generation IP
Services.Our equipment and software
support multiple services. As a result, service providers using
our products can offer a variety of revenue-generating services
as customer needs evolve, without deploying dedicated equipment
for each service. For example, our Adit products support the
efficient delivery of data traffic with VoIP services, while
supporting or converting existing customer telephone and data
equipment. This is accomplished by deploying service cards that
support multiple communications services and technologies within
the Adit chassis, thus protecting both the service
providers investment in access equipment and the end-user
investment in enterprise communications equipment.

Cost Effectiveness and
Scalability.Our products are designed
to enable our customers to cost-effectively add additional voice
and data capacity as the demand for bandwidth and new services
increases. Our products reduce unused bandwidth and lower
service providers equipment upgrade and operating costs by
allowing the easy installation of additional cards into an
already installed product. These line cards enable a variety of
new communications services without sacrificing existing
infrastructure investments. In addition, our products are
capable of performing a variety of communications networking
functions in a single chassis. For example, our Axxius products
integrate multiple services such as transport, routing, and
service protection at the access point of wireless networks.

Manageability and
Flexibility.As voice and data network
complexity increases, we believe service providers will require
software and systems that provide end-to-end management of the
communications services they offer to their customers. We
develop and integrate software-based network management
capabilities with our products that enable telecommunications
equipment providers to more easily manage voice and data traffic
and services within their networks. Our NetworkValet software
remotely manages and provisions our products. This remote
management capability reduces the overall cost of ownership by
decreasing the need for on-site configuration, maintenance, and
diagnostics.

Our Strategy

Our objective is to become a leading provider of
broadband access products for the wireless backhaul, the portion
linking cell sites to the wired switching center, and products
that provide converged voice and data

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services delivery. These products enable our
customers to cost-effectively deploy next-generation networks.
Key elements of our strategy to achieve this objective include:


Pursue High Growth Market
Opportunities.We will continue to
apply our diverse product portfolio and research and development
expertise to engineer, manufacture, and support innovative
products for strategic, high growth markets, such as wireless
backhaul and VoIP. For example, at the beginning of 2001, we
derived minimal revenue from wireless backhaul products. At that
time, we began dedicating significant resources to designing
products serving the wireless backhaul and data integration
market. We believe that we have successfully gained a position
in this market, as evidenced by the fact that products deployed
in the wireless market accounted for 57% of our total net
revenue in the fourth quarter of 2003.

Continue to Pursue and Leverage Global
Strategic Relationships.We intend to
maintain and expand our existing relationships and pursue new
strategic relationship opportunities with leading global
communications equipment vendors. We currently have strategic
relationships with the following companies: Alcatel, for the
distribution of our standard products and the OEM of our Exxtenz
product line; Cisco, for the co-sale and joint sale partnering
for certain of our products; Fujitsu Asia, for the distribution
of our Adit 600 product in certain territories outside of the
United States; Marconi, for the distribution of our Broadmore
product through their Federal division, Marconi
Federal, Inc.; and other OEM, private label, or resale
customers. Several of these customers integrate our products
with their own product offerings to provide a comprehensive
offering to their service provider, residential, enterprise, or
commercial customers. For example, we are supplying our
Broadmore product to Marconi as part of a complete
communications system, which they supply and support for
U.S. Department of Defense agencies. These relationships
are important to us because they allow us to combine product
synergies for a more complete product portfolio. In addition,
these relationships allow us to leverage our sales force with
the sales and marketing personnel of our strategic partners and
provide complete product offerings to our joint customers.
However, these relationships are not currently material to us
from a financial standpoint.

Leverage our Technology and Customer Base to
Expand our Product Portfolio.We
believe that the demand for media-rich voice and data services
is a key driver of our service provider customers growth.
We intend to assure that our product portfolio and architectures
continue to offer the performance and flexibility needed for the
economical introduction of new services. We also believe that
our expertise in a broad range of technologies, such as VoIP,
data transport and routing, and management software provides us
with a technology platform from which we can develop or enhance
our products to address new markets and applications. For
example, we leveraged our relationship with one supplier to
introduce new service cards for the Adit and Axxius platforms
that provided access cost savings in both wireless and wireline
applications within their networks.

Pursue Acquisitions.In addition to our internal research and development efforts, we
continually evaluate acquisitions of companies and technologies
that could extend our product offerings, technology expertise,
industry knowledge, and global customer base. Since 1998, we
have completed three acquisitions, including our recent
acquisition of Paragon. These acquisitions have and will extend
our ability to provide additional and enhanced products that
enable the wireless backhaul and the delivery of converged voice
and data services. We intend to pursue additional acquisitions
in the future. However, we are not currently engaged in any
negotiations with respect to any such transactions.

The ability to achieve our objective to become a
leading provider of broadband access products is subject to many
challenges and uncertainties. In particular, our industry is
highly competitive and there are many companies providing
competitive products in the same market in which we sell our
products. See Business  Competition.

Principal Products

Since our founding in 1995, we have continually
broadened our product line, through internal development and
acquisitions, to serve the needs of customers in high-growth
telecommunications markets. Currently, our products support
traditional telecommunications technologies as well as emerging
technologies such as VoIP and fiber-based broadband access,
which is referred to as a passive optical network, or PON. Our
current product portfolio features eight platforms that reside
in a variety of locations, including the service providers
central

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office, cell site and wireless hub locations, and
the end-users business premises. Our products meet the
highest appropriate quality standards, and all our products
comply with ISO 9001:2000. ISO 9001:2000 is a set of
comprehensive standards that provide quality assurance
requirements and quality management guidance. These standards
act as a model for quality assurance for companies involved with
the design, testing, manufacture, delivery and service of
products.


|                 |  |                |   |                    |  |                |   |  |  |  |   | 
|---------------- |  | -------------- | - | ------------------ |  | -------------- | - |  |  |  | - | 
|                 |  |                |   | Converged          |  |               
|                 |  | Wireless       |   | Enterprise Service |  | Fiber Business
|Platform         |  | Infrastructure |   | Delivery           |  | Access        
|                 |  |                |   |                    |  |               
|Axxius           |  |                | l |                    |  |                |   |  |  |  |   | 
|Adit             |  |                | l |                    |  |                | l |  |  |  |   | 
|Wide Bank        |  |                | l |                    |  |                | l |  |  |  |   | 
|Access Navigator |  |                |   |                    |  |                | l |  |  |  |   | 
|Broadmore        |  |                |   |                    |  |                |   |  |  |  | l | 
|Exxtenz          |  |                |   |                    |  |                |   |  |  |  | l | 
|NetworkValet     |  |                | l |                    |  |                | l |  |  |  |   | 
|MASTERseries     |  |                | l |                    |  |                |   |  |  |  |   | 
|BROADway         |  |                | l |                    |  |                |   |  |  |  | l | 

Wireless
Infrastructure.We provide equipment
to wireless service providers for use in the backhaul portion of
their networks. In addition, wireless infrastructure equipment
providers have integrated our Adit and Axxius products and the
Paragon MASTERseries and BROADway products as an important
component to their system solution. Our products are used to
terminate the wireline service at both the cell site location
and at the wireless service providers switching center.
Paragons products are primarily used for upgrading the
capacity of the wireless backhaul. Our scalable products enable
wireless carriers to cost-effectively offer new
revenue-generating voice and data services, optimize wireless
backhaul capacity, and lower network operating costs. We also
provide equipment that is used by wireless service providers in
their provisioning of FCC mandated E911 services.

Converged Enterprise Voice/ Data Service
Delivery.We provide products that
integrate multiple voice and data access services that are both
easy to install and easy to manage, while delivering the quality
of service that end-users demand. Our products support the
connection of customer voice and data equipment such as
telephones, enterprise telephone networks, local area networks,
point of sale terminals, video conferencing equipment, and
installed data equipment to wide area network services. We also
provide products that transmit voice communications over the
Internet. Our VoIP products can be used to connect customers to
a single network infrastructure for the transmission of data,
voice, and video traffic as part of an IP communications service
that fully integrates voice and data. These converged IP
communications services provide new multimedia communications
capabilities to end-users, while offering lower capital and
operating costs for service providers.

Fiber Access.We
offer products that enable service providers to utilize PON
technology to deliver new or enhanced services such as
wire-speed Ethernet, voice, T1, and video services to
businesses. Our Fiber Access products deliver these services in
a cost-efficient manner by supporting up to 32 customer building
connections from a single strand of fiber. PON technology offers
a cost-effective means to deliver new services to both business
and multi-dwelling residential customers. Our PON product is
based on internationally accepted standards and delivered as
part of an end-to-end offering with our strategic partners, such
as Alcatel.

Product Details



| |                                                                   
| | ------------------------------------------------------------------
| | Axxius 800 Platform  access
    integration platform for wireless

The Axxius 800 Access Integration Platform
reduces network complexity, scalability, space, power,
protection, and environmental constraints associated with
delivering voice and data services in wireless networks. This
product combines the functions of multiple products into one
scalable, integrated and managed platform that enables our
customers to deliver services at significantly lower costs.

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The Axxius is used primarily at wireless cell
sites and hub locations to optimize wireless backhaul traffic,
provide remote access and management of cell site equipment,
monitor T1 line performance, and enable service providers to add
bandwidth and new revenue-generating services. In addition, the
Axxius remote access capability allows cell site
technicians to remotely manage their facility. The Axxius
provides bandwidth capacities from our T1/ E1s to two DS3
circuits.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Adit 600 Platform  integrated
    delivery terminal for voice and data services

The Adit 600 Multi-service Delivery Terminal
helps wireline and wireless service providers to offer
revenue-generating voice and data services. It provides
converged voice, data, and Internet access in a scalable,
modular platform. The Adit 600 delivers carrier-quality
broadband voice and data services for a wide range of
applications, while allowing service providers to lower their
infrastructure hardware costs by replacing and consolidating
traditional network access equipment.



| |                                                                      
| | ---------------------------------------------------------------------
| | Adit 600 Customer Media Gateway 
    VoIP media gateway service card

The Customer Media Gateway, or CMG, service card
expands the Adit 600 platforms capabilities beyond
traditional communications applications to enable the
transmission of media-rich applications over the Internet.

The Adit 600 CMG enables gradual and seamless
migration of voice and data services from traditional
communication services to delivery over the Internet, while
preserving existing equipment investments. The platform offers
service providers and small- to medium-sized businesses a
carrier-quality, cost-effective product that enables the
integration of IP and traditional TDM voice services. In
addition, the Adit 600 CMG is interoperable with all leading
soft switch vendors, maintaining superior flexibility in the
emerging VoIP market.



| |                                                       
| | ------------------------------------------------------
| | Exxtenz Platform  PON optical
    network termination

The Exxtenz platform enables service providers to
deliver enhanced services such as integrated high-speed data,
Ethernet, voice and video services to businesses and multiple
dwelling units. By utilizing PON technology, the Exxtenz
platform has the ability to deliver these services at
significantly lower capital costs. Our PON technology supports
up to 32 Exxtenz devices from a single strand of fiber.



| |                                            
| | -------------------------------------------
| | Wide Bank 28 Platform  M13
    multiplexer

The Wide Bank platform was engineered to
significantly reduce size and power requirements for terminating
communications circuits. Its design can handle multiple levels
of electronics redundancy to assure service availability and
management. The Wide Bank is used by both wireless and wireline
service providers for a variety of communications applications.



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | Broadmore 1750 Platform 
    encrypted communications provisioning for government
    agencies

The Department of Defense and other government
agencies utilize the Broadmore to improve their optical
communications infrastructure. These logically provisioned
circuits can be routed, tested, and restored at lower costs,
higher network utilization and higher security levels than are
associated with traditional circuit transportation methods.
Recent enhancements include additional security features such as
encryption and secure management and identification.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Access Navigator  voice traffic
    concentration application sold in combination with Adit
    products

The Access Navigator comes in three
configurations that allow carriers to utilize existing resources
more efficiently and enables the provisioning of services to a
greater number of customers with minimal incremental
infrastructure investments. With its small footprint and low
power requirements, the Access Navigator is used in applications
where traditional larger and more expensive communications
infrastructure would be impractical. Combined with the Adit, the
two devices provide an end-to-end offering for the delivery of
enterprise or residential voice and Internet IP access.

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| |                                                      
| | -----------------------------------------------------
| | NetworkValet  remote broadband
    access management

NetworkValet is a software product that allows
service providers to remotely manage, configure and provision
our products. NetworkValet lowers the cost of ownership by
significantly reducing configuration and maintenance costs and
troubleshooting activities.



| |                                                        
| | -------------------------------------------------------
| | MASTERseries  acquired through
    Paragon Acquisition

The MASTERseries, which is typically located at a
cell site, optimizes wireless backhaul traffic for analog and
digital base stations, E911 location devices and data devices in
a single, highly reliable platform. The MASTERseries provides
bandwidth capacities from four to 32 T1/ E1 circuits.



| |                                                    
| | ---------------------------------------------------
| | BROADway  acquired through
    Paragon Acquisition

The BROADway product allows wireless service
providers to connect their cell sites and mobile switch centers.
The BROADway is used primarily at wireless hub locations to
optimize backhaul, provide remote access and management of
equipment, monitor T1 line performance, and enable service
providers to add bandwidth and new revenue-generating services.
Together with MASTERseries and MASTERview network management
system, BROADway provides a broadband offering that addresses
the needs for both network optimization and new services
deployment.

Customers and Channels

We sell our products directly through our sales
force and indirectly through our OEM, private label, and other
distribution partners. Our products are used by wireless service
providers, local and long distance carriers, cable operators,
and international communications providers to provide enhanced
voice and high-speed data and Internet services to end-users.

Since 2000, our products have been deployed in
over 2,000 private networks. However, our net revenue has
historically been concentrated among a small number of
distributors and service provider customers. For the year ended
December 31, 2003, we had four customers that each
accounted for over 10% of our net revenue: T Mobile accounted
for 17%, XO Communications accounted for 12%, Walker &
Associates accounted for 11% and Nortel Networks, Inc.
accounted for 11%. No other customer accounted for more than 10%
of our net revenue for that period.

Sales, Marketing and Customer
Support

Our sales model consists of indirect sales to
distributors and OEMs and direct sales to end-users. Our sales
force works with distributors and OEMs to identify potential
customers and provide pre- and post-sales support to our service
provider customers and other end-users. For the year ended
December 31, 2003, sales to distributors and OEMs accounted
for 40% of our net revenue and direct sales to end-users
accounted for 60% of our net revenue. For the year ended
December 31, 2002, sales to distributors and OEMs accounted
for 45% of our net revenue and direct sales to end-users
accounted for 55% of our net revenue. We typically ship products
soon after receipt of the customers orders and,
accordingly, our backlog has typically not been significant.

Sales to Distributors and
OEMs.Our distributors and OEMs are
responsible for fulfilling product orders, warehousing product,
and identifying potential customers. We establish relationships
with distributors and OEMs through written agreements that
provide prices, discounts and other material terms and
conditions under which the distributor or OEM is eligible to
purchase our products for resale. Such agreements generally do
not grant exclusivity to the distributors or OEMs, do not
prevent the distributors from carrying competing product lines,
and do not require the distributors to sell any particular
dollar amount of our products.

Sales Directly to
End-Users.A significant portion of
the sales of our products is made through direct sales to
end-users. As a result, our continued success depends on
building and maintaining good relations with our direct
customers. We typically sell to these customers on credit.

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Sales Force.Our
sales force covers the continental U.S. and Mexico. It includes
sales and sales engineering and is responsible for product
configuration, evaluation, installation and telephone presales
support activities. Our sales engineering strategy focuses on
assisting service providers and end-users in rapidly integrating
our products into their networks. The sales engineering support
group identifies service provider and end-user leads and, based
on initial presentations, provides evaluation units for trial in
communication service provider and end-user networks. After
successful trial and approval, the service provider or end-user
is provided with product installation and maintenance training.
Initially, our sales engineering support group is involved in
educating service providers and end-users about the
functionality and benefits that may be derived from using our
products. Subsequently, members of both our sales engineering
and research and development organizations are involved in
providing the service provider or end-user with the required
training and technical support to integrate our products into a
new application or service.

Marketing.Our
marketing organization develops strategies for products and,
along with the sales force, develops key account strategies and
defines product and service functions and features. Our
marketing group is responsible for sales support, handling
requests for information, requests for quotes and requests for
proposals, preparing in-depth product presentations, interfacing
with operations, setting price levels, developing new services
and business opportunities and writing proposals in response to
customer requests for information or quotations. We engage in a
number of marketing activities that include exhibiting products
and customer applications at industry trade shows, advertising
in selected publications aimed at targeted markets, taking part
in public relations activities with trade and business press and
distributing sales literature, technical specifications and
documentation in order to create awareness, market demand and
sales opportunities for our products.

Customer Service and
Support.Based on customer support
calls, we believe that ongoing customer support is critical to
maintaining and enhancing relationships with service providers,
end-users and distributors. The service provider and end-user
support group has five functions: new product development that
provides for product ideas and enhancements based on customer
requirements through the pre- and post-sales support effort;
inbound technical support which focuses on pre- and post-sales
calls made to us by our customers; outbound application support
and response to proposed quotation requests; training, including
installation and application development training for customers,
sales engineers, and employees; and reporting and analysis based
on the automated trouble ticket and returned material systems.

Competition

There is intense competition in the
telecommunications equipment market with a large number of
suppliers providing a variety of products to diverse market
segments. We believe that the principal competitive factors for
products in our markets include:



| |   |                                          
| | - | -----------------------------------------
| |  | lower initial and lifetime costs;        
|
| |  | performance and reliability;             
|
| |  | flexibility, scalability and ease-of-use;
|
| |  | service and support;                     
|
| |  | breadth of features and benefits; and    
|
| |  | end-to-end management systems.           

We believe our products compete favorably with
respect to each of these factors.

Our principal competitors for our products
include Adtran, Inc., Advanced Fibre
Communications, Inc., Telco Systems, Inc., Cisco
Systems, Inc., Eastern Research, Inc., Lucent
Technologies, Inc., Tellabs, Inc., Zhone
Technologies, Inc. and other small independent systems
integrators and private and public companies. Most of these
companies offer products competitive with one or more of our
product lines. We expect that our competitors that currently
offer products competitive with only one of our product lines
will eventually offer products competitive with all of our
products. Due to the rapidly evolving markets in which we
compete, additional competitors with significant market presence
and financial resources, including large telecommunications

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equipment manufacturers and computer hardware and
software companies, may enter these markets through
acquisitions, thereby intensifying competition.


We believe our competitive position is enhanced
by our ability to adapt quickly to changes in the market, the
capability to modify existing products to decrease their size
and expense while maintaining functionality in order to meet
customers demands, and our close connections with multiple
markets through our customer base. Our competitive position may
be negatively affected, however, by our relatively small size,
which could inhibit our ability to fund research and development
activities as aggressively as our competitors. This factor could
in turn affect our ability to attract new customers that may
choose to purchase from one of our competitors with a larger
market share and product offering.

Manufacturing

Our manufacturing operations consist of materials
planning and procurement, final assembly, product assurance
testing, quality control, and packaging and shipping. We
currently use several independent manufacturers to provide
certain printed circuit boards, chassis and subassemblies. We
have developed a manufacturing process that enables our products
to be configured to different customer hardware and software
applications at the final assembly stage. This flexibility is
designed to reduce both our manufacturing cycle time and our
need to maintain a large inventory of finished goods. We also
believe that the efficiency of our manufacturing process to date
is largely due to our product architecture and our commitment to
manufacturing process design.

We spend significant engineering resources
producing customized software and hardware to assure consistent
high product quality. We test every product both during and
after the assembly process using internally developed automated
product assurance testing procedures. These procedures consist
of automated board and automated system testing as well as
environmental testing. Although we generally use standard parts
and components for our products, many key components are
purchased from sole or single source vendors for which
alternative sources are not currently available. It is possible
that we may experience supply problems in the future from any of
our manufacturers or vendors. We believe that there may be
seasonal fluctuations in the placement of orders that may cause
us to experience supply problems.

Research and Product Development

We focus our development efforts on providing
enhanced functionality to our existing products, including total
network offerings and performance and the development of
additional software-based features and functionality. We obtain
extensive product development input from our customers and our
monitoring of end-user needs and changes in the marketplace. Our
current product development focus has been on developing
next-generation wireline and wireless broadband access products
and completing new products. We believe that our success will
depend, in part, on our ability to develop and introduce in a
timely fashion new products and enhancements to our existing
products. We have in the past made, and intend to continue
making, significant investments in product and technological
development. Our engineering, research and development
expenditures totaled approximately $33.6 million in 2001,
$23.7 million in 2002 and $11.0 million for the year
ended December 31, 2003. We perform our research and
product development activities at our offices in Boulder,
Colorado, Tulsa, Oklahoma, Roanoke, Virginia and Brookfield,
Connecticut. Our inability to develop new products or
enhancements to existing products on a timely basis, or the
failure of these new products or enhancements to achieve market
acceptance, could have a material adverse effect on our business.

Intellectual Property

As of December 31, 2003, we held a total of
13 issued U.S. patents and had approximately 18 pending
U.S. patent applications. We have one U.S. trademark
application pending and have 14 registered trademarks. A large
number of patents and frequent litigation based on allegations
of patent infringement exist within the telecommunications
industry. From time to time, third parties may assert patent,
copyright, trademark and other intellectual property rights to
technologies that are important to us. If any such claims
asserting that our products infringe on proprietary rights of
third parties were determined adversely to us, it could have a
material adverse effect on our business, financial condition or
results of operations.

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We rely upon a combination of patent, copyright,
trademark and trade secret laws as well as confidentiality
procedures and contractual restrictions to establish and protect
our proprietary rights. We have also entered into
confidentiality agreements with our employees and consultants,
and we enter into non-disclosure agreements with our suppliers
and distributors so as to limit access to and disclosure of our
proprietary information. However, such measures may not be
adequate to deter and prevent misappropriation of our
technologies or independent third-party development of similar
technologies. The laws of certain foreign countries in which our
products are or may be developed, manufactured or sold may not
protect our products or intellectual property rights to the same
extent as do the laws of the U.S. and thus make the possibility
of misappropriation of our technology and products more likely.
Based on the effort and cost associated with enforcing foreign
intellectual property protections as compared with the
comparative value of such protections, we suspended our
activities related to obtaining international trademark and
patent registrations in the first quarter of 2003.

Employees

As of December 31, 2003, we employed
238 full-time employees. No employees are covered by any
collective bargaining agreements and we have never experienced a
work stoppage. We believe that our relationships with our
employees are good. During 2002, we resized our employee base to
focus on the largest opportunities in the ILECs, wireless, and
global service provider markets. This process included reducing
our workforce from 443 full time employees at December 31,
2001 to 188 at February 28, 2003.

Many of our employees are highly skilled, and our
continued success depends in part upon our ability to attract
and retain such employees. In an effort to attract and retain
such employees, we continue to offer employee benefit programs
that we believe are at least equivalent to those offered by our
competitors. Despite these programs, in the past we have
experienced difficulties in hiring certain skilled personnel. In
critical areas, we have utilized consultants and contract
personnel to fill these needs until full time employees could be
recruited.

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RISK FACTORS

Any investment in our common stock involves a
high degree of risk. You should consider carefully the following
information about these risks, together with the other
information contained and incorporated in this prospectus,
before you decide to invest in our common stock. If any of the
following risks actually occur, our business, financial
condition and results of operations would likely suffer. In
these circumstances, the market price of our common stock could
decline and you may lose all or part of your
investment.



| |                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result of declining sales of our
    products, we experienced large net losses and decreases in net
    revenue in 2001 and 2002, which caused a significant decline in
    the market price of our common stock, and we could experience
    similar declines in net revenue in the future, which could
    negatively impact the market price of our common
    stock.

Our quarterly and annual operating results have
fluctuated significantly in the past and may continue to vary
significantly in the future. For example, although we were
profitable on an annual basis from 1997 to 2000, we experienced
net losses of $14.9 million and $52.7 million in 2001
and 2002, respectively. In addition, our net revenue decreased
from $148.1 million in 2000 to $100.7 million and
$50.2 million in 2001 and 2002, respectively.

We face a number of risks that could cause our
future net revenue and operating results to experience similar
fluctuations, including the following:



| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the loss of, or significant reduction in
    purchases by, any of our large customers, four of whom were each
    responsible for more than 10% of our net revenue in the year
    ended December 31, 2003;
|
| |  | reductions in capital spending for equipment by
    the telecommunications industry, a factor that resulted in a
    large decline in our product sales starting in 2000; and                              
|
| |  | costs related to acquisitions of technologies or
    businesses such as our acquisition of Paragon Networks
    International Inc. in November 2003.                                                       



| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on a limited number of distributors
    and OEMs, the loss of any of which could cause a decline in our
    net revenue and have an adverse effect on our results of
    operations and the price of our common stock.

A significant portion of the sales of our
products are through distributors and OEMs, which generally are
responsible for warehousing products, fulfilling product orders,
servicing end-users and, in some cases, customizing and
integrating our products at end-users sites. We rely on a
limited number of distributors and OEMs to sell our products.
For example, one distributor, Walker &
Associates, Inc., accounted for 23%, 16% and 11% of our net
revenue in 2001, 2002 and 2003, respectively. In addition, one
OEM customer accounted for over 10% of our net revenue in the
year ended December 31, 2003. We expect that, in the
future, a significant portion of our products will continue to
be sold to a small number of distributors and OEMs. Accordingly,
if we lose any of our significant distributors and OEMs or
experience reduced sales to such distributors and OEMs, our net
revenue would decline, which would have an adverse effect on our
operating results and could cause a decline in the price of our
common stock.



| |                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our distributors are not successful both
    in terms of operating their own businesses and in selling our
    products to their customers, we could experience a decline in
    net revenue, an increase in inventory and bad debt, and a
    deterioration in our operating results.

In the past, some of our distributors have
experienced problems with their financial and other resources
that have impaired their ability to pay us. For example, in 2002
we incurred bad debt of approximately $1.2 million from one
of our distributors when it declared bankruptcy. Although we
continually monitor and adjust our reserves for bad debts, we
cannot assure you that any future bad debts that we incur will
not exceed our reserves. Furthermore, we cannot assure you that
the financial instability of one or more of our distributors
will not result in decreased net revenue for us and a
deterioration in our operating results. Distributors have, in
the past, reduced planned purchases of our products due to
overstocking and such reductions may occur again in the future.

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Moreover, distributors who have overstocked our
products have, in the past, reduced their inventories of our
products by selling such products at significantly reduced
prices. This may occur again in the future. Any reduction in
planned purchases or sales at reduced prices by distributors in
the future could harm our business by, among other things,
reducing the demand for our products and creating conflicts with
other distributors and our direct sales efforts.




| |                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Some of our distributors and OEMs have
    stock rotation and price protection rights which could cause a
    material decrease in the average selling prices and gross
    margins of our products, either of which would have an adverse
    effect on our operating results and financial
    condition.

We generally provide our distributors and OEMs
with limited stock rotation rights. For example, three times a
year, these customers can return up to 15% of our unsold
products to us in return for an equal dollar amount of new
products. The returned products must have been held in stock by
such distributor or OEM and have been purchased within the
four-month period prior to the return date. We cannot assure you
that we will not experience significant returns of our products
in the future or that we will make adequate allowances to offset
these returns.

We also provide certain distributors and OEMs
with price protection rights in which we provide these customers
with 60-days notice of price increases. Orders we receive from
distributors or OEMs within the 60-day period are filled at the
lower product price. In the event of a price decrease, we are
sometimes required to credit distributors and OEMs the
difference in price for any stock they have in their inventory.
In addition, we grant certain of our distributors and OEMs
most favored customer terms, pursuant to which we
have agreed not to knowingly grant another distributor or OEM
the right to resell our products on terms more favorable than
those granted to the existing distributor or OEM, without
offering the more favorable terms to the existing distributor or
OEM. It is possible that these price protection and most
favored customer clauses could cause a material decrease
in the average selling prices and gross margins of our products,
which could in turn have a material adverse effect on
distributor or OEM inventories, our business, financial
condition, or results of operations.



| |                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We do not have exclusive agreements with
    our distributors, which sell other broadband communications
    equipment that competes with our products. As a result, our
    distributors may not recommend or continue to use and offer our
    products or devote sufficient resources to market and support
    our products, which could result in a reduction in sales of our
    products.

Our agreements with our distributors generally do
not grant exclusivity, prevent the distributor from carrying
competing products or require the distributor to purchase any
minimum dollar amount of our products. Additionally, our
distribution agreements do not attempt to allocate certain
territories for our products among our distributors. To the
extent that different distributors target the same end-users of
our products, distributors may come into conflict with one
another, which could damage our relationship with, and sales to,
such distributors.

Most of our existing distributors also distribute
the products of our competitors. Our distributors may not
recommend or continue to use and offer our products, or our
distributors may not devote sufficient resources to market and
provide the necessary customer support for our products. In
addition, it is possible that our distributors will give a
higher priority to the marketing and customer support of
competitive products or alternative solutions.

Our distributors do not have any obligation to
purchase additional products, and accordingly, they may
terminate their purchasing arrangements with us, or
significantly reduce or delay the amount of our products that
they order, without penalty. Any such termination, change,
reduction, or delay in orders would harm our business.



| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We continue to rely on a limited number of
    direct customers, the loss of any of which could result in a
    decline in net revenue and the price of our common
    stock.

A significant portion of our net revenue has been
derived from a limited number of large orders to direct
customers, and we believe that this trend will continue in the
future. For example, for the year ended December 31, 2003,
we sold directly to two customers that each accounted for over
10% of our net revenue. The majority of our direct customers do
not have any obligation to purchase additional products, and,
accordingly, they may terminate their purchasing arrangements
with us or significantly reduce or delay the amount of our

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products that they order without penalty. We have
experienced cancellations and delays of orders in the past, and
we expect to continue to experience order cancellations and
delays from time to time in the future. Any such termination,
change, reduction or delay in orders would harm our business.
The timing of customer orders and our ability to fulfill them
can cause material fluctuations in our operating results, and we
anticipate that such fluctuations will continue in the future.




| |                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our direct customers do not successfully
    operate their own businesses, their capital expenditures could
    be limited, which could result in a delay in payment for, or a
    decline in the purchase of, our products, which could result in
    a decrease in our net revenue and a deterioration of our
    operating results.

In the past, some of our direct customers have
experienced problems with their financial and other resources
that have impaired their ability to pay us. For example, in
2002, one of our direct customers filed for bankruptcy
protection, and, as a result, we incurred approximately
$1.1 million in bad debt. Another direct customer, which
accounted for 13.5% of our net revenues in 2002, has experienced
financial difficulty and restructured its operations, and it may
not be in a position in the future to continue its historic
purchase levels. We cannot assure you that any bad debts that we
incur in connection with direct sales will not exceed our
reserves or that the financial instability of one or more of our
direct customers will not continue to adversely affect future
sales of our products or our ability to collect on accounts
receivable for current sales of our products.

In addition, we sell a moderate volume of
products to competitive service providers. The competitive
service provider market is overbuilt and is experiencing
consolidation. Many of our competitive service provider
customers do not have a strong financial position and have
limited ability to access the public financial markets for
additional funding for growth and operations. Neither equity nor
debt financing may be available to these companies on favorable
terms, if at all. To the extent that these companies are unable
to obtain the financing they need, our ability to make future
sales to these customers and realize revenue from any such sales
could be harmed. In addition, if one or more of these
competitive service providers fail, we could face a loss in
revenue and an increased bad debt expense, due to their
inability to pay outstanding invoices, as well as a
corresponding decrease in customer base and future revenue.
Furthermore, a significant portion of our sales to competitive
service providers is made through independent distributors. The
failure of one or more competitive service providers could cause
a distributor to experience business failure and/or default on
payments to us.



| |                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We grant certain of our direct customers
    most favored customer terms, which could cause a
    material decrease in the average selling prices and gross
    margins of our products, which would have an adverse effect on
    our operating results and financial condition.

In agreements with direct customers that contain
most favored customer terms, we have agreed to not
knowingly provide another direct customer with similar terms and
conditions or a better price than those provided to the existing
direct customer without offering the more favorable terms,
conditions or prices to the existing direct customer. It is
possible that these most favored customer clauses
could cause a material decrease in the average selling prices
and gross margins of our products, which could, in turn, have an
adverse effect on our operating results and financial condition.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | A longer than expected sales cycle could cause
    our revenues and operating results to vary significantly from
    quarter to quarter.

Our sales cycle averages approximately four to
18 months but can take longer in the case of incumbent
local exchange carriers, or ILECs, and other end-users. This
process is often subject to delays because of factors over which
we have little or no control, including:



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | a distributors, OEMs or service
    providers budgetary constraints;                                              
|
| |  | a distributors, OEMs or service
    providers internal acceptance reviews;                                        
|
| |  | a distributors, OEMs or service
    providers staffing levels and availability of lab time for
    product testing;
|
| |  | the success and continued internal support and
    development of a service providers product
    offerings; and    

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| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | the possibility of cancellation or delay of
    projects by distributors, OEMs or service providers.

In addition, as service providers have matured
and grown larger, their purchase processes have typically become
more institutionalized, requiring more of our time and effort to
gain the initial acceptance and final adoption of our products
by these customers. Although we attempt to develop our products
with the goal of facilitating the time to market of our
customers products, the timing of the commercialization of
a new distributor or service provider applications or services
based on our products is primarily dependent on the success and
timing of a customers own internal deployment program.
Delays in purchases of our products can also be caused by late
deliveries by other vendors, changes in implementation
priorities and slower than anticipated growth in demand for our
products. A delay in, or a cancellation of, the sale of our
products could cause our results of operations to vary
significantly from quarter to quarter.

In the industry in which we compete, a supplier
must first obtain product approval from an ILEC or other carrier
to sell its products to them. This process can last from four to
18 months or longer depending on the technology, the
service provider, and the demand for the product from the
service providers subscribers. Consequently, we are
involved in a constant process of submitting for approval
succeeding generations of products, as well as products that
deploy new technology or respond to new technology demand from
certain carriers or other end-users. We have been successful in
the past in obtaining such approvals. However, we cannot be
certain that we will obtain such approvals in the future or that
sales of such products will continue to occur. Furthermore, the
delay in sales until the completion of the approval process, the
length of which is difficult to predict, could result in
fluctuations of revenue and uneven operating results from
quarter to quarter or year to year.



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Communications service providers face capital
    constraints which have restricted and may continue to restrict
    their ability to buy our products, thereby resulting in longer
    sales cycles, deferral or delay of purchase commitments for our
    products, and increased price competition.

Our customers consist primarily of communications
service providers, including wireless service providers, local
exchange carriers, multi-service cable operators, and
competitive local and international communications providers.
These service providers require substantial capital for the
development, construction, and expansion of their networks and
the introduction of their services. The general slowdown in the
economy and the fact that an oversupply of communications
bandwidth exists have resulted in a constraint on the
availability of capital for these service providers and have had
a material adverse effect on many of our customers, with
numerous customers going out of business or substantially
reducing their capital spending. If our current or potential
customers cannot successfully raise necessary funds or if they
experience any other adverse effects with respect to their
operating results or profitability, their capital spending
programs could continue to be adversely impacted. These
conditions adversely impacted the sale of our products and our
operating results most severely in the fourth quarter of 2000,
and they continued to have an adverse impact throughout 2001,
2002, and 2003. These conditions may continue to result in
longer sales cycles, deferral or delay of purchase commitments
for our products, and increased price competition. In addition,
to the extent we choose to provide financing to these
prospective customers, we will be subject to additional
financial risk which could increase our expenses.



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to develop new or enhanced
    products that achieve market acceptance, we could experience a
    reduction in our future product sales, which would cause the
    market price of our common stock to decline.

The communications industry is characterized by
rapidly changing technology, evolving industry standards,
changes in end-user requirements, and frequent new product
introductions and enhancements, each of which may render our
existing products obsolete or unmarketable. Our success depends
on our ability to enhance our existing products and to timely
and cost-effectively develop new products with features that
meet changing end-user requirements and emerging industry
standards. The development of new, technologically advanced
products is an expensive, complex and uncertain process
requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. We may not be
successful in identifying, developing, manufacturing, and
marketing product enhancements or new products that will respond
to technological change or evolving industry standards. In the
recent past, we have experienced delays in the development and
shipment of new products and

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enhancements, which has resulted in distributor
and end-user frustration and delay or loss of net revenue. It is
possible that we will experience similar or other difficulties
in the future that could delay or prevent the successful
development, production, or shipment of such new products or
enhancements, or that our new products and enhancements will not
adequately meet the requirements of the marketplace and achieve
market acceptance. Announcements of currently planned or other
new product offerings by our competitors or us have in the past
caused, and may in the future cause, distributors or end-users
to defer or cancel the purchase of our existing products. Our
inability to develop new products or enhancements to existing
products on a timely basis, or the failure of such new products
or enhancements to achieve market acceptance, could result in a
decline in our future product sales and the price of our common
stock.




| |                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The introduction of new or enhanced
    products could cause disruptions in our distribution channels
    and the management of our operations, which could cause us to
    record lower net revenue or adversely affect our gross
    margins.

Our introduction of new or enhanced products will
require us to manage the transition from older products in order
to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories, and ensure that
adequate supplies of new products can be delivered to meet
customer demand. We have historically reworked certain of our
products in order to add new features that were included in
subsequent releases of the products, which generally resulted in
reduced gross margins for those products until such time as
production volumes of these new products increase. We can give
no assurance that these historical practices will not occur in
the future and cause us to record lower net revenue or
negatively affect our gross margins.



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on the introduction of new or
    enhanced products to offset the declining sales prices and gross
    margins of our older products, and the failure of our new or
    enhanced products to achieve market acceptance could result in a
    decline in our net revenue and operating results.

We believe that average selling prices and gross
margins for our products will decline as such products mature
and as competition intensifies. For example, the average selling
price for our Wide Bank products and Adit products has decreased
substantially in the past two years. These decreases were due to
general economic conditions and the introduction of competitive
products. To offset declining selling prices, we believe that,
in addition to reducing the costs of production of our existing
products, we must introduce and sell new and enhanced products
on a timely basis at a low cost or incorporate features in these
products that enable them to be sold at higher average selling
prices. To the extent that we are unable to reduce costs
sufficiently to offset any declining average selling prices or
that we are unable to introduce enhanced products with higher
selling prices, our gross margins would decline, and such
decline could adversely affect our operating results and the
price of our common stock.



| |                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | To develop new products or enhancements to
    our existing products, we will need to continue to invest in
    research and development, which could adversely affect our
    financial condition and operating results, especially if we need
    to increase the amount of our investment to successfully respond
    to developing industry standards.

As standards and technologies evolve, we will be
required to modify our products or develop and support new
versions of our products. Our research and development expenses
decreased 54% to $11.0 million in 2003 from
$23.7 million in 2002. As a result, we may not have
sufficient resources allocated to the development of new and
enhanced products to remain competitive. The failure of our
products to comply, or delays in achieving compliance, with the
various existing and evolving technological changes and industry
standards could harm sales of our current products or delay
introduction of our future products.



| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our industry is highly competitive; if we fail
    to compete successfully against our competitors, our market
    share and product sales could be adversely affected, resulting
    in a decline in our net revenue and deterioration of our
    operating results.

The market for our products is intensely
competitive, with a large number of equipment suppliers
providing a variety of products to diverse market segments
within the telecommunications industry. Our existing and

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potential competitors include many large domestic
and international companies, including companies that have
longer operating histories, greater name recognition, larger
customer bases and substantially greater financial,
manufacturing, technological, sales and marketing, distribution,
and other resources. Our principal competitors include
Adtran, Inc., Advanced Fibre Communications, Inc.,
Cisco Systems, Inc., Eastern Research, Inc., Lucent
Technologies, Inc., Telco Systems, Inc.,
Tellabs, Inc., Zhone Technologies, Inc. and other
small independent systems integrators and private and public
companies. Most of these companies offer products competitive
with one or more of our product lines. We expect that our
competitors that currently offer products competitive with only
one of our products will eventually offer products competitive
with all of our products. Due to the rapidly evolving markets in
which we compete, additional competitors with significant market
presence and financial resources, including large
telecommunications equipment manufacturers and computer hardware
and software companies, may enter these markets through
acquisition, thereby further intensifying competition.


Many of our current and potential competitors are
substantially larger than we are and have significantly greater
financial, sales and marketing, technical, manufacturing, and
other resources and more established channels of distribution.
As a result, such competitors may be able to respond more
rapidly to new or emerging technologies and changes in customer
requirements, or to devote greater resources than we can devote
to the development, promotion, and sale of their products. In
addition, such competitors may enter our existing or future
markets with solutions, either developed internally or through
acquisition, that may be less costly, provide higher performance
or additional features, or be introduced earlier than our
solutions. Successful new product introductions or enhancements
by our competitors could cause a significant decline in sales or
loss of market acceptance of our products. Competitive products
may also cause continued intense price competition or render our
products or technologies obsolete or noncompetitive.

To be competitive, we must continue to invest
significant resources in research and development and sales and
marketing. We may not have sufficient resources to make such
investments or be able to make the technological advances
necessary to be competitive. In addition, our current and
potential competitors have established or may establish
cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs
of our prospective customers. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition
is likely to result in price reductions, reduced gross margins,
and loss of market share, any of which could cause a decline in
the price of our common stock.



| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our customers are subject to heavy government
    regulation in the telecommunications industry, and regulatory
    changes could adversely affect our customers capital
    expenditure budgets and result in reduced sales of our products
    and significant fluctuations in the price of our common
    stock.

Competitive local exchange carriers, or CLECs,
are allowed to compete with ILECs in the provisioning of local
exchange services primarily as a result of the adoption of
regulations under the Telecommunications Act of 1996, or the
1996 Act, that imposed new duties on ILECs to open their local
telephone markets to competition. Although the 1996 Act was
designed to expand competition in the telecommunications
industry, the realization of the objectives of the 1996 Act is
subject to many uncertainties. Such uncertainties include
actions by the Federal Communications Commission, or the FCC,
judicial and administrative proceedings designed to define
rights and obligations pursuant to the 1996 Act, actions or
inaction by ILECs or other service providers that affect the
pace at which changes contemplated by the 1996 Act occur,
resolution of questions concerning which parties will finance
such changes, and other regulatory, economic, and political
factors. Any changes to the 1996 Act or the regulations adopted
thereunder, the adoption or repeal of new regulations by federal
or state regulatory authorities apart from or under the 1996
Act, including the E911 FCC mandate or any legal challenges to
the 1996 Act could have a material adverse impact upon the
market for our products.

We are aware of certain litigation challenging
the validity of the 1996 Act and local telephone competition
rules adopted by the FCC for the purpose of implementing the
1996 Act. Furthermore, Congress has indicated that it may hold
hearings to gauge the competitive impact of the 1996 Act, and it
is possible that Congress will propose changes to the 1996 Act.
This litigation and potential regulatory change may delay
further implementation of the 1996 Act, which could negatively
impact demand for our products. Moreover, our distributors or
service provider customers may require that we modify our
products to address actual or anticipated changes in

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the regulatory environment, or we may voluntarily
decide to make such modifications. Our inability to modify our
products in a timely manner or address such regulatory changes
could cause a reduction in demand for our products, a loss of
existing customers or the failure to attract new customers,
which would result in lower than expected net revenue and a
decline in the price of our common stock.




| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have limited supply sources for some key
    parts and components of our products, and our operations could
    be harmed by supply interruptions, component defects or
    unavailability of these parts and components.

Many key parts and components are purchased from
sole source suppliers for which alternative sources are not
currently available. We currently purchase approximately 380 key
components from suppliers for which there are currently no
substitutes, and we purchase approximately 89 key components
from single source suppliers. Lead times for materials and
components vary significantly and depend on many factors, some
of which are beyond our control, such as specific supplier
performance, contract terms and general market demand for
components. If product orders vary significantly from forecasts,
we may not have enough inventories of certain materials and
components to fill orders. In addition, many companies utilize
the same materials and supplies as we do in the production of
their products. Companies with more resources than our own may
have a competitive advantage in obtaining materials and supplies
due to greater buying power. These factors can result in reduced
supply, higher prices of certain materials, and delays in the
receipt of certain of our key components, which in turn may
generate increased costs, lower margins, and delays in product
delivery. Furthermore, due to general economic conditions in the
U.S. and globally, our suppliers may experience financial
difficulties, which could result in increased delays, additional
costs, or loss of a supplier. We attempt to manage these risks
through developing alternative sources, through engineering
efforts designed to obviate the necessity of certain components,
and by building long-term relationships and maintaining close
personal contact with each of our suppliers. However, delays in
or failures of deliveries of key components, either to us or to
our contract manufacturers, and consequent delays in product
deliveries, may occur in the future.

We currently do not have long-term supply
contracts for many of our key components. Our suppliers may
enter into exclusive arrangements with our competitors, be
acquired by our competitors, stop selling their products or
components to us at commercially reasonable prices, refuse to
sell their products or components to us at any price, or be
unable to obtain or have difficulty obtaining components for
their products from their suppliers.

Our distributors, OEMs and direct customers
frequently require rapid delivery after placing an order. Our
inability to obtain sufficient quantities of the components
needed to fulfill such orders has in the past resulted in, and
may in the future result in, delays or reductions in product
shipments, which could have an adverse effect on sales and
customer relationships, our business, financial condition, or
results of operations. In the event of a reduction or
interruption of supply, it could take up to nine months or more
for us to begin receiving adequate supplies from alternative
suppliers. Furthermore, we may not be able to engage an
alternative supplier who could be in a position to satisfy our
production requirements on a timely basis, if at all. Delays in
shipment by one of our suppliers have led to lost or delayed
sales and sales opportunities in the past and may do so again in
the future. For example, in the third quarter of 2003, we were
not able to fulfill all of our open purchase orders of our
Axxius product due to unforecasted demand and an insufficient
availability of parts.

In addition, the manufacturing process for
certain single or sole source components is extremely complex.
Our reliance on suppliers for these components, especially for
newly designed components, exposes us to potential production
difficulties and quality variations that the suppliers
experience. In the past, this reliance on outside suppliers for
these components has negatively impacted cost and the timely
delivery of our products to our customers.

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| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our dependence on third-party manufacturers
    could result in product delivery delays, which would adversely
    affect our ability to successfully sell and market our products
    and could result in a decline in our net revenue and operating
    results.

We currently use several third-party
manufacturers to provide certain components, printed circuit
boards, chassis, and subassemblies. Our reliance on third-party
manufacturers involves a number of risks, including the
potential for inadequate capacity, the unavailability of, or
interruptions in, access to certain process technologies,
transportation interruptions, and reduced control over product
quality delivery schedules, manufacturing yields, and costs.
Some of our manufacturers are undercapitalized and may be unable
in the future to continue to provide manufacturing services to
us. If these manufacturers are unable to manufacture our
components in required volumes, we will have to identify and
qualify acceptable additional or alternative manufacturers,
which could take in excess of nine months. We cannot assure you
that any such source would become available to us or that any
such source would be in a position to satisfy our production
requirements on a timely basis. Any significant interruption in
our supply of these components would result in delays, the
payment of damages for such delays, or reallocation of products
to customers, all of which could have a material adverse effect
on our ability to successfully sell and market our products and
could result in a decline in our net revenue and operating
results. Moreover, since a significant portion of our final
assembly and test operations are performed in one location, any
fire or other disaster at our assembly facility could also have
an adverse effect on our net revenue and operating results.



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our executive officers and certain key
    personnel are critical to our business, and any failure to
    retain these employees could adversely affect our ability to
    manage our operations and develop new products or enhancements
    to current products.

Our success depends to a significant degree upon
the continued contributions of our Chief Executive Officer and
key management, sales, engineering, finance, customer support,
and product development personnel, many of whom would be
difficult to replace. In particular, the loss of Roger L.
Koenig, President and Chief Executive Officer and our
co-founder, could adversely affect our ability to manage our
operations. We believe that our future success will depend in
large part upon our ability to attract and retain highly skilled
managerial, sales, customer support and product development
personnel. We do not have employment contracts with any of our
key personnel. The loss of the services of any such persons, the
inability to attract or retain qualified personnel in the
future, or delays in hiring required personnel, particularly
engineering personnel and qualified sales personnel, could
adversely affect our ability to manage our operations and
develop new products or enhancements to current products.



| |                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our customers are subject to numerous and
    changing regulations and industry standards. If the products
    they purchase from us do not meet these regulations or are not
    compatible with these standards, our ability to continue to sell
    our products could be seriously harmed.

Our products must comply with a significant
number of voice and data regulations and standards, which vary
between U.S. and international markets, and may also vary within
specific foreign markets. We also need to ensure that our
products are easily integrated with various telecommunications
systems. Standards for new services continue to evolve,
requiring us to continuously modify our products or develop new
versions to meet new standards. Testing to ensure compliance and
interoperability requires significant investments of time and
money. If our systems fail to timely comply with evolving
standards in U.S. and international markets, if we fail to
obtain compliance on new features or if we fail to maintain
interoperability with equipment from other companies, our
ability to sell our products would be significantly impaired. We
could thereby experience, among other things, customer contract
penalties, delayed or lost customer orders and decreased
revenues.

We have maintained compliance with ISO 9001:2000
since we were first certified in May 2000, with Telcordia OSMINE
since we were first certified in the fourth quarter of 2001 and
with Network Equipment Building Standards Level 3 since we
were first certified in April 1998. ISO 9001:2000 is a set of
comprehensive standards that provide quality assurance
requirements and quality management guidance. These standards
act as a model for quality assurance for companies involved with
the design, testing, manufacture, delivery and service of
products. Telecordia, formerly known as Bellcore, developed the
Osmine program, which is a process designed to

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ensure that all of the network equipment used by
Regional Bell Operating Companies, or RBOCs, can be managed by
the same software programs. NEBS, or Network Equipment Building
Standards, is a set of performance, quality and safety
requirements  which were developed internally at Bell
Labs and later at Telecordia  for network switches.
RBOCs and local exchange carriers rely on NEBS-compliant
hardware for their central office telephone switching. We cannot
assure that we will maintain these certifications. The failure
to maintain any of these certifications may adversely impair the
competitiveness of our products.




| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products may suffer from defects or errors
    that may subject us to product returns and product liability
    claims, which could adversely affect our reputation and
    seriously harm our results of operations.

Our products have contained in the past, and may
contain in the future, undetected or unresolved errors when
first introduced or when new versions are released. For example,
in the first quarter of 2003, we discovered that a service card
in one of our products contained a software defect when used in
certain applications. We corrected this defect with a software
upgrade to the service card which required us to incur
additional costs and expend additional resources to develop and
install the software upgrade. Despite our extensive testing,
errors, defects, or failures are possible in our current or
future products or enhancements. If such defects occur, we may
be subject to:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | delays in or losses of market acceptance and
    sales;                           
|
| |  | product returns;                                                                  
|
| |  | diversion of development resources resulting in
    new product development delay;
|
| |  | injury to our reputation; or                                                      
|
| |  | increased service and warranty costs.                                             

Delays in meeting deadlines for announced product
introductions, or enhancements or performance problems with such
products, could undermine customer confidence in our products,
which would harm our customer relationships.

Our agreements with our distributors, OEMs and
direct customers typically contain provisions designed to limit
our exposure to potential product liability claims. However, it
is possible that the limitation of liability provisions
contained in our agreements may not be effective or adequate
under the laws of certain jurisdictions. It is also possible
that our errors and omissions insurance may be inadequate to
cover any potential product liability claim. Although we have
not experienced any product liability claims to date, the sale
and support of our products entails the risk of such claims, and
it is possible that we will be subject to such claims in the
future. Product liability claims brought against us could harm
our business.



| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The operations of recently acquired Paragon
    Networks International Inc. may prove difficult to integrate
    into our own, and we may not achieve the anticipated benefits of
    the acquisition.

We recently completed the acquisition of Paragon
Networks International Inc. The Paragon acquisition is the
largest acquisition we have completed, and the complex process
of integrating Paragon with our operations requires significant
resources. We will also face ongoing business challenges that
principally include the geographic dispersion of our operations
and generating market demand for an expanded product line.
Failure to achieve the anticipated benefit of this acquisition
or to successfully integrate the operations of Paragon could
harm our financial position and results of operations.

We have incurred and expect to continue to incur
significant costs and commit significant management time
integrating Paragons operations, technology, development
programs, products, information systems, customers and
personnel. These costs have been, and will likely continue to
be, substantial and include costs for:



| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | integrating and reorganizing operations,
    including combining teams, facilities and processes in various
    functional areas;
|
| |  | fees and expenses of professionals and
    consultants involved in completing the integration process;                           

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| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | settling existing Paragon liabilities;                                                                                            
|
| |  | integrating technology and products; and                                                                                          
|
| |  | other transaction costs associated with the
    acquisition, including financial advisor, attorney, accountant
    and other fees.

Some of these costs will result in an increase in
our operating expenses, which, if not offset by an increase in
net revenue if and when we are able to successfully sell and
market the Paragon product line, would decrease our operating
profits and adversely affect our cash flows and operating
results, which could result in a decline in the price of our
common stock.



| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Difficulties in integrating past or future
    acquisitions could adversely affect our operating results and
    result in a decline in the price of our common stock.

We have spent and may continue to spend
significant resources identifying businesses to be acquired by
us. The efficient and effective integration of any businesses we
acquire into our organization is critical to our growth. Our
acquisition of Paragon, and any future acquisitions, involves
numerous risks including difficulties in integrating the
operations, technologies and products of the acquired companies,
the diversion of our managements attention from other
business concerns and the potential loss of key employees of the
acquired companies. Failure to achieve the anticipated benefits
of these and any future acquisitions or to successfully
integrate the operations of the companies we acquire could also
harm our business, results of operations and cash flows.
Additionally, we cannot assure you that we will not incur
material charges in future quarters to reflect additional costs
associated with any future acquisitions we may make.



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we have insufficient proprietary rights or
    if we fail to protect those rights we have, third parties could
    develop and market products that are equivalent to our own,
    which would harm our sales efforts and could result in a
    decrease in our net revenue and the price of our common
    stock.

We rely primarily on a combination of patent,
copyright, trademark, and trade secret laws, as well as
confidentiality procedures and contractual restrictions, to
establish and protect our proprietary rights. As of
December 31, 2003, we held a total of 13 issued
U.S. patents and had approximately 18 pending
U.S. patent applications. We have one U.S. trademark
application pending and have 14 registered trademarks. We cannot
assure you that our pending patent or trademark applications
will be granted or, if granted, will be sufficient to protect
our rights. We have entered into confidentiality agreements with
our employees and consultants, and non-disclosure agreements
with our suppliers, customers, and distributors in order to
limit access to and disclosure of our proprietary information.
However, such measures may not be adequate to deter and prevent
misappropriation of our technologies or independent third-party
development of similar technologies. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt
to copy our products or obtain and use trade secrets or other
information that we regard as proprietary. Furthermore, we may
be subject to additional risks as we enter into transactions in
foreign countries where intellectual property laws do not
protect our proprietary rights as fully as the laws of the
U.S. Based on the effort and cost associated with enforcing
foreign intellectual property protections as compared with the
comparative value of such protections, we suspended our
activities related to obtaining international trademark and
patent registrations in the first quarter of 2003. We cannot
assure that our competitors will not independently develop
similar or superior technologies or duplicate any technology
that we have. Any such events could harm our ability to sell and
market our products, which could result in a decrease in net
revenue and the price of our common stock.



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may face intellectual property
    infringement claims that could result in significant expense to
    us, divert the efforts of our technical and management
    personnel, or cause product shipment delays.

The telecommunications industry is characterized
by the existence of a large number of patents and frequent
litigation based on allegations of patent infringement. As the
number of entrants in our markets increases and the
functionality of our products is enhanced and overlaps with the
products of other companies, we may become subject to claims of
infringement or misappropriation of the intellectual property
rights of others. From time to time, third parties may assert
patent, copyright, trademark, and other intellectual property
rights to technologies

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that are important to us. Any future third-party
claims, whether or not such claims are determined adversely to
us, could result in significant expense, divert the efforts of
our technical and management personnel, or cause product
shipment delays. In the event of an adverse ruling in any
litigation, we might be required to discontinue the use and sale
of infringing products, expend significant resources to develop
non-infringing technology, or obtain licenses from third
parties. In addition, any public announcements related to
litigation or interference proceedings initiated or threatened
against us, even if such claims are without merit, could cause
our stock price to decline.


In our customer agreements, we agree to indemnify
our customers for any expenses or liabilities resulting from
claimed infringements of patents, trademarks, or copyrights of
third parties. In certain limited instances, the amount of such
indemnities may be greater than the net revenue we may have
received from our customer.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | Increased sales volume in international
    markets could result in increased costs or loss of revenue due
    to factors inherent in these markets.

We are in the process of expanding into
international markets, and we anticipate increased sales from
these markets. A number of factors inherent to these markets
expose us to significantly more risk than domestic business,
including:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | local economic and market conditions;                                                                                               
|
| |  | exposure to unknown customs and practices;                                                                                          
|
| |  | potential political unrest;                                                                                                         
|
| |  | foreign exchange exposure;                                                                                                          
|
| |  | unexpected changes in or impositions of
    legislative or regulatory requirements;                                                 
|
| |  | less regulation of patents or other safeguards of
    intellectual property; and                                                    
|
| |  | difficulties in collecting receivables and
    inability to rely on local government aid to enforce standard
    business practices.

Any of these factors, or others, of which we are
not currently aware, could result in increased operating costs
or loss of net revenue.



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to meet future capital needs would
    adversely affect our ability to fund our business operations and
    result in a decline in the price of our common stock.

We require substantial working capital to fund
our business. As of December 31, 2003, we had approximately
$36.5 million in cash and marketable securities. Subsequent
to December 31, 2003 we completed a public stock offering,
which generated additional cash of approximately
$78.5 million. We believe that our cash and marketable
securities, together with cash generated by operations, if any,
will be sufficient to meet our capital requirements for at least
the next 12 months. However, our capital requirements
depend on several factors, including the rate of market
acceptance of our products, our ability to expand our client
base and the growth of sales and marketing. If our capital
requirements vary materially from those currently forecasted, we
may need to obtain additional financing. Additional financing
may not be available when needed on terms favorable to us, or at
all. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop or enhance our
services, take advantage of future opportunities, or respond to
competitive pressures, which would adversely affect our business
and result in a decline in the price of our common stock.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A small number of stockholders can exert
    significant influence on the outcome of matters requiring the
    approval of a majority of the outstanding shares of our common
    stock.

As of March 1, 2004, our directors and
executive officers, together with members of their families and
entities that may be deemed affiliates of, or related to, such
persons or entities, beneficially owned approximately 41% of our
outstanding shares of common stock. In particular,
Mr. Koenig, a director and our President and Chief
Executive Officer, and Ms. Pierce, a director and our
Secretary and Corporate Development Officer, are married. As of
March 1, 2004, Mr. Koenig and Ms. Pierce together
beneficially owned approximately 40% of our

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outstanding shares of common stock. Accordingly,
these two stockholders can exert significant influence over the
election of members of our Board of Directors and the outcome of
all corporate actions requiring stockholder approval of a
majority of the voting power held by our stockholders, such as
mergers and acquisitions. This level of ownership by such
persons and entities may delay, defer, or prevent a change in
control and may harm the voting and other rights of other
holders of our common stock.







|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

Our principal administrative, sales and
marketing, research and development, and support facilities
consist of approximately 64,000 square feet of office space
in Boulder, Colorado. We occupy these premises under two
separate leases, one for approximately 37,000 square feet
that expires on December 31, 2005, with an option to renew
through December 31, 2008, and one for approximately
27,000 square feet that expires on March 31, 2009. As
of December 31, 2003, the annual base rent for these
facilities was approximately $849,993.

We lease three other facilities in Boulder,
Colorado. Approximately 7,500 square feet of space is our
former office and is leased through June 30, 2007. This
space is subject to a sublease for the remaining term of the
master lease. We lease approximately 39,000 square feet of
manufacturing and warehouse space in a facility located outside
of Boulder under a lease that expires on November 30, 2005.
We have a lease for a warehouse of approximately
57,000 square feet in Boulder, Colorado, which expires on
November 22, 2005. We vacated this space in February 2003
and subleased it for the remaining term of the master lease on
August 22, 2003.

In addition, we lease facilities in three other
states: Connecticut, Oklahoma and Virginia. We are currently
occupying approximately 12,800 square feet in Brookfield,
Connecticut, a Paragon lease with an expiration date of
December 31, 2004. We also occupy approximately
10,100 square feet in Bethel, Connecticut, a Paragon lease,
which is used for administration and manufacturing, with an
expiration date of December 31, 2004. Our space in Tulsa,
Oklahoma, is used for research and development and consists of
approximately 16,000 square feet of space with an
expiration date of April 30, 2005. We are currently
occupying approximately 14,000 square feet of this space
and are seeking a sublease for the remaining approximately
2,000 square feet. Our lease consists of approximately
17,000 square feet of space in Roanoke, Virginia, with an
expiration date of November 30, 2007. We are currently
occupying approximately 7,000 square feet of this space and
are seeking to sublease the remaining approximate
10,000 square feet. We also occupy a 2,000 square foot
sales office in Ottawa, Canada with an expiration date of
June 30, 2005.

In October 2002, we closed a research and
development facility in Camarillo, California. The Camarillo
lease consisted of approximately 14,500 square feet and
expires on August 31, 2005. We are currently seeking to
sublease that space.

We lease one small office for our field sales and
support organization located in Greensboro, North Carolina.






|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

On August 16, 2002, SMTC Manufacturing
Corporation of Colorado filed a breach of contract claim, and
other related claims, for a total of $13.4 million against
us in District Court, County of Adams, Colorado, based on an
inventory-purchasing dispute. On October 17, 2002, we filed
a breach of contract counterclaim, and other related
counterclaims, in District Court, County of Adams, Colorado for
$1.0 million. On December 5, 2002, we amended our
counterclaim to seek damages of $27.0 million. We are
currently in the discovery phase of the litigation and have
insufficient information to make an estimate of the outcome of
this litigation. Therefore, no provision for any potential
liability or asset that may result has been made in the
consolidated financial statements. We intend to vigorously
defend this lawsuit.

We are involved in certain other disputes and
legal actions arising in the ordinary course of our business.
While it is not feasible to predict or determine the outcome of
these proceedings, in our opinion, based on a review with legal
counsel, none of these disputes and legal actions is expected to
have a material effect on our consolidated financial position,
results of operations, or cash flows. However, litigation is
subject to inherent uncertainties, and an adverse result in
these or other matters may arise from time to time that may harm
our business.

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|        |                                                        
|------- | -------------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS

No matters were submitted to a vote of security
holders during the fourth quarter of 2003.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The names, ages and positions of all our
executive officers as of March 1, 2004 are listed below,
followed by a brief summary of their business experience.
Executive officers are normally appointed annually by the Board
of Directors at a meeting of the directors immediately following
the Annual Meeting of Stockholders and serve until their
successors are appointed. There are no family relationships
among these officers, other than between Mr. Koenig and
Ms. Pierce, who are married, or any arrangements or
understandings between any officer and any other person pursuant
to which an officer was selected.

|                    |  |     |    |          |  |                                                                                     
|------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------------------
|Name                |  | Age |    | Position
|                    |  |     |    |         
|Roger L. Koenig     |  |     | 49 |          |  | President and Chief Executive Officer                                               
|Nancy Pierce        |  |     | 46 |          |  | Corporate Development Officer, Secretary                                            
|Timothy R. Anderson |  |     | 44 |          |  | Chief Financial Officer, Vice President of
    Finance and Administration, Treasurer

Roger L. Koenig.Mr. Koenig has served as our President, Chief Executive
Officer and Chairman of the Board since we were incorporated in
September 1992. Prior to co-founding the company,
Mr. Koenig served as the President and Chief Executive
Officer of Koenig Communications, Inc., an equipment
systems integration and consulting firm, from 1987 to 1992.
Prior to founding Koenig Communications, Mr. Koenig held a
number of positions with IBM/ ROLM Europe, a telecommunications
equipment manufacturer, including Engineering Section Manager
for Europe. Mr. Koenig received a B.S. in Electrical
Engineering from Michigan State University and an M.S. in
Engineering Management from Stanford University.

Nancy Pierce.Ms. Pierce has served as our Corporate Development Officer
since April 2000 and has been a Director and Secretary since our
incorporation in September 1992. Ms. Pierce also served as
our Secretary and Corporate Controller, Chief Financial Officer,
Vice President, Finance and Administration and Treasurer. Prior
to co-founding the company, Ms. Pierce served as the
Controller of Koenig Communications, Inc., a systems
integration and consulting firm and held positions at IBM
Corporation and ROLM Corporation. Ms. Pierce serves on the
Board of Directors of Koala Corporation, a provider of
commercial protection and activities products designed for
infants and children. Ms. Pierce earned a B.S. degree from
Colorado State University and an M.B.A. from California State
University, Chico. In addition, Ms. Pierce holds an
honorary doctorate degree in Commercial Science from St. Thomas
Aquinas University.

Timothy R. Anderson.Mr. Anderson has served as our Treasurer, Chief Financial
Officer and Vice President of Administration since April 2000.
Mr. Anderson has served as the Vice President of Finance
since July 1999. Mr. Anderson previously held the position
of our Corporate Controller from February 1996 to July 1999.
Prior to joining the company, Mr. Anderson served as the
Controller of RIK Medical LLC from September 1994 to February
1996. Mr. Anderson received a B.S. in finance and an M.B.A.
in accounting from the University of Colorado and is a Certified
Management Accountant.

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PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND
    RELATED STOCKHOLDER MATTERS

Price Range of Common Stock.

Our initial public offering was held on
July 30, 1998 at a price of $12.00 per share. Our
common stock is listed on the Nasdaq National Market under the
symbol CACS. The table below sets forth the high and
the low closing sales prices per share as reported on the Nasdaq
National Market for the periods indicated.

|                              |  |      |        |     |  |   |       | 
|----------------------------- |  | ---- | ------ | --- |  | - | ----- | 
|                              |  | High |        | Low
|                              |  |      |        |    
|Year Ended December 31, 2002: |  |      |        |     |  |   |       | 
|First Quarter                 |  | $    | 4.920  |     |  | $ | 3.000 | 
|Second Quarter                |  |      | 3.360  |     |  |   | 1.110 | 
|Third Quarter                 |  |      | 1.270  |     |  |   | 0.500 | 
|Fourth Quarter                |  |      | 0.760  |     |  |   | 0.370 | 
|Year Ended December 31, 2003: |  |      |        |     |  |   |       | 
|First Quarter                 |  | $    | 1.100  |     |  | $ | 0.470 | 
|Second Quarter                |  |      | 2.210  |     |  |   | 0.950 | 
|Third Quarter                 |  |      | 5.040  |     |  |   | 2.170 | 
|Fourth Quarter                |  |      | 15.680 |     |  |   | 4.550 | 

Holders of Common Stock

On March 1, 2004, the last reported sale
price of our common stock as reported on the Nasdaq National
Market was $12.00 per share. As of March 1, 2004,
there were approximately 146 holders of record of our common
stock. Because many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, we are
unable to estimate the total number of stockholders represented
by these record holders.

Dividends

We have never declared cash dividends on our
common stock. We currently intend to retain any earnings in our
business and do not anticipate paying any cash dividends in the
foreseeable future.

Sale of Unregistered Shares

During the fourth quarter of 2003, we issued an
aggregate of 1,334,521 shares of unregistered common stock
to certain stockholders of Paragon Networks
International, Inc. (Paragon) in connection
with our acquisition of Paragon. The unregistered common stock
had an aggregate value of $19,163,722. The shares of our common
stock issued in connection with the acquisition were exempt from
registration under the Securities Act of 1933, as amended,
pursuant to Regulation D promulgated under
Section 4(2) thereof, on the basis that the transaction did
not involve a public offering.

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|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

The selected financial data for the years ended
December 31, 1999, 2000, 2001, 2002 and 2003 have been
derived from our audited consolidated financial statements. The
information set forth below should be read in connection with
our audited consolidated financial statements and the notes
thereto and Managements Discussion and Analysis of
the Financial Condition and Results of Operations included
elsewhere in this Report on Form 10-K.

Consolidated Financial Highlights

|                         |         |                                          |         |      |  |      |         |      |  |      |         |       |   |   |         |       |   |   |         |      | 
|------------------------ | ------- | ---------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ---- | 
|                         |         |                                         
|                         |         | As of or for the Year Ended December 31,
|                         |         |                                         
|                         |         | 1999                                     |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                         |         |                                          |         |      |  |      |         |      |  |     
|                         |         |                                         
|                         |         | (In thousands, except per share data)   
|Revenue, net             |         | $                                        | 108,815 |      |  | $    | 148,050 |      |  | $    | 100,706 |       |   | $ | 50,247  |       |   | $ | 62,556  |     
|Gross profit             |         | $                                        | 63,316  |      |  | $    | 81,281  |      |  | $    | 46,616  |       |   | $ | 17,102  |       |   | $ | 27,332  |     
|Operating income (loss)  |         | $                                        | 33,106  |      |  | $    | 23,269  |      |  | $    | (27,051 | )     |   | $ | (52,267 | )     |   | $ | 2,016   |     
|Net income (loss)        |         | $                                        | 23,565  |      |  | $    | 18,550  |      |  | $    | (14,855 | )     |   | $ | (52,655 | )     |   | $ | 2,458   |     
|                        
|Income (loss) per share: |         |                                          |         |      |  |      |         |      |  |      |         |       |   |   |         |       |   |   |         |     
|                         | Basic   |                                          | $       | 0.98 |  |      | $       | 0.76 |  |      | $       | (0.60 | ) |   | $       | (2.13 | ) |   | $       | 0.10 | 
|                         | Diluted |                                          | $       | 0.93 |  |      | $       | 0.74 |  |      | $       | (0.60 | ) |   | $       | (2.13 | ) |   | $       | 0.09 | 
|Working capital          |         | $                                        | 90,153  |      |  | $    | 99,851  |      |  | $    | 91,597  |       |   | $ | 56,324  |       |   | $ | 67,570  |     
|Total assets             |         | $                                        | 108,345 |      |  | $    | 154,999 |      |  | $    | 133,017 |       |   | $ | 76,437  |       |   | $ | 107,542 |     
|Stockholders equity     |         | $                                        | 97,234  |      |  | $    | 132,797 |      |  | $    | 118,593 |       |   | $ | 66,114  |       |   | $ | 89,394  |     






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NOTICE CONCERNING FORWARD-LOOKING
STATEMENTS

This Managements Discussion and Analysis
contains forward-looking statements within the
meaning of the federal securities laws, including
forward-looking statements regarding future sales of our
products to our customers, inventory levels, our anticipated
product offerings, expectations regarding selling, general and
administrative expenses, customer revenue mix, sources of
revenue, gross margins, our tax liability and operating costs
and expenses. In some cases, forward-looking statements can be
identified by the use of terminology such as may,
will, expects, intends,
plans, anticipates,
estimates, potential, or continue,
or the negative thereof or other comparable terminology.
These statements are based on current expectations and
projections about our industry and assumptions made by the
management and are not guarantees of future performance.
Although we believe that the expectations reflected in the
forward-looking statements contained herein are reasonable,
these expectations or any of the forward-looking statements
could prove to be incorrect, and actual results could differ
materially from those projected or assumed in the
forward-looking statements. Our future financial condition, as
well as any forward-looking statements, are subject to risks and
uncertainties, including but not limited to the factors set
forth under the heading Risk Factors in Item 1
of this report. All forward looking statements and reasons why
results may differ included in this report are made as of the
date hereof, and, unless required by law, we undertake no
obligation to update any forward-looking statements or reasons
why actual results may differ in this Report on
Form 10-K.




Overview

We design, manufacture and sell next-generation
broadband access communications equipment to wireline and
wireless communications service providers. We were incorporated
in September 1992 as a successor company to Koenig
Communications, Inc., an equipment systems integration and
consulting company which had been in operation since 1986. In
the summer of 1995, we ceased our systems integration and
consulting business and commenced our main product sales with
the commercial deployment of our first network access products,

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which was followed by the introduction of our
Wide Bank products in November 1997, Access Navigator products
in January 1999, Adit products in December 1999, the Broadmore
products in October 2000, which we acquired from Litton Network
Access Systems, Inc., or LNAS, and the Axxius products in
June 2002. In November 2003 we acquired the MASTER Series and
Broadway product lines through our acquisition of Paragon
Networks International, Inc.


During the late 1990s, a substantial number of
service providers, including CLECs, invested heavily in network
infrastructure and service delivery projects, which accelerated
growth in the telecommunications equipment market. By 2000, when
our annual net revenues reached $148.1 million, we relied
on a limited number of CLECs for a significant portion of our
net revenue. However, starting in late 2000, many of these CLECs
encountered sharp declines in the amount of capital they had
available to fund network infrastructure and service delivery
projects. As a result, there was a significant decline in the
demand for telecommunications equipment, including demand for
our products.

We have since broadened our product portfolio
into new markets, including wireless service providers and
incumbent wireline carriers. For example, in 2000, 62% of our
net revenue was derived from CLECs, 13% from ILECs, and 5% from
wireless service providers compared to 23%, 19% and 37%,
respectively, in 2003. Currently, the wireless and ILEC markets
are dominated by a small number of large companies, and we
continue to rely upon a small number of customers in these
markets for a significant portion of our revenue. For example,
we believe that TMobile USA, Inc., a wireless service
provider, both directly and indirectly through our OEM channel,
accounted for 28% of our net revenue for the year ended
December 31, 2003.

When the downturn in the telecommunications
industry adversely affected our net revenue and operating
results in late 2000, we reduced our operating expenses in an
effort to better position our business for the long term. In
December 2002, we completed a restructuring plan designed to
reduce our expenses and align our workforce and operations to be
more in line with anticipated net revenues. As a result of the
restructuring plan, we recorded a $2.0 million
restructuring charge in the fourth quarter of 2002. This charge
was comprised of $1.4 million for future rent payments
related to facility closures and downsizing and $600,000 for
salary-related expenses due to reductions in our workforce. Our
objective has been to focus on cost controls while continuing to
invest in the development of new and enhanced products, which we
believe will position us to take advantage of sales
opportunities as economic conditions improve and demand
recovers, a trend that we have started to see over the past six
months. However, we believe current economic conditions may
continue to cause our customers and potential customers to defer
and reduce capital spending.

Historically, most of the sales of our products
have been through a limited number of distributors. For example,
as a percentage of net revenue, Walker & Associates
accounted for 23% in 2001, 16% in 2002, and 11% in 2003.
Recently, however, an increasing proportion of our products
sales have been made directly to telecommunications service
providers and OEMs. For example, for the year ended
December 31, 2003, Nortel, an OEM, accounted for 11% of net
revenue and we sold directly to two service providers, T Mobile
and XO Communications, Inc., which accounted for 17% and
12% of our net revenue, respectively. We expect that the sale of
our products will continue to be made to a small number of
distributors, OEMs, and direct customers. As a result, the loss
of, or reduction of sales to, any of these customers would have
a material adverse effect on our business.

Our net revenue continues to be affected by the
timing and number of orders for our products, which continue to
vary from quarter to quarter due to factors such as demand for
our products, economic conditions, and the financial stability
and ordering patterns of our direct customers, distributors, and
OEMs. In addition, a significant portion of our net revenue has
been derived from a limited number of large orders, and we
believe that this trend will continue in the future, especially
if the percentage of OEM and direct sales to customers continues
to increase since such customers typically place larger orders
than our distributors. The timing of such orders and our ability
to fulfill them have caused material fluctuations in our
operating results, and we anticipate that such fluctuations will
continue in the future.

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Recent Developments

On November 25, 2003, we completed the
acquisition of Paragon Networks International Inc., a provider
of wireless transport products to mobile wireless operators
worldwide. In exchange for all outstanding shares of Paragon
capital stock, we issued 1,334,521 shares of our common
stock and distributed $411,407 in cash to the Paragon
stockholders. As of the closing of the acquisition, the
aggregate value of the consideration that we issued to the
Paragon stockholders was approximately $19.6 million. All
outstanding Paragon options and warrants were cancelled as part
of the transaction. We accounted for the acquisition using the
purchase method of accounting. In addition to the consideration
that we issued in exchange for the outstanding shares of Paragon
capital stock, we will pay an aggregate of approximately
$1.0 million in cash to Paragon employees.




Results of Operations



| |                                                 
| | ------------------------------------------------
| | Years Ended December 31, 2003, 2002
    and 2001

|                   |  |                         |         |      |  |      |        |  |  |   |        | 
|------------------ |  | ----------------------- | ------- | ---- |  | ---- | ------ |  |  | - | ------ | 
|                   |  |                        
|                   |  | Year Ended December 31,
|                   |  |                        
|                   |  | 2001                    |         | 2002 |  | 2003
|                   |  |                         |         |      |  |     
|                   |  |                        
|                   |  | (In thousands)         
|Net revenue        |  | $                       | 100,706 |      |  | $    | 50,247 |  |  | $ | 62,556 | 
|Cost of goods sold |  | $                       | 54,090  |      |  | $    | 33,145 |  |  | $ | 35,224 | 

Our net revenue for 2003 increased to
$62.6 million from $50.2 million in 2002. The increase
in net revenue in 2003 was due to increases in the number of
units sold into the wireless market. We believe that the
increase in units sold in 2003 was partially due to the
deployment by some wireless carriers of our Axxius, Adit and
MasterSeries products to comply with FCC mandated E911 location
services and expand cell site bandwidth capacity. The
acquisition of Paragon in November 2003 contributed to the
increase in our wireless market revenue, primarily because of
the MasterSeries product. Our net revenue also improved due to a
slight economic recovery and the lessening of capital market
constraints in the telecommunications sector in 2003.

Our net revenue for 2002 decreased to
$50.2 million from $100.7 million for the year ended
December 31, 2001. The decrease in net revenue in 2002 was
due to decreases in the number of units of our products sold and
price decreases in some of our products, which were primarily
caused by overall economic weakness and capital market
constraints impacting telecommunication service providers and
continued downturns in the telecommunications sector in 2002.

A significant portion of our net revenue has been
derived from a limited number of large orders, and we believe
that this trend will continue in the future, especially if the
percentage of direct sales to end-users increases. In 2001, 2002
and 2003, 23% of our net revenue was derived from 15, 14 and 16
orders, respectively. Ten customers placed these orders over
those years. These customers include ADC, Walker &
Associates and XO, each of which contributed at least 10% of our
net revenue in at least one of those periods. We have
experienced a substantial decrease in the number of orders from
some of these customers as a result of decreases in their
capital spending budgets and the impact of adverse economic
conditions both in general and in the telecommunications
equipment industry in particular, which has resulted in
decreased demand for telecommunications equipment during this
period. In order to maintain or grow our net revenue, as well as
offset the loss of anticipated net revenue from some of our
prior customers, we will need to sell more products to both our
remaining customers and new customers, and we can provide no
assurance that we will be able to make such sales. Our net
revenue was and continues to be affected by the timing and
quantities of orders for our products which may vary from
quarter to quarter in the future, as they have in the past, due
to factors such as demand for our products, economic conditions,
bankruptcies of our customers and distributors, and ordering
patterns of distributors, OEMs and other direct customers. We
believe that this trend could continue in the future, especially
if the percentage of direct sales to end-users increases. The
timing of customer orders and our ability to fulfill them can
cause material fluctuations in our operating results, and we
anticipate that such fluctuations will occur in the future.

During 2003, approximately 40% of our revenue was
derived from the sales of our products through our distributors
and OEMs. Our success depends in part on the continued sales and
customer support efforts of our

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network of distributors and OEMs as well as
increased sales to our direct customers. In 2003,
Walker & Associates, a distributor, accounted for 11%
of net revenue and Nortel, an OEM, accounted for 11% of net
revenue. We expect that the sale of our products will continue
to be made to a small number of distributors. Accordingly, the
loss of, or a reduction in sales to, any of our key distributors
or OEMs could have a material adverse effect on our business. In
addition to being dependent on a small number of distributors
and OEMs for a majority of our net revenue, we believe that our
products are distributed to a limited number of service provider
customers. Two of these service provider end-user customers, T
Mobile and XO Communications, Inc., accounted for 17% and
12% of our net revenue, respectively, for the year ended
December 31, 2003. A decrease in sales to either T Mobile
or XO Communications could have a material adverse effect on our
business.


We believe that our revenue will increase in 2004
as we will have a full year of revenue from the Broadway and
MasterSeries products acquired with the Paragon acquisition, and
as wireless carriers continue their expansion of cell sites and
continue to deploy data services into cell sites for E911
location services and other bandwidth intensive applications
like pictures or streaming video. Additionally we believe the
acceptance and deployment of voice over IP services will
continue to increase throughout the year.

Cost of goods sold for 2003 was
$35.2 million compared to $33.1 million in 2002 and
$54.1 million for 2001. The increase in 2003 was due to
increased sales and was partially offset by charges of
$3.0 million taken in 2002 for slow moving and excess
inventory. The decrease in 2002 was primarily attributable to
decreased product shipments, partially influenced by cost
reductions in existing product platforms, and partially offset
by charges taken in 2002 for slow moving and excess inventory.

|             |  |                         |        |      |  |      |        |   |  |   |        |  
|------------ |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|             |  |                        
|             |  | Year Ended December 31,
|             |  |                        
|             |  | 2001                    |        | 2002 |  | 2003
|             |  |                         |        |      |  |     
|             |  |                        
|             |  | (In thousands)         
|Gross profit |  | $                       | 46,616 |      |  | $    | 17,102 |   |  | $ | 27,332 |  
|Gross margin |  |                         | 46     | %    |  |      | 34     | % |  |   | 44     | %

Gross profit in 2003 increased to
$27.3 million from a gross profit of $17.1 million in
2002. This increase was caused by the increased shipments of our
products in 2003 and by charges taken for slow moving and excess
inventory in 2002. Gross margin increased to 44% in 2003 from
34% in 2002. Gross margin increases were also attributable to
changes in product mix, as gross margins vary among products,
product cost reductions and higher production volumes, and were
partially offset by decreases in selling prices. Our gross
profit for 2002 was $17.1 million, a decrease of
$29.5 million from the gross profit of $46.6 million
in 2001. Gross margin decreased to 34% in 2002 from 46% in 2001.
The decrease in gross margin was driven primarily by reduced
revenues and charges taken for slow moving and excess inventory.
Gross margins were also impacted by changes in the mix of
products sold, as gross margins vary among products, increased
production volumes, decreases in selling prices, product cost
reductions, and decreased overhead expenses.

We believe that gross margins could continue to
increase in 2004 if sales of our products increase and if we are
able to reduce the cost of our products at a greater rate than
anticipated price reductions, or if we are able to gain
manufacturing efficiencies by consolidating our production
facilities. New product introductions could potentially harm
gross margins until production volumes increase. We believe that
average selling prices and gross margins for our products will
decline as such products mature, as volume price discounts in
distributor contracts and direct sales relationships take
effect, and as competition intensifies, among other factors. For
example, the average selling price for the Wide Bank products
and Adit products has decreased in the past two years. These
decreases were due to unfavorable general economic conditions
and the introduction of competitive products. In addition,
discounts to distributors vary among product lines and are based
on volume shipments, each of which affects gross margins. As a
result, we believe that our gross margins are likely to
fluctuate in the future based on product mix and channel mix.
Furthermore, gross margins may decrease from time to time as a
result of new product introductions by our competitors and us.

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|                                  |  |                         |        |      |  |      |        |   |  |   |        |  
|--------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                  |  |                        
|                                  |  | Year Ended December 31,
|                                  |  |                        
|                                  |  | 2001                    |        | 2002 |  | 2003
|                                  |  |                         |        |      |  |     
|                                  |  |                        
|                                  |  | (In thousands)         
|Research and development expenses |  | $                       | 33,568 |      |  | $    | 23,728 |   |  | $ | 11,001 |  
|As a percentage of net revenue    |  |                         | 33.3   | %    |  |      | 47.2   | % |  |   | 17.6   | %

Research and development expenses for 2003
decreased to $11.0 million from $23.7 million in 2002
mostly due to a $7.9 million decrease in personnel expense
due to reductions in work force. There were also decreases of
$1.7 million for depreciation expense, $1.4 million in
expense for technical certification programs and
$1.1 million decrease in prototyping expenses. Depreciation
decreased as we took assets out of service in late 2002 and
Telcordia certification decreased due to a one-time expense in
2002 related to our Wide Bank product. We believe that research
and development expenses will increase in the first quarter of
2004 as we absorb the research and development department from
the Paragon acquisition and as we continue to develop new
product platforms and service cards for our existing platforms.
Research and development expenses for 2002 decreased to
$23.7 million from $33.6 million in 2001 primarily as
a result of a $6.7 million decrease in personnel expense
and a $2.0 million decrease in prototyping expense.
Personnel expense in the past two years decreased as we reduced
employees in order to reduce operating expenses. Prototyping
expense decreased in the past two years as we completed and
reduced the number of product development programs.

|                                                   |  |                         |        |      |  |      |        |   |  |   |        |  
|-------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                   |  |                        
|                                                   |  | Year Ended December 31,
|                                                   |  |                        
|                                                   |  | 2001                    |        | 2002 |  | 2003
|                                                   |  |                         |        |      |  |     
|                                                   |  |                        
|                                                   |  | (In thousands)         
|Sales and marketing expenses                       |  | $                       | 23,357 |      |  | $    | 18,259 |   |  | $ | 11,776 |  
|General and administrative expenses                |  |                         | 8,365  |      |  |      | 9,823  |   |  |   | 5,362  |  
|Goodwill and intangible asset amortization         |  |                         | 3,460  |      |  |      | 216    |   |  |   | 262    |  
|Bad debt expense (recoveries)                      |  |                         | 697    |      |  |      | 5,567  |   |  |   | (3,085 | )
|Asset impairment charges                           |  |                         | 4,220  |      |  |      | 9,795  |   |  |   |       |  
|Restructuring charge                               |  |                         |       |      |  |      | 1,981  |   |  |   |       |  
|                                                   |  |                         |        |      |  |      |        |   |  |   |        |  
|Total selling, general and administrative expenses |  | $                       | 40,099 |      |  | $    | 45,641 |   |  | $ | 14,315 |  
|As a percentage of net revenue                     |  |                         | 39.8   | %    |  |      | 90.8   | % |  |   | 22.9   | %

Selling, general and administrative expense for
2003 decreased to $14.3 million from $45.6 million in
2002. Sales and marketing expense for 2003 decreased to
$11.8 million from $18.3 million in 2002 primarily as
a result of a $4.0 million decrease in personnel expense, a
$618,000 decrease in travel and entertainment expense, a
$449,000 decrease in expenses for demonstration equipment and a
$315,000 decrease in communication expense. Most of the
decreases in sales and marketing expenses were the result of the
reduction in sales and marketing personnel that occurred in the
early part of 2003 and the expenses related to their sales and
marketing activities. We anticipate that sales and marketing
expenses will increase in 2004 as we increased our sales and
marketing department with the acquisition of Paragon . We are
also increasing marketing activities in some targeted markets.
General and administrative expense for 2003 decreased to
$5.4 million from $9.8 million in 2002. The decrease
was primarily attributable to a $2.2 million expense for
legal and settlement costs incurred in 2002 as well as a
$1.7 million decrease in personnel cost and a $233,000
decrease in professional fees. Bad debt expense went from a
$5.6 million expense in 2002 to a $3.1 million
recovery in 2003. In 2002, a number of our customers filed for
bankruptcy and one of our distributors was experiencing
financial difficulties which caused a significant amount of
accounts receivables to become delinquent. In 2003, we were able
to recover some of the delinquent receivables and part of the
accounts receivable related to the bankruptcy. We also incurred
an asset impairment charge related to goodwill of
$9.8 million and a restructuring charge of
$2.0 million in 2002.

Selling, general and administrative expenses for
2002 increased to $45.6 million from $40.1 million in
2001. Sales and marketing expense for 2002 decreased to
$18.3 million from $23.4 million in 2001 primarily as
a result of a $2.0 million decrease in personnel expense, a
$675,000 decrease in recruiting expense and a $564,000 decrease
in advertising expense. General and administrative expenses for
2002 increased to $9.8 million from

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$8.4 million in 2001 primarily as a result
of a $2.0 million payment for a settlement to an inventory
purchasing dispute, partially offset by a $900,000 decrease in
personnel expense.


|                               |  |                         |         |      |  |      |       |  |  |   |     |  
|------------------------------ |  | ----------------------- | ------- | ---- |  | ---- | ----- |  |  | - | --- | -
|                               |  |                        
|                               |  | Year Ended December 31,
|                               |  |                        
|                               |  | 2001                    |         | 2002 |  | 2003
|                               |  |                         |         |      |  |     
|                               |  |                        
|                               |  | (In thousands)         
|Interest and other income, net |  | $                       | 1,635   |      |  | $    | 714   |  |  | $ | 353 |  
|Income taxes (benefit)         |  | $                       | (10,561 | )    |  | $    | 1,102 |  |  | $ | (89 | )

Interest and other income, net for 2003 decreased
to $353,000 from $714,000 in 2002. The decrease was due to lower
interest income earned due to lower interest rates. We believe
that net interest and other income will increase substantially
in 2004 due to increased cash and cash equivalent balances from
our public stock offering that we completed in February 2004,
which resulted in net proceeds of $78.5 million.

Interest and other income, net for 2002 decreased
to $714,000 from $1.6 million in 2001. The decrease of
$921,000 was due to interest income earned on lower cash and
cash equivalent balances as well as lower interest rates.

For 2003, our effective combined federal and
state income tax rate was a negative 3.8% compared to an income
tax rate of negative 2.1% and 41.6% for 2002 and 2001,
respectively. In the second quarter of 2002, we determined that
it was not more likely than not, based on our
taxable losses, projections of future taxable income and the
reversal of deferred tax liabilities, that our deferred tax
assets would be realized. As a result, we recorded a valuation
allowance of $12.8 million reducing the carrying amount of
our deferred tax assets to zero. We recorded an additional
valuation allowance of $4.3 million in the second half of
2002 and $20,000 in 2003 to reduce the additional deferred tax
assets generated during that period. In 2001, we realized a tax
benefit from research and experimentation tax credits, which
increased the effective rate of the tax benefit in 2001.
Although we may be profitable in 2004 , we do not believe that
we will experience any income tax expense in 2004. Our net
operating loss carryforwards may be used to offset up to
$38.3 million of future taxable income for federal tax
purposes and up to $58.9 million for state tax purposes. As
these net operating loss carryforwards are utilized, we will
reduce the related valuation allowance. Reductions in the
valuation allowance, if any, will be recognized in our
statements of operations as an income tax benefit, and may
offset any current income tax expense. In addition, should we
demonstrate a history of sustained profitability, we may reverse
all or a significant portion of the remaining valuation
allowance.




Liquidity and Capital Resources

|                                                 |  |              |        |              |  |   |         | 
|------------------------------------------------ |  | ------------ | ------ | ------------ |  | - | ------- | 
|                                                 |  | December 31, |        | December 31,
|                                                 |  | 2002         |        | 2003        
|                                                 |  |              |        |             
|Working capital                                  |  | $            | 56,324 |              |  | $ | 67,570  | 
|Cash, cash equivalents and marketable securities |  | $            | 25,728 |              |  | $ | 36,542  | 
|Total assets                                     |  | $            | 76,437 |              |  | $ | 107,542 | 

|                             |  |                          |         |      |  |      |        |   |  |   |        |  
|---------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                             |  |                         
|                             |  | Years Ended December 31,
|                             |  |                         
|                             |  | 2001                     |         | 2002 |  | 2003
|                             |  |                          |         |      |  |     
|Net cash provided (used) by: |  |                          |         |      |  |      |        |   |  |   |        |  
|Operating activities         |  | $                        | (10,751 | )    |  | $    | (9,211 | ) |  | $ | 9,638  |  
|Investing activities         |  | $                        | 2,624   |      |  | $    | (644   | ) |  | $ | (8,932 | )
|Financing activities         |  | $                        | 56      |      |  | $    | 14     |   |  | $ | 1,601  |  

At December 31, 2003, our principal sources
of liquidity included cash and cash equivalents and marketable
securities available for sale of approximately
$36.5 million. At December 31, 2003, our working
capital was approximately $67.6 million. We have no
significant capital spending or purchase commitments other than
facilities leases. Subsequent to December 31, 2003, we
completed a stock offering, which generated additional cash of
approximately $78.5 million.

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Cash provided by operations was $9.6 million
for the year ended December 31, 2003 contrasted by
$9.2 million used in operations in 2002. The
$18.8 million change was primarily due to our net income in
2003 of $2.5 million combined with the receipt of our
income tax refund of $7 million compared with our net loss
of $52.7 million in 2002. This was partially offset by
decreases in non-cash charges for depreciation, asset
impairments, provisions for doubtful accounts and obsolete
inventory, and deferred tax expense. Increases in accounts
receivable were substantially offset by the increase in accounts
payable.

Cash used by investing activities for the year
ended December 31, 2003 was $8.9 million compared to
$644,000 for the year ended December 31, 2002. For the year
ended December 31, 2003, we had net purchases of
$8.5 million of marketable securities compared to net sales
of $1.0 million for the year ended December 31, 2002.
We acquired $1 million of cash in connection with our
acquisition of Paragon, net of cash used for the acquisition.
Our capital expenditures for the year ended December 31,
2003 were $770,000 for equipment to support research,
development, and manufacturing activities compared to
$1.7 million for the year ended December 31, 2002. We
believe our current facilities are sufficient to meet our
current operating requirements. Capital expenditures in 2004 are
expected to exceed those of 2003 as we invest to support
research, development and production tooling.

Net cash from financing activities provided
$1.6 million for the year ended December 31, 2003,
which was the result of cash received upon the exercise of stock
options, compared to $14,000 for the year ended
December 31, 2002.

Our net inventory levels increased approximately
$2.0 million to $26.1 million at December 31,
2003 from $24.1 million at December 31, 2002. The
increase was primarily the result of the fulfillment of a
$7.0 million purchase commitment, which was satisfied in
June of 2003, and $3.7 million from the acquisition of
Paragon offset by the shipment of products. We anticipate that
inventory levels will decline in 2004, as we have decreased our
purchasing and continue to ship out of our current inventory.

We believe that our existing cash and investment
balances are adequate to fund our projected working capital and
capital expenditure requirements for a period greater than
12 months. Although operating activities may provide cash
in certain periods, to the extent we experience growth in the
future, we anticipate that our operating and investing
activities may use cash. We may consider using our capital to
make strategic investments, acquisitions of companies, or to
acquire or license technology or products. However, we cannot
assure you that additional funds or capital will be available to
us in adequate amounts and with reasonably acceptable terms.




Contractual Obligations

The Company leases office space under various
noncancelable-operating leases that expire through 2009. The
Company also leases copiers under various capital leases which
expire in 2006. The impact that our contractual obligations as
of December 31, 2003 are expected to have on our liquidity
and cash flow in future periods is as follows (in thousands):

|                     |  |       |        |                        |  |           |        |           |  |         |       |  |  |  |     |  |  |  |   | 
|-------------------- |  | ----- | ------ | ---------------------- |  | --------- | ------ | --------- |  | ------- | ----- |  |  |  | --- |  |  |  | - | 
|                     |  |       |        |                       
|                     |  |       |        | Payments Due by Period
|                     |  |       |        |                       
|                     |  |       |        | Less                   |  |           |        | More     
|                     |  |       |        | than                   |  |           |        | Than     
|                     |  | Total |        | 1 Year                 |  | 1-3 Years |        | 3-5 Years |  | 5 Years
|                     |  |       |        |                        |  |           |        |           |  |        
|Operating Leases     |  | $     | 6,519  |                        |  |           | 2,667  |           |  |         | 3,365 |  |  |  | 487 |  |  |  |  | 
|Purchase Obligations |  | $     | 12,743 |                        |  |           | 12,743 |           |  |         |       |  |  |  |     |  |  |  |   | 
|Total                |  | $     | 19,262 |                        |  |           | 15,410 |           |  |         | 3,365 |  |  |  | 487 |  |  |  |   | 

The Company records rent expense under
noncancelable operating leases using the straight-line method
after consideration of increases in rental payments over the
lease term, and records the difference between actual payments
and rent expense as deferred rent concessions.

The Company has placed non-cancellable purchase
orders for $12.7 million of inventory from certain of its
vendors for delivery in 2004. Purchase orders are generally
placed up to 4 months in advance based on the lead time of
the inventory.

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Rent expense for the years ended
December 31, 2001, 2002, and 2003 totaled
$1.5 million, and $1.9 million, and $1.6 million
respectively.




Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.




Critical Accounting Policies

Our discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On
an ongoing basis, we evaluate our estimates, including those
related to revenue and product returns, inventory valuations,
allowance for doubtful accounts, intangible assets, deferred
income taxes and warranty reserves. We use historical experience
and various other assumptions that are believed to be reasonable
under the circumstances as a basis for making estimates about
the carrying value of assets and liabilities and other items
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions. We consider the following accounting areas to have
the most significant impact on the reported financial results
and financial position of our company.

Revenue Recognition.We recognize revenue from product sales at the time of shipment
and passage of title using guidance from SEC Staff Accounting
Bulletin No. 101 Revenue Recognition in Financial
Statements, as amended by Staff Accounting Bulletin
No. 104. Our revenue from sales of products is recognized
upon shipment based upon our shipping terms, provided that we
have evidence of an arrangement, the fee is fixed and
collectibility is probable. We offer certain of our customers
the right to return products for a limited time after shipment
as part of a stock rotation program. We estimate future stock
rotation returns based upon actual historical return rates and
reduce our revenue by these estimated returns. If future returns
exceed our estimates, revenue would be further reduced.

Inventory Reserves.We value our inventory at the lower of the actual cost to
purchase and/or manufacture or the current estimated net
realizable value of inventory. We regularly review inventory
quantities on hand and record a provision for excess and
obsolete inventory based primarily on our estimated forecast of
product demand and production requirements. We write down our
inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the
estimated net realizable value based upon assumptions about
future demand and market conditions. If actual future demand or
market conditions are less favorable than our estimates, then
additional inventory write-downs may be required.

Allowance for Doubtful
Accounts.We perform ongoing credit
evaluations of our customers and adjust open account status
based upon payment history and the customers current
creditworthiness, as determined by our review of current credit
information. We continuously monitor collections and payments
from our customers and maintain a provision for estimated credit
losses based upon the age of outstanding invoices and any
specific customer collection issues that we have identified.
While such credit losses have usually been within our
expectations and the provisions established, we did recover a
significant portion of aged receivables in 2003 that we had
previously provided for. This recovery amounted to approximately
$3.1 million. We cannot guarantee that we will continue to
experience the same credit loss rates that we have in the past.
Because our accounts receivable are concentrated in a relatively
few number of customers, a significant change in the liquidity
or financial position of any one of these customers could have a
material impact on our ability to collect our accounts
receivable and, accordingly, on our future operating results.

Valuation of Intangible
Assets.We regularly evaluate the
potential impairment of goodwill and other intangible assets. In
assessing whether the value of our goodwill and other
intangibles has been impaired, we must make assumptions
regarding estimated future cash flows and other factors to
determine the fair value of these assets. If these estimates or
their related assumptions change in the future, we may be
required to record additional impairment charges.

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Deferred Income
Taxes.Current income tax expense
(benefit) represents actual or estimated amounts payable or
receivable on tax return filings each year. Deferred tax assets
and liabilities are recorded for the estimated future tax
effects of temporary differences between the tax bases of assets
and liabilities and amounts reported in the accompanying balance
sheets, and for operating loss and tax credit carryforwards. The
change in deferred tax assets and liabilities for the period
determines the deferred tax provision or benefit for the period.
Effects of changes in enacted tax laws on deferred tax assets
and liabilities are reflected as adjustments to the tax
provision or benefit in the period of enactment. A valuation
allowance is required to reduce the carrying amount of deferred
tax assets if management cannot conclude that realization of
such assets is more likely than not at the balance sheet date.
Based upon our recent history of losses and an analysis of
projected net taxable income for future operating periods, we
determined that realization of our tax net operating loss
carryforwards, tax credit carryforwards and other deferred tax
assets is not sufficiently assured. Based upon this analysis, a
valuation allowance was established.

Warranty Reserves.We offer warranties of various lengths to our customers
depending on the specific product and the terms of our customer
purchase agreements. Our standard warranties require us to
repair or replace defective product returned to us during the
warranty period at no cost to the customer. We record an
estimate for warranty related costs based on our actual
historical return rates and repair costs at the time of sale. On
an on-going basis, management reviews these estimates against
actual expenses and makes adjustments when necessary. While our
warranty costs have historically been within our expectations
and the provisions established, we cannot guarantee that we will
continue to experience the same warranty return rates or repair
costs that we have in the past. A significant increase in
products return rates or the costs to repair our products could
have a material adverse impact on our operating results.






|         |                                                                
|-------- | ---------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK.

Market risk represents the risk of loss that may
impact our financial position, results of operations or cash
flows due to adverse changes in financial and commodity market
prices and interest rates. Historically, and as of
December 31, 2003, we have had little or no exposure to
market risk in the area of changes in foreign currency exchange
rates and interest rates as measured against the United States
dollar. Historically, and as of December 31, 2003, we have
not used derivative instruments or engaged in hedging activities.

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|        |                                                             
|------- | ------------------------------------------------------------
|ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and
Consolidated Financial Statement Schedule

|                                                                                                                                      |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                      |  | Page
|                                                                                                                                      |  |     
|CONSOLIDATED FINANCIAL STATEMENTS:                                                                                                    |  |      |    | 
|                                                                                                                                     
|Independent Auditors Report                                                                                                          |  |      | 36 | 
|                                                                                                                                     
|Consolidated Balance Sheets December 31,
    2002 and 2003                                                                            |  |      | 37 | 
|                                                                                                                                     
|Consolidated Statements of Operations Years ended
    December 31, 2001, 2002, and 2003                                               |  |      | 38 | 
|                                                                                                                                     
|Consolidated Statements of Stockholders
    Equity and Comprehensive Income (Loss) Years ended
    December 31, 2001, 2002, and 2003 |  |      | 39 | 
|                                                                                                                                     
|Consolidated Statements of Cash Flows Years ended
    December 31, 2001, 2002 and 2003                                                |  |      | 40 | 
|                                                                                                                                     
|Notes to Consolidated Financial Statements                                                                                            |  |      | 41 | 

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INDEPENDENT AUDITORS REPORT

The Board of Directors


Carrier Access Corporation:


We have audited the accompanying consolidated
balance sheets of Carrier Access Corporation and subsidiaries as
of December 31, 2002 and 2003, and the related consolidated
statements of operations, stockholders equity and
comprehensive income (loss) and cash flows for each of the years
in the three year period ended December 31, 2003. These
consolidated financial statements are the responsibility of
Carrier Access Corporations management. Our responsibility
is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Carrier Access Corporation
and subsidiaries as of December 31, 2002 and 2003, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 5 to the consolidated
financial statements, Carrier Access Corporation adopted the
provisions of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002.

KPMG LLP

Boulder, Colorado

March 12, 2004


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CARRIER ACCESS CORPORATION

CONSOLIDATED BALANCE SHEETS


|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |        |  |       |         |         | 
|-------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------- | ------ |  | ----- | ------- | ------- | 
|                                                                                                                                       |                                                                                                                                                                                     |                                           
|                                                                                                                                       |                                                                                                                                                                                     | December 31,                              
|                                                                                                                                       |                                                                                                                                                                                     |                                           
|                                                                                                                                       |                                                                                                                                                                                     | 2002                                       |       | 2003   
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |        
|                                                                                                                                       |                                                                                                                                                                                     |                                           
|                                                                                                                                       |                                                                                                                                                                                     | (In thousands)                            
|ASSETS                                                                                                                                
|Current assets:                                                                                                                        |                                                                                                                                                                                     |                                            |       |         |        |  |       |        
|                                                                                                                                       | Cash and cash equivalents                                                                                                                                                           |                                            | $     | 14,900  |        |  | $     | 17,207  |        
|                                                                                                                                       | Marketable securities available for sale                                                                                                                                            |                                            |       | 10,828  |        |  |       | 19,335  |        
|                                                                                                                                       | Accounts receivable, net of allowance for
    doubtful accounts of $3,071 and $871 in 2002 and 2003,
    respectively                                                               |                                            |       | 8,598   |        |  |       | 18,333  |        
|                                                                                                                                       | Income tax receivable                                                                                                                                                               |                                            |       | 6,989   |        |  |       | 83      |        
|                                                                                                                                       | Inventory, net                                                                                                                                                                      |                                            |       | 24,134  |        |  |       | 26,135  |        
|                                                                                                                                       | Prepaid expenses and other                                                                                                                                                          |                                            |       | 1,198   |        |  |       | 4,625   |        
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |        |  |       |        
|                                                                                                                                       |                                                                                                                                                                                     | Total current assets                       |       |         | 66,647 |  |       |         | 85,718  | 
|Property and equipment, net of accumulated
    depreciation and amortization of $11,746 and $15,538 in 2002 and
    2003, respectively |                                                                                                                                                                                     |                                            | 9,462 |         |        |  | 7,012 |        
|Goodwill                                                                                                                               |                                                                                                                                                                                     |                                            |      |         |        |  | 6,748 |        
|Intangibles, net of amortization of $0 and $262
    in 2002 and 2003, respectively                                                     |                                                                                                                                                                                     |                                            | 146   |         |        |  | 7,692 |        
|Other assets                                                                                                                           |                                                                                                                                                                                     |                                            | 182   |         |        |  | 372   |        
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |        |  |       |        
|                                                                                                                                       |                                                                                                                                                                                     | Total assets                               |       | $       | 76,437 |  |       | $       | 107,542 | 
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |        |  |       |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                              
|Current liabilities:                                                                                                                   |                                                                                                                                                                                     |                                            |       |         |        |  |       |        
|                                                                                                                                       | Accounts payable                                                                                                                                                                    |                                            | $     | 5,437   |        |  | $     | 12,862  |        
|                                                                                                                                       | Accrued compensation payable                                                                                                                                                        |                                            |       | 1,832   |        |  |       | 2,905   |        
|                                                                                                                                       | Accrued restructuring                                                                                                                                                               |                                            |       | 1,586   |        |  |       | 536     |        
|                                                                                                                                       | Deferred rent                                                                                                                                                                       |                                            |       | 904     |        |  |       | 912     |        
|                                                                                                                                       | Other accrued liabilities                                                                                                                                                           |                                            |       | 564     |        |  |       | 933     |        
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |        |  |       |        
|                                                                                                                                       |                                                                                                                                                                                     | Total current liabilities                  |       |         | 10,323 |  |       |         | 18,148  | 
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |        |  |       |        
|Stockholders equity:                                                                                                                  |                                                                                                                                                                                     |                                            |       |         |        |  |       |        
|                                                                                                                                       | Preferred stock, $0.001 par value,
    5,000 shares authorized and no shares issued or outstanding
    at December 31, 2002 and 2003                                                |                                            |       |        |        |  |       |        |        
|                                                                                                                                       | Common stock, $0.001 par value, 60,000
    authorized, 24,771 shares issued and outstanding at
    December 31, 2002, 26,588 shares issued and
    outstanding at December 31, 2003 |                                            |       | 25      |        |  |       | 27      |        
|                                                                                                                                       | Additional paid-in capital                                                                                                                                                          |                                            |       | 85,785  |        |  |       | 106,571 |        
|                                                                                                                                       | Deferred stock compensation                                                                                                                                                         |                                            |       | (65     | )      |  |       | (12     | )      
|                                                                                                                                       | Accumulated deficit                                                                                                                                                                 |                                            |       | (19,643 | )      |  |       | (17,185 | )      
|                                                                                                                                       | Accumulated other comprehensive income (loss)                                                                                                                                       |                                            |       | 12      |        |  |       | (7      | )      
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |        |  |       |        
|                                                                                                                                       |                                                                                                                                                                                     | Total stockholders equity                 |       |         | 66,114 |  |       |         | 89,394  | 
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |        |  |       |        
|                                                                                                                                       | Commitments and contingencies
    (Note 10)                                                                                                                                         |                                            |       |         |        |  |       |         |        
|                                                                                                                                       |                                                                                                                                                                                     | Total liabilities and stockholders equity |       | $       | 76,437 |  |       | $       | 107,542 | 
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |        |  |       |        

See accompanying notes to consolidated financial
statements.

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CARRIER ACCESS CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                             |                                            |                                       |         |         |         |      |        |         |         |   |        |        |       | 
|-------------------------------------------- | ------------------------------------------ | ------------------------------------- | ------- | ------- | ------- | ---- | ------ | ------- | ------- | - | ------ | ------ | ----- | 
|                                             |                                            |                                      
|                                             |                                            | Year Ended December 31,              
|                                             |                                            |                                      
|                                             |                                            | 2001                                  |         | 2002    |         | 2003
|                                             |                                            |                                       |         |         |         |     
|                                             |                                            |                                      
|                                             |                                            | (In thousands, except per share data)
|Revenue, net of allowances for sales returns |                                            | $                                     | 100,706 |         |         | $    | 50,247 |         |         | $ | 62,556 |       
|Cost of sales                                |                                            |                                       | 54,090  |         |         |      | 33,145 |         |         |   | 35,224 |       
|                                             |                                            |                                       |         |         |         |      |        |         |         |   |        |       
|                                             | Gross profit                               |                                       |         | 46,616  |         |      |        | 17,102  |         |   |        | 27,332 |      
|                                             |                                            |                                       |         |         |         |      |        |         |         |   |        |       
|Operating expenses:                          |                                            |                                       |         |         |         |      |        |         |         |   |        |       
|                                             | Sales and marketing                        |                                       |         | 23,357  |         |      |        | 18,259  |         |   |        | 11,776 |      
|                                             | Research and development                   |                                       |         | 33,568  |         |      |        | 23,728  |         |   |        | 11,001 |      
|                                             | General and administrative                 |                                       |         | 8,365   |         |      |        | 9,823   |         |   |        | 5,362  |      
|                                             | Goodwill and intangible asset amortization |                                       |         | 3,460   |         |      |        | 216     |         |   |        | 262    |      
|                                             | Asset impairment charges                   |                                       |         | 4,220   |         |      |        | 9,795   |         |   |        |       |      
|                                             | Restructuring charge                       |                                       |         |        |         |      |        | 1,981   |         |   |        |       |      
|                                             | Bad debt expense (recovery)                |                                       |         | 697     |         |      |        | 5,567   |         |   |        | (3,085 | )    
|                                             |                                            |                                       |         |         |         |      |        |         |         |   |        |       
|                                             | Total operating expenses                   |                                       |         | 73,667  |         |      |        | 69,369  |         |   |        | 25,316 |      
|                                             |                                            |                                       |         |         |         |      |        |         |         |   |        |       
|                                             |                                            | Income (loss) from operations         |         |         | (27,051 | )    |        |         | (52,267 | ) |        |        | 2,016 | 
|Interest income                              |                                            |                                       | 1,638   |         |         |      | 715    |         |         |   | 353    |       
|Other income (expense), net                  |                                            |                                       | (3      | )       |         |      | (1     | )       |         |   |       |       
|                                             |                                            |                                       |         |         |         |      |        |         |         |   |        |       
|                                             |                                            | Income (loss) before income taxes     |         |         | (25,416 | )    |        |         | (51,553 | ) |        |        | 2,369 | 
|Income taxes (benefit)                       |                                            |                                       | (10,561 | )       |         |      | 1,102  |         |         |   | (89    | )     
|                                             |                                            |                                       |         |         |         |      |        |         |         |   |        |       
|                                             | Net income (loss)                          |                                       | $       | (14,855 | )       |      | $      | (52,655 | )       |   | $      | 2,458  |      
|                                             |                                            |                                       |         |         |         |      |        |         |         |   |        |       
|Income (loss) per share:                     |                                            |                                       |         |         |         |      |        |         |         |   |        |       
|                                             | Basic                                      |                                       | $       | (0.60   | )       |      | $      | (2.13   | )       |   | $      | 0.10   |      
|                                             | Diluted                                    |                                       | $       | (0.60   | )       |      | $      | (2.13   | )       |   | $      | 0.09   |      
|Weighted average common shares outstanding:  |                                            |                                       |         |         |         |      |        |         |         |   |        |       
|                                             | Basic                                      |                                       |         | 24,695  |         |      |        | 24,754  |         |   |        | 24,815 |      
|                                             | Diluted                                    |                                       |         | 24,695  |         |      |        | 24,754  |         |   |        | 26,545 |      

See accompanying notes to consolidated financial
statements.

38



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##### Table of Contents



CARRIER ACCESS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND


COMPREHENSIVE INCOME (LOSS)


YEARS ENDED DECEMBER 31, 2001, 2002, AND
2003


|                                                                                                       |                                                                     |                          |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |         |         |  
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------- | ------------------------ | ------ | ---------- |  | ------------ | -- | ------------- |  | ------------- | ------- | ------------- |  | ------ | ------ | - |  | - | ------- | ------- | - | - | --- | ---- | - | - | ------- | ------- | ------- | -
|                                                                                                       |                                                                     |                          |        |            |  |              |    |               |  | Retained      |         | Accumulated   |  |       
|                                                                                                       |                                                                     |                          |        | Additional |  | Deferred     |    | Earnings      |  | Other         |         | Total        
|                                                                                                       |                                                                     | Common Stock             |        | Paid-in    |  | Stock Option |    | (Accumulated) |  | Comprehensive |         | Shareholder  
|                                                                                                       |                                                                     | Shares                   |        | Amount     |  | Capital      |    | Compensation  |  | (Deficit)     |         | Income (Loss) |  | Equity
|                                                                                                       |                                                                     |                          |        |            |  |              |    |               |  |               |         |               |  |       
|                                                                                                       |                                                                     |                         
|                                                                                                       |                                                                     | (In thousands)          
|BALANCES AT DECEMBER 31, 2000                                                                          |                                                                     |                          | 24,673 |            |  | $            | 25 |               |  | $             | 86,140  |               |  | $      | (1,425 | ) |  | $ | 47,867  |         |   | $ | 190 |      |   | $ | 132,797 |        
|Exercise of stock options                                                                              |                                                                     |                          | 67     |            |  |              |   |               |  |               | 56      |               |  |        |       |   |  |   |        |         |   |   |    |      |   |   | 56      |        
|Amortization of deferred stock compensation                                                            |                                                                     |                          |       |            |  |              |   |               |  |               |        |               |  |        | 449    |   |  |   |        |         |   |   |    |      |   |   | 449     |        
|Forfeitures of deferred stock compensation
    related to stock options issued at less than fair value |                                                                     |                          |       |            |  |              |   |               |  |               | (510    | )             |  |        | 510    |   |  |   |        |         |   |   |    |      |   |   |        |        
|Tax benefit from exercise of stock options                                                             |                                                                     |                          |       |            |  |              |   |               |  |               | 160     |               |  |        |       |   |  |   |        |         |   |   |    |      |   |   | 160     |        
|Stock options issued for services                                                                      |                                                                     |                          |       |            |  |              |   |               |  |               | 127     |               |  |        |       |   |  |   |        |         |   |   |    |      |   |   | 127     |        
|Comprehensive loss:                                                                                    |                                                                     |                          |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |        
|                                                                                                       | Net change in unrealized gain (loss) on
    investments, net of tax |                          |        |           |  |              |    |              |  |               |         |              |  |        |        |  |  |   |         |        |   |   |     | (141 | ) |   |         | (141    | )      
|                                                                                                       | Net loss                                                            |                          |        |           |  |              |    |              |  |               |         |              |  |        |        |  |  |   |         | (14,855 | ) |   |     |     |   |   |         | (14,855 | )      
|                                                                                                       |                                                                     |                          |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |        
|                                                                                                       |                                                                     | Total comprehensive loss |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |         | (14,996 | )
|                                                                                                       |                                                                     |                          |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |        
|BALANCES AT DECEMBER 31, 2001                                                                          |                                                                     |                          | 24,740 |            |  |              | 25 |               |  |               | 85,973  |               |  |        | (466   | ) |  |   | 33,012  |         |   |   | 49  |      |   |   | 118,593 |        
|Exercise of stock options                                                                              |                                                                     |                          | 31     |            |  |              |   |               |  |               | 14      |               |  |        |       |   |  |   |        |         |   |   |    |      |   |   | 14      |        
|Amortization of deferred stock compensation                                                            |                                                                     |                          |       |            |  |              |   |               |  |               |        |               |  |        | 199    |   |  |   |        |         |   |   |    |      |   |   | 199     |        
|Forfeitures of deferred stock compensation
    related to stock options issued at less than fair value |                                                                     |                          |       |            |  |              |   |               |  |               | (202    | )             |  |        | 202    |   |  |   |        |         |   |   |    |      |   |   |        |        
|Comprehensive loss:                                                                                    |                                                                     |                          |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |        
|                                                                                                       | Net change in unrealized gain (loss) on
    investments, net of tax |                          |        |           |  |              |    |              |  |               |         |              |  |        |        |  |  |   |         |        |   |   |     | (37  | ) |   |         | (37     | )      
|                                                                                                       | Net loss                                                            |                          |        |           |  |              |    |              |  |               |         |              |  |        |        |  |  |   |         | (52,655 | ) |   |     |     |   |   |         | (52,655 | )      
|                                                                                                       |                                                                     |                          |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |        
|                                                                                                       |                                                                     | Total comprehensive loss |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |         | (52,692 | )
|                                                                                                       |                                                                     |                          |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |        
|BALANCES AT DECEMBER 31, 2002                                                                          |                                                                     |                          | 24,771 |            |  |              | 25 |               |  |               | 85,785  |               |  |        | (65    | ) |  |   | (19,643 | )       |   |   | 12  |      |   |   | 66,114  |        
|Exercise of stock options                                                                              |                                                                     |                          | 482    |            |  |              | 1  |               |  |               | 1,600   |               |  |        |       |   |  |   |        |         |   |   |    |      |   |   | 1,601   |        
|Shares issued in connection with acquisition                                                           |                                                                     |                          | 1,335  |            |  |              | 1  |               |  |               | 19,162  |               |  |        |       |   |  |   |        |         |   |   |    |      |   |   | 19,163  |        
|Amortization of deferred stock compensation                                                            |                                                                     |                          |       |            |  |              |   |               |  |               |        |               |  |        | 53     |   |  |   |        |         |   |   |    |      |   |   | 53      |        
|Stock options issued for services                                                                      |                                                                     |                          |       |            |  |              |   |               |  |               | 24      |               |  |        |       |   |  |   |        |         |   |   |    |      |   |   | 24      |        
|Comprehensive loss:                                                                                    |                                                                     |                          |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |        
|                                                                                                       | Net change in unrealized gain (loss) on
    investments, net of tax |                          |        |           |  |              |    |              |  |               |         |              |  |        |        |  |  |   |         |        |   |   |     | (19  | ) |   |         | (19     | )      
|                                                                                                       | Net loss                                                            |                          |        |           |  |              |    |              |  |               |         |              |  |        |        |  |  |   |         | 2,458   |   |   |     |     |   |   |         | 2,458   |        
|                                                                                                       |                                                                     |                          |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |        
|                                                                                                       |                                                                     | Total comprehensive loss |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |         | 2,439   |  
|                                                                                                       |                                                                     |                          |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |        
|BALANCES AT DECEMBER 31, 2003                                                                          |                                                                     |                          | 26,588 |            |  | $            | 27 |               |  | $             | 106,571 |               |  | $      | (12    | ) |  | $ | (17,185 | )       |   | $ | (7  | )    |   | $ | 89,394  |        
|                                                                                                       |                                                                     |                          |        |            |  |              |    |               |  |               |         |               |  |        |        |   |  |   |         |         |   |   |     |      |   |   |         |        

See accompanying notes to consolidated financial
statements.

39



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##### Table of Contents



CARRIER ACCESS CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                      |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |         |        |        |  
|------------------------------------- | --------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------- | ------- | ------ | ------- | - | ------- | ----- | ------ | - | ------- | ------ | ------ | -
|                                      |                                                                                                     |                                                          
|                                      |                                                                                                     | Year Ended December 31,                                  
|                                      |                                                                                                     |                                                          
|                                      |                                                                                                     | 2001                                                      |                              | 2002    |        | 2003   
|                                      |                                                                                                     |                                                           |                              |         |        |        
|                                      |                                                                                                     |                                                          
|                                      |                                                                                                     | (In thousands)                                           
|Cash flows from operating activities: |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|                                      | Net income (loss)                                                                                   |                                                           | $                            | (14,855 | )      |         | $ | (52,655 | )     |        | $ | 2,458   |       
|                                      | Adjustments to reconcile net income (loss) to net
    cash provided (used) by operating activities: |                                                           |                              |         |        |         |   |         |       |        |   |         |       
|                                      |                                                                                                     | Depreciation and amortization expense                     |                              |         | 8,117  |         |   |         | 5,759 |        |   |         | 4,062  |       
|                                      |                                                                                                     | Provisions for (recoveries of) doubtful accounts          |                              |         | 697    |         |   |         | 5,567 |        |   |         | (3,085 | )     
|                                      |                                                                                                     | Provisions for (recoveries of) inventory
    obsolescence |                              |         | 5,662  |         |   |         | 3,619 |        |   |         | 200    |       
|                                      |                                                                                                     | Asset impairment charges                                  |                              |         | 4,220  |         |   |         | 9,795 |        |   |         |       |       
|                                      |                                                                                                     | Stock-based compensation                                  |                              |         | 576    |         |   |         | 199   |        |   |         | 77     |       
|                                      |                                                                                                     | Deferred income tax expense (benefit)                     |                              |         | (2,008 | )       |   |         | 7,319 |        |   |         |       |       
|                                      |                                                                                                     | Tax benefit relating to exercise of stock options         |                              |         | 160    |         |   |         |      |        |   |         |       |       
|                                      |                                                                                                     | Changes in operating assets and liabilities:              |                              |         |        |         |   |         |       |        |   |         |        |       
|                                      |                                                                                                     |                                                           | Accounts receivable          |         |        | 5,351   |   |         |       | 3,643  |   |         |        | (4,765 | )
|                                      |                                                                                                     |                                                           | Income tax receivable        |         |        | (4,085  | ) |         |       | 1,479  |   |         |        | 6,906  |  
|                                      |                                                                                                     |                                                           | Inventory                    |         |        | (11,451 | ) |         |       | 8,747  |   |         |        | 1,550  |  
|                                      |                                                                                                     |                                                           | Prepaid expenses and other   |         |        | 4,643   |   |         |       | 1,418  |   |         |        | (3,370 | )
|                                      |                                                                                                     |                                                           | Accounts payable             |         |        | (6,882  | ) |         |       | (3,427 | ) |         |        | 5,540  |  
|                                      |                                                                                                     |                                                           | Accrued compensation payable |         |        | (484    | ) |         |       | (2,024 | ) |         |        | 777    |  
|                                      |                                                                                                     |                                                           | Accrued restructuring        |         |        |        |   |         |       | 1,586  |   |         |        | (1,050 | )
|                                      |                                                                                                     |                                                           | Other liabilities            |         |        | (412    | ) |         |       | (236   | ) |         |        | 338    |  
|                                      |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|                                      | Net cash provided (used) by operating
    activities                                                |                                                           |                              | (10,751 | )      |         |   | (9,211  | )     |        |   | 9,638   |       
|                                      |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|Cash flows from investing activities: |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|                                      | Purchase of equipment                                                                               |                                                           |                              | (5,010  | )      |         |   | (1,651  | )     |        |   | (770    | )     
|                                      | Purchase of marketable securities                                                                   |                                                           |                              | (6,314  | )      |         |   | (11,359 | )     |        |   | (18,617 | )     
|                                      | Sales of marketable securities available for sale                                                   |                                                           |                              | 13,948  |        |         |   | 12,366  |       |        |   | 10,091  |       
|                                      | Acquisition, including acquisition costs of
    $672K, net of cash acquired of $1.446M              |                                                           |                              |        |        |         |   |        |       |        |   | 364     |       
|                                      |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|                                      | Net cash provided (used) by investing
    activities                                                |                                                           |                              | 2,624   |        |         |   | (644    | )     |        |   | (8,932  | )     
|                                      |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|Cash flows from financing activities: |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|                                      | Proceeds from exercise of stock options                                                             |                                                           |                              | 56      |        |         |   | 14      |       |        |   | 1,601   |       
|                                      | Proceeds from short-term borrowings                                                                 |                                                           |                              | 2,000   |        |         |   |        |       |        |   |        |       
|                                      | Payments on short-term borrowings                                                                   |                                                           |                              | (2,000  | )      |         |   |        |       |        |   |        |       
|                                      |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|                                      | Net cash provided by financing activities                                                           |                                                           |                              | 56      |        |         |   | 14      |       |        |   | 1,601   |       
|                                      |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|                                      | Net increase (decrease) in cash and cash
    equivalents                                            |                                                           |                              | (8,071  | )      |         |   | (9,841  | )     |        |   | 2,307   |       
|                                      | Cash and cash equivalents at beginning of year                                                      |                                                           |                              | 32,812  |        |         |   | 24,741  |       |        |   | 14,900  |       
|                                      |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|                                      | Cash and cash equivalents at end of year                                                            |                                                           | $                            | 24,741  |        |         | $ | 14,900  |       |        | $ | 17,207  |       
|                                      |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|                                      | Supplemental disclosure of cash flow and
    financing activities information:                      |                                                           |                              |         |        |         |   |         |       |        |   |         |       
|                                      | Common stock issued for acquisition                                                                 |                                                           | $                            |        |        |         | $ |        |       |        | $ | 19,163  |       
|                                      |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|                                      | Accounts receivable in exchange for notes
    receivable                                            |                                                           | $                            |        |        |         | $ | 775     |       |        | $ |        |       
|                                      |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        
|                                      | Cash paid (received) for income taxes                                                               |                                                           | $                            | (4,578  | )      |         | $ | (7,180  | )     |        | $ | (6,995  | )     
|                                      |                                                                                                     |                                                           |                              |         |        |         |   |         |       |        |   |        

See accompanying notes to consolidated financial
statements.

40



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##### Table of Contents



CARRIER ACCESS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


December 31, 2001, 2002, and
2003


1.     Summary of
Significant Accounting Policies

a. Business and Basis of
Presentation. Carrier Access Corporation (the
Company) is a provider of broadband digital access
equipment to communications service providers, including
incumbent local exchange carriers, wireless service providers,
competitive local exchange carriers, InterExchange Carriers
(IXCs), IOCs, ISPs and wireless service
providers, which is used for the provisioning of enhanced voice
and high-speed Internet services by service providers to
end-users such as small and medium-sized businesses and
government and educational institutions. The Company sells its
products through distributors and directly to end-user
customers. The Company operates in one business segment and
substantially all of its sales and operations are domestic.

The accompanying consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

The preparation of consolidated financial
statements in conformity with accounting standards generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.

b. Cash and Cash Equivalents and
Marketable Securities Available for Sale. Cash and cash
equivalents include investments in highly liquid debt securities
with maturities or interest reset dates of three months or less
at the time of purchase.

Marketable securities
available-for-sale represent U.S. Government
agency and corporate bonds with maturities of greater than three
months and are recorded at fair value. Marketable securities
available for sale all of which mature within one
year, consisted of the following as of December 31 (in
thousands, except percentages):

|                           |       |              |       |        |  |                |        |        |  |  |                 |  | 
|-------------------------- | ----- | ------------ | ----- | ------ |  | -------------- | ------ | ------ |  |  | --------------- |  | 
|                           |       |              |       |       
|                           |       | Market Value |       |       
|                           |       |              |       |       
|                           |       | 2002         |       | 2003   |  | Interest Rates
|                           |       |              |       |        |  |               
|Municipal Bonds            |       | $            | 4,486 |        |  | $              | 4,048  |        |  |  | 2.75% to 5.875% | 
|Municipal Short Term Notes |       |              | 6,300 |        |  |                | 15,265 |        |  |  | 1.2% to 2.125%  | 
|Other                      |       |              | 42    |        |  |                | 22     |        |  |  | 1.2% to 2.125%  | 
|                           |       |              |       |        |  |                |        |        |  |  |                 | 
|                           | Total |              | $     | 10,828 |  |                | $      | 19,335 |  |  |                 |  | 
|                           |       |              |       |        |  |                |        |        |  |  |                 | 

Increases and temporary decreases in the fair
value of investments classified as available-for-sale are
recorded in accumulated other comprehensive income (loss), net
of the related tax effect, if any. Other than temporary declines
are recognized currently in the statement of operations.
Subsequent recoveries in the fair value, if any, are not
recognized in the statement of operations, but as a component of
accumulated other comprehensive income (loss), as indicated
above.

c. Accounts receivableIn general the
Company extends credit to customers, after completing an
evaluation of the customers credit worthiness. The Company
records a provision for uncollectible accounts receivables based
on managements review of the aging of the receivable
balances, and evaluation of the customers current ability
to pay, and current market conditions.

d. Other receivables. Other
receivables consist of amounts owed from third party
manufacturers for components delivered from the Company for
their manufacture into finished products.

41



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##### Table of Contents



e. Fair Value of Financial
Instruments. Cash and cash equivalents, accounts receivable,
accounts payable, and other accrued liabilities are recorded at
cost which approximates fair value because of the short-term
maturity of these instruments.

f. Inventory. Inventory is recorded
at the lower of cost or net realizable value using standard
costs that approximate average costs. Costs include certain
warehousing costs and other allocable overhead. The carrying
amount of inventory is marked down when 1) the cost of the
inventory exceeds the estimated net realizable value determined
by analyzing assumptions about future demand and market
conditions or 2) the technology associated with a product
is considered obsolete and the inventory cannot be used in the
manufacture of other products.

g. Property and Equipment. Property,
equipment and leasehold improvements are recorded at cost and
are depreciated and amortized using the straight-line method
over useful lives ranging from three to thirty years or the
lease term. Depreciation and amortization expense for the years
ended December 31, 2001, 2002 and 2003 totaled
$4.8 million, $2.1 million, and $3.8 million,
respectively.

h. Goodwill and Other Intangibles.
Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangibles.Intangible assets that
are acquired individually or with a group of other assets (but
not those acquired in a business combination) are initially
recorded and measured at their fair value. Costs of internal
developing, maintaining, or restoring intangible assets that are
not specifically identifiable, that have indeterminate lives, or
that are inherent in a continuing business and related to an
entity as a whole, are expensed as incurred. Intangible assets
with definite useful lives are amortized over such useful lives,
which range from three to five years, and are subject to tests
for impairment whenever events or changes in circumstances
indicate that impairment may exist. Acquired goodwill and
certain other intangible assets with indefinite lives, if any,
are not amortized. Instead goodwill and other indefinite-lived
intangible assets are subject to periodic (at least annual)
tests for impairment. For the periods presented the Company does
not have any indefinite-lived intangible assets, other than
goodwill. Impairment testing is performed in two steps:
(i) The Company assesses goodwill for a potential
impairment loss by comparing the fair value of its reporting
unit with its carrying value, and (ii) if an impairment is
indicated because the reporting units fair value is less
than its carrying amount, the Company measures the amount of
impairment loss by comparing the implied fair value of goodwill
with the carrying amount of that goodwill. The Company has
determined that it has one reporting unit and therefore, the
Companys annual impairment tests for goodwill are
performed at the consolidated level. As a result of its
assessment in 2002, the company recorded impairments of goodwill
and other intangibles of $9.0 million in 2002. The Company
also recorded a $4.2 million impairment of its goodwill in
2001 in accordance with, the then applicable accounting
standards.

i. Long-Lived Assets. The Company
monitors assets to be held and used for indications of
impairment. If indicated, the Company evaluates the carrying
value of the asset and records an impairment if and when the
carrying amount of a long-lived asset is not recoverable from
future estimated cash flows and exceeds its fair value. An asset
that is classified as held-for-sale is recorded at the lower of
its carrying amount or fair value less cost to sell.

In connection with the restructuring in the
fourth quarter of 2002, the Company recorded an $800,000
impairment for certain capitalized assets that were either
abandoned or are no longer in use and held for sale. No
impairments of long-lived assets were recorded in 2003 or 2001.

j. Revenue Recognition. Revenue from
sales of products is recognized upon shipment based upon the
Companys shipping terms, provided the Company has evidence
of an arrangement, the fee is fixed and collectibility is
probable.

The Company provides limited price protection to
its distributors, whereby increases in prices are subject to a
60-day notice period before becoming effective. In addition, the
distributor is entitled to receive a credit for subsequent price
decreases to the extent of unsold distributor inventory at the
time of the price decrease. The Company also provides its
distributors with limited stock rotation rights, whereby
products may be returned for an equal dollar amount of new or
different equipment. Customers are limited to three exchanges
per year and an amount equal to 15% of purchases in the
preceding four-month period. Neither of these rights affect the
total sales price or payment obligations of the customer. In
addition, the customers obligation to the Company is not

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contingent upon the ultimate resale of the
products. The Company provides for the estimated impact of
returns, price protection and stock rotation rights in its
allowance for estimated returns based on historical experience
and managements forecasts of price protection credits and
returns.


k. Research and Development Costs.
Research and development costs are charged to operations as
incurred, and consist primarily of internal personnel and
facility costs.

l. Income Taxes. Current income tax
expense (benefit) represents actual or estimated amounts payable
or receivable on tax return filings each year. Deferred tax
assets and liabilities are recorded for the estimated future tax
effects of temporary differences between the tax bases of assets
and liabilities and amounts reported in the accompanying balance
sheets, and for operating loss and tax credit carryforwards. The
change in deferred tax assets and liabilities for the period
measures the deferred tax provision or benefit for the period.
Effects of changes in enacted tax laws on deferred tax assets
and liabilities are reflected as adjustments to the tax
provision or benefit in the period of enactment. A valuation
allowance is required to reduce deferred tax assets if
management cannot conclude that realization of such assets is
more likely than not, as defined by SFAS No. 109,
Accounting for Income Taxes. In determining the need for
a valuation allowance, the Company considers its historical
taxable income, the expected reversal of temporary differences
and projections of future taxable income.

m. Earnings Per Share. Basic earnings
per share (EPS) is computed by dividing income or
loss by the weighted average number of common shares outstanding
during the period. Diluted EPS reflects basic EPS adjusted for
the potential dilution, computed using the treasury stock
method, that could occur if securities or other contracts to
issue common stock were exercised or converted and resulted in
the issuance of common stock.

A reconciliation of net income (loss) and
weighted average shares used in computing basic and diluted
earnings (loss) per share amounts is presented below.

|                                              |                                                 |                                 |                                                              |                                   |   |        |       |         |   |        |       |        |  |        |      | 
|--------------------------------------------- | ----------------------------------------------- | ------------------------------- | ------------------------------------------------------------ | --------------------------------- | - | ------ | ----- | ------- | - | ------ | ----- | ------ |  | ------ | ---- | 
|                                              |                                                 | 2001                            |                                                              | 2002                              |   | 2003  
|                                              |                                                 |                                 |                                                              |                                   |   |       
|                                              |                                                 |                                
|                                              |                                                 | (in thousands, except per share
|                                              |                                                 | amounts)                       
|Basic earnings (loss) per share computation   |                                                 |                                 |                                                              |                                   |   |        |       |         |   |        |       |       
|                                              | Net income (loss)                               |                                 | $                                                            | (14,855                           | ) |        | $     | (52,655 | ) |        | $     | 2,458  | 
|                                              |                                                 |                                 |                                                              |                                   |   |        |       |         |   |        |       |       
|                                              | Weighted average shares outstanding 
    basic |                                 |                                                              | 24,695                            |   |        |       | 24,754  |   |        |       | 24,815 | 
|                                              |                                                 |                                 |                                                              |                                   |   |        |       |         |   |        |       |       
|                                              |                                                 |                                 |                                                              | Basic earnings (loss) per share   |   | $      | (0.60 | )       |   | $      | (2.13 | )      |  | $      | 0.10 | 
|                                              |                                                 |                                 |                                                              |                                   |   |        |       |         |   |        |       |       
|Diluted earnings (loss) per share computation |                                                 |                                 |                                                              |                                   |   |        |       |         |   |        |       |       
|                                              | Net income (loss)                               |                                 | $                                                            | (14,855                           | ) |        | $     | (52,655 | ) |        | $     | 2,458  | 
|                                              |                                                 |                                 |                                                              |                                   |   |        |       |         |   |        |       |       
|                                              |                                                 | Weighted-average shares         |                                                              |                                   |   |        |       |         |   |        |       |        |  |       
|                                              |                                                 |                                 | Average shares outstanding-basic                             |                                   |   | 24,695 |       |         |   | 24,754 |       |        |  | 24,815 |     
|                                              |                                                 |                                 | Shares assumed issued through exercises of stock
    options |                                   |   |       |       |         |   |       |       |        |  | 1,730  |     
|                                              |                                                 |                                 |                                                              |                                   |   |        |       |         |   |        |       |       
|                                              |                                                 |                                 | Average shares outstanding-diluted                           |                                   |   | 24,695 |       |         |   | 24,754 |       |        |  | 26,545 |     
|                                              |                                                 |                                 |                                                              |                                   |   |        |       |         |   |        |       |       
|                                              |                                                 |                                 |                                                              | Diluted earnings (loss) per share |   | $      | (0.60 | )       |   | $      | (2.13 | )      |  | $      | 0.09 | 
|                                              |                                                 |                                 |                                                              |                                   |   |        |       |         |   |        |       |       

As a result of the Companys net losses for
the years ended December 31, 2001 and 2002, all potential
dilutive securities were anti-dilutive and therefore have been
excluded from the computation of diluted loss per share. The
number of shares excluded from computation of diluted net loss
per share because their effect is anti-dilutive totaled
2,996,580 for 2001, 3,589,395 for 2002, and 1,459,107 for 2003.

n. Stock-Based Compensation. In
December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure  an amendment of
FASB Statement No. 123. This Statement provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement

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123 to require prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results.


The following table summarizes relevant
information as to reported results under our intrinsic value
method of accounting for stock awards, with supplemental
information as if the fair value recognition provisions of
SFAS 123, Accounting for Stock Based Compensationhad been applied to each of the years in the three-year
period ended December 31, 2003 (in thousands, except per
share amounts):

|                                                                                                         |  |                         |         |      |  |      |         |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                                                                         |  |                        
|                                                                                                         |  | Year Ended December 31,
|                                                                                                         |  |                        
|                                                                                                         |  | 2001                    |         | 2002 |  | 2003
|                                                                                                         |  |                         |         |      |  |     
|                                                                                                         |  |                        
|                                                                                                         |  | (In thousands)         
|Net income (loss)                                                                                        |  | $                       | (14,855 | )    |  | $    | (52,655 | ) |  | $ | 2,458  |  
|Add back: Stock-based employee compensation
    expense, as reported                                     |  |                         | 449     |      |  |      | 199     |   |  |   | 53     |  
|Deduct: Stock-based employee compensation
    expense, determined under fair value method for all awards |  |                         | (9,605  | )    |  |      | (3,349  | ) |  |   | (2,233 | )
|                                                                                                         |  |                         |         |      |  |      |         |   |  |   |        |  
|Net income (loss)                                                                                        |  | $                       | (24,011 | )    |  | $    | (55,805 | ) |  | $ | 278    |  
|                                                                                                         |  |                         |         |      |  |      |         |   |  |   |        |  
|Income (loss) per share  basic, as
    reported                                                         |  | $                       | (0.60   | )    |  | $    | (2.13   | ) |  | $ | 0.10   |  
|Income (loss) per share  diluted, as
    reported                                                       |  | $                       | (0.60   | )    |  | $    | (2.13   | ) |  | $ | 0.09   |  
|Income (loss) per share  basic and
    diluted, as adjusted                                             |  | $                       | (0.97   | )    |  | $    | (2.25   | ) |  | $ | 0.01   |  

The weighted average fair values of options
granted during 2001, 2002 and 2003 were $5.76, $1.94 and
$4.13 per share, respectively, using the Black-Scholes
option-pricing model with the following assumptions: no expected
dividends, 106% volatility in 2001, 316% volatility in 2002 and
111% volatility in 2003, expected life of the options of five
years in 2001, 2002 and 2003 and a risk-free interest rate of
3.8% for 2001, 3.0% for 2002 and 3.1% for 2003.

o. Warranty Costs. The Company
provides warranties of various lengths to customers depending on
the specific product and the terms of the customer purchase
agreements. The Company has accrued for its warranty obligations
based on historical experience and managements estimate of
future warranty costs to be incurred. Charges and accruals to
the warrant liability are summarized as follows:

|                                             |  |                         |        |      |  |      |      |   |  |   |      |  
|-------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                             |  |                        
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  | 2001                    |        | 2002 |  | 2003
|                                             |  |                         |        |      |  |     
|                                             |  |                        
|                                             |  | (In thousands)         
|Warranty Liability                           |  |                         |        |      |  |      |      |   |  |   |      |  
|Product warranty liability beginning balance |  | $                       | 757    |      |  | $    | 599  |   |  | $ | 244  |  
|Add: Current year accruals                   |  |                         | 1,089  |      |  |      | 535  |   |  |   | 995  |  
|Deduct: Current year charges                 |  |                         | (1,247 | )    |  |      | (890 | ) |  |   | (829 | )
|                                             |  |                         |        |      |  |      |      |   |  |   |      |  
|Product warranty liability ending balance    |  | $                       | 599    |      |  | $    | 244  |   |  | $ | 410  |  
|                                             |  |                         |        |      |  |      |      |   |  |   |      |  

p. Comprehensive Income (Loss).
Comprehensive income (loss) consists of net income (loss),
adjusted for the change in net unrealized holding gains or
losses on available for sale securities.

q. Reclassifications. Certain
reclassifications have been made in the 2001 and 2002 financial
statements to conform to the 2003 presentation.

r. Exit and Disposal Activities. In
June 2002, FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities.
SFAS No. 146 supercedes EITF 94-3. Under
EITF 94-3, a liability for an exit cost, as defined, was
recognized at the date of an entitys commitment to an exit
plan. SFAS No. 146 eliminates the definition and
requirements for recognition of exit costs in EITF 94-3,
and concludes that an entitys commitment to a plan, by
itself, does not create a present obligation to others that
meets the definition of a liability. SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred.
SFAS No. 146 also establishes that fair value is the
objective for initial

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measurement of the liability. The Company is
required to apply the provisions of SFAS No. 146 to
exit or disposal activities that are initiated after
December 31, 2002.


In December 2002, the Company completed a
restructuring plan in accordance with EITF 94-3 designed to
reduce its expenses to be more in line with anticipated revenue.
Included in this plan were reductions in salary-related
expenses, facility closures or downsizing, and disposal of
excess or unused assets. As a result of these expense
reductions, the Company took a charge in the fourth quarter of
2002 of $2.0 million. The charge will result in an
aggregate $2.0 million cash outlay. The Company paid
approximately $400,000 of this charge in the fourth quarter of
2002 and approximately $418,000 in the first quarter of 2003,
including $264,000 for severance expenses related to the
elimination of 35 positions during the first quarter of 2003.
During the second, third, and fourth quarters of 2003, the
Company paid out an additional $217,000, $219,000, and $196,000
respectively in connection with the restructuring plan. The
majority of the remaining cash disbursements related to the
restructuring plan will be paid by December 31, 2004. The
Company made no changes to its restructuring plan assumptions
during 2003.

Restructuring reserve activity resulting from the
2002 fourth quarter restructuring plan for 2003 is detailed
below (in thousands):

|     |  |                   |       |               |  |          |       |                |  |   |        |   |  |   |       | 
|---- |  | ----------------- | ----- | ------------- |  | -------- | ----- | -------------- |  | - | ------ | - |  | - | ----- | 
|     |  | Beginning Reserve |       | Restructuring |  |          |       | Ending Reserve
|     |  | Balance           |       | Charges       |  | Payments |       | Balance       
|     |  |                   |       |               |  |          |       |               
|2002 |  |                   |      |               |  | $        | 1,986 |                |  | $ | (400   | ) |  | $ | 1,586 | 
|2003 |  | $                 | 1,586 |               |  |          |      |                |  | $ | (1,050 | ) |  | $ | 536   | 

2.     Acquisitions

On November 25, 2003 Carrier Access
Corporation completed its acquisition of Paragon Networks
International, Inc Paragon. Management believes
the addition of Paragons products complements the
Companys own product portfolio by increasing the breadth
of its product offerings, as well as adding new customers. The
Company believes the acquisition will strengthen its position in
the wireless market and provide for synergies in revenue and
operating expenses. In exchange for all outstanding shares of
Paragon capital stock, Carrier issued 1,334,521 shares of
Carrier Access common stock and $411,000 in cash to Paragon
stockholders. All outstanding Paragon options and warrants were
cancelled as part of the transaction. Carrier Access accounted
for the transaction using the purchase method of accounting. The
results of Paragons operations have been included in the
consolidated financial statements since November 25, 2003.

The aggregate purchase price was approximately
$20.6 million, consisting of cash and Carrier Access common
stock issued, valued using the average closing price as of
November 25, 2003 and the two days before and after, and
other costs directly related to the acquisition as follows (in
thousands):

|                                      |  |   |        | 
|------------------------------------- |  | - | ------ | 
|Cash                                  |  | $ | 411    | 
|Carrier Access stock issued to seller |  |   | 19,163 | 
|Estimated acquisition related costs   |  |   | 1,022  | 
|                                      |  |   |        | 
|Total Consideration                   |  | $ | 20,596 | 
|                                      |  |   |        | 

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The following table summarizes the estimated fair
value of the assets acquired and liabilities assumed at the date
of acquisition. The price paid was greater than the net assets
and liabilities due the expected increase in future revenues and
cash flows from the Paragon products and customer base.

|                                      |  |                   |        |  
|------------------------------------- |  | ----------------- | ------ | -
|                                      |  | November 25, 2003
|                                      |  |                  
|Current assets:                       |  |                   |        |  
|Cash and cash equivalents             |  | $                 | 1,446  |  
|Accounts receivable                   |  |                   | 1,885  |  
|Inventories                           |  |                   | 3,751  |  
|Other current assets                  |  |                   | 214    |  
|Fixed assets                          |  |                   | 572    |  
|Other assets                          |  |                   | 42     |  
|Accounts payable and accrued expenses |  |                   | (1,862 | )
|Developed product technology          |  |                   | 2,500  |  
|Backlog                               |  |                   | 200    |  
|Customer relationships                |  |                   | 5,100  |  
|Goodwill                              |  |                   | 6,748  |  
|                                      |  |                   |        |  
|Total consideration                   |  | $                 | 20,596 |  
|                                      |  |                   |        |  

In connection with the acquisition, the Company
acquired approximately $6.3 million of net deferred tax
assets, comprised of deferred tax assets related primarily to
net operating loss and tax credit carryforwards and deferred tax
liabilities related to the intangible assets acquired.

In addition, the Company paid approximately
$1.0 million to the employees of Paragon. Of this
approximately $670,000 was capitalized as part of the
acquisition cost as it required no future performance, while
approximately $330,000 related to retention bonuses which were
expensed in 2003 as the service obligations were completed. The
Company also incurred approximately $350,000 of direct
acquisition costs.

The amount allocated to developed product
technology, backlog and customer relationships were determined
by an independent appraisal using established valuation
techniques in the high-technology communications industry.

The goodwill acquired in connection with the
acquisition is not subject to amortization. Instead, it will be
subject to periodic (at least annual) tests for impairment (see
note 1(h)). The acquired intangible assets with definite
lives are subject to tests for impairment whenever events or
changes in circumstances indicate that impairment may exist, and
are being amortized over their useful lives as follows:

|                             |  |  |          | 
|---------------------------- |  |  | -------- | 
|Developed product technology |  |  | 5 Years  | 
|Backlog                      |  |  | 3 Months | 
|Customer Relationships       |  |  | 7 Years  | 

Amortization expense for year ended
December 31, 2003 was $262,000. Estimated amortization
expense for the next five years is as follows:

|                             |  |        |  |        |  |        |  |       
|---------------------------- |  | ------ |  | ------ |  | ------ |  | ------
|                            
|For Years ended December 31,
|                            
|2004                         |  | 2005   |  | 2006   |  | 2007   |  | 2008  
|                             |  |        |  |        |  |        |  |       
|$1,362                       |  | $1,236 |  | $1,236 |  | $1,236 |  | $1,194

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The following unaudited pro forma financial
statements have been prepared to give effect to the acquisition
of Paragon Networks International, Inc. These pro forma
condensed combined consolidated financial statements were
prepared as if the acquisition had been completed as of
January 1, 2002 and as of January 1, 2003 for purposes
of the statement of operations.

Unaudited Pro Forma Condensed Combined
Statement of Operations

|                                            |  |                       |         |      |  |   |        | 
|------------------------------------------- |  | --------------------- | ------- | ---- |  | - | ------ | 
|                                            |  |                      
|                                            |  | For the Twelve Months
|                                            |  | Ended December 31,   
|                                            |  |                      
|                                            |  | 2002                  |         | 2003
|                                            |  |                       |         |     
|                                            |  |                      
|                                            |  | (In thousands, except
|                                            |  | per share data)      
|Net revenue                                 |  | $                     | 63,231  |      |  | $ | 76,367 | 
|Cost of goods sold                          |  |                       | 40,872  |      |  |   | 42,222 | 
|                                            |  |                       |         |      |  |   |        | 
|Gross profit                                |  |                       | 22,359  |      |  |   | 34,145 | 
|                                            |  |                       |         |      |  |   |        | 
|Net income (loss)                           |  | $                     | (60,239 | )    |  | $ | 865    | 
|                                            |  |                       |         |      |  |   |        | 
|Income (loss) per share                     |  |                       |         |      |  |   |        | 
|Basic                                       |  | $                     | (2.31   | )    |  | $ | .03    | 
|                                            |  |                       |         |      |  |   |        | 
|Diluted                                     |  | $                     | (2.31   | )    |  | $ | .03    | 
|                                            |  |                       |         |      |  |   |        | 
|Weighted average common shares outstanding: |  |                       |         |      |  |   |        | 
|Basic                                       |  |                       | 26,089  |      |  |   | 26,150 | 
|                                            |  |                       |         |      |  |   |        | 
|Diluted                                     |  |                       | 26,089  |      |  |   | 27,880 | 
|                                            |  |                       |         |      |  |   |        | 

3.     Inventory

The components of inventory as of
December 31 are summarized as follows (in thousands):

|                         |  |      |        |      |  |   |        |  
|------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                         |  | 2002 |        | 2003
|                         |  |      |        |     
|Raw materials            |  | $    | 23,623 |      |  | $ | 26,916 |  
|Work-in-process          |  |      |       |      |  |   | 11     |  
|Finished goods           |  |      | 6,676  |      |  |   | 5,009  |  
|Reserve for obsolescence |  |      | (6,165 | )    |  |   | (5,801 | )
|                         |  |      |        |      |  |   |        |  
|                         |  | $    | 24,134 |      |  | $ | 26,135 |  
|                         |  |      |        |      |  |   |        |  

4.     Property and
Equipment

Property and equipment as of December 31
consisted of the following (in thousands):

|                                                                 |  |      |         |      |  |   |         |  
|---------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                                                 |  | 2002 |         | 2003
|                                                                 |  |      |         |     
|Machinery and software (5 and 3 years
    respectively)          |  | $    | 18,036  |      |  | $ | 19,206  |  
|Real property (30 years)                                         |  |      | 265     |      |  |   | 265     |  
|Furniture, fixtures and other (7 years)                          |  |      | 753     |      |  |   | 823     |  
|Leasehold improvements (shorter of 7 years
    or live of lease) |  |      | 2,154   |      |  |   | 2,256   |  
|                                                                 |  |      |         |      |  |   |         |  
|                                                                 |  |      | 21,208  |      |  |   | 22,550  |  
|Less accumulated depreciation and amortization                   |  |      | (11,746 | )    |  |   | (15,538 | )
|                                                                 |  |      |         |      |  |   |         |  
|                                                                 |  | $    | 9,462   |      |  | $ | 7,012   |  
|                                                                 |  |      |         |      |  |   |         |  

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5.     Goodwill and
Other Intangibles

Effective January 1, 2002, the Company
adopted SFAS No. 142. During the third quarter of
2002, the Companys analysis of implied goodwill versus
expected revenue and market value showed that the carrying value
of goodwill exceeded its fair value due to reduced revenue and
cash flow forecasts. As a result, the Company recorded an
impairment charge of $9 million against its goodwill.

Had the Company applied the provisions of
SFAS No. 142 to all periods presented, net income
(loss) and earnings (loss) per share would have been as follows:

|                                                            |  |                      |         |  
|----------------------------------------------------------- |  | -------------------- | ------- | -
|                                                            |  | 2001                
|                                                            |  |                     
|                                                            |  | (in thousands except
|                                                            |  | per share amounts)  
|Net income (loss) available to stockholders as
    reported |  | $                    | (14,855 | )
|Add back goodwill amortization                              |  |                      | 2,458   |  
|                                                            |  |                      |         |  
|Adjusted net income (loss) available to
    stockholders    |  | $                    | (12,397 | )
|                                                            |  |                      |         |  
|Basic and diluted loss per share, as reported               |  | $                    | (0.60   | )
|                                                            |  |                      |         |  
|Basic and diluted loss per share, as adjusted               |  | $                    | (0.50   | )
|                                                            |  |                      |         |  

During the third quarter of 2001, due to a
decline in projected demand for certain of the Companys
acquired product lines, the Company determined that a portion of
its goodwill was impaired. As a result, the Company recorded an
impairment charge of $4.2 million.

6.     Income
Taxes

Income tax expense (benefit) for the years ended
December 31 (in thousands) consists of the following:

|         |                              |      |        |         |   |      |        |       |  |   |     |     |  
|-------- | ---------------------------- | ---- | ------ | ------- | - | ---- | ------ | ----- |  | - | --- | --- | -
|         |                              | 2001 |        | 2002    |   | 2003
|         |                              |      |        |         |   |     
|Current  |                              | $    | (8,553 | )       |   | $    | (6,217 | )     |  | $ | (89 | )  
|Deferred |                              |      | (2,008 | )       |   |      | 7,319  |       |  |   |    |    
|         |                              |      |        |         |   |      |        |       |  |   |     |    
|         | Income tax expense (benefit) |      | $      | (10,561 | ) |      | $      | 1,102 |  |   | $   | (89 | )
|         |                              |      |        |         |   |      |        |       |  |   |     |    

A reconciliation of expected income tax expense
(benefit) calculated by applying the statutory Federal tax rate
to actual income tax expense (benefit) for the years ended
December 31 is as follows (in thousands):

|                                         |                                     |      |        |         |   |      |         |       |  |   |        |     |  
|---------------------------------------- | ----------------------------------- | ---- | ------ | ------- | - | ---- | ------- | ----- |  | - | ------ | --- | -
|                                         |                                     | 2001 |        | 2002    |   | 2003
|                                         |                                     |      |        |         |   |     
|Expected income tax expense (benefit)    |                                     | $    | (8,792 | )       |   | $    | (18,044 | )     |  | $ | 829    |    
|State income taxes, net of federal taxes |                                     |      | (670   | )       |   |      | (1,195  | )     |  |   | 67     |    
|Change in valuation allowance            |                                     |      |       |         |   |      | 17,109  |       |  |   | (1,083 | )  
|Non-deductible goodwill                  |                                     |      | 711    |         |   |      | 2,497   |       |  |   |       |    
|Research and experimentation credit      |                                     |      | (1,397 | )       |   |      |        |       |  |   |       |    
|Other, net                               |                                     |      | (413   | )       |   |      | 735     |       |  |   | 98     |    
|                                         |                                     |      |        |         |   |      |         |       |  |   |        |    
|                                         | Actual income tax expense (benefit) |      | $      | (10,561 | ) |      | $       | 1,102 |  |   | $      | (89 | )
|                                         |                                     |      |        |         |   |      |         |       |  |   |        |    

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The tax effects of significant temporary
differences that result in deferred tax assets and liabilities
at December 31 are as follows (in thousands):

|                               |                                                 |                                       |   |         |        |   |   |         |        |  
|------------------------------ | ----------------------------------------------- | ------------------------------------- | - | ------- | ------ | - | - | ------- | ------ | -
|                               |                                                 | 2002                                  |   | 2003   
|                               |                                                 |                                       |   |        
|Deferred tax assets:           |                                                 |                                       |   |         |        |   |   |        
|                               | Allowance for doubtful accounts and returns     |                                       | $ | 1,159   |        |   | $ | 332     |       
|                               | Inventory reserves                              |                                       |   | 2,461   |        |   |   | 3,521   |       
|                               | Restructuring reserve                           |                                       |   | 865     |        |   |   | 202     |       
|                               | Compensation accruals                           |                                       |   | 1,476   |        |   |   | 1,480   |       
|                               | Amortization of goodwill related to acquisition |                                       |   | 2,555   |        |   |   | 2,352   |       
|                               | Net operating loss carryforwards                |                                       |   | 5,509   |        |   |   | 14,174  |       
|                               | Research and experimentation credit             |                                       |   | 4,306   |        |   |   | 4,306   |       
|                               | Other                                           |                                       |   | 571     |        |   |   | 596     |       
|                               |                                                 |                                       |   |         |        |   |   |        
|                               | Gross deferred tax assets                       |                                       |   | 18,902  |        |   |   | 26,963  |       
|                               | Less: Valuation allowance                       |                                       |   | (17,109 | )      |   |   | (23,460 | )     
|                               |                                                 |                                       |   |         |        |   |   |        
|                               |                                                 | Total deferred income tax assets      |   |         | 1,793  |   |   |         | 3,503  |  
|                               |                                                 |                                       |   |         |        |   |   |        
|Deferred tax liabilities:      |                                                 |                                       |   |         |        |   |   |        
|                               | Property and equipment                          |                                       |   | (1,681  | )      |   |   | (166    | )     
|                               | Paragon identifiable intangibles                |                                       |   | 0       |        |   |   | (3,205  | )     
|                               | Other                                           |                                       |   | (112    | )      |   |   | (132    | )     
|                               |                                                 |                                       |   |         |        |   |   |        
|                               |                                                 | Total deferred income tax liabilities |   |         | (1,793 | ) |   |         | (3,503 | )
|                               |                                                 |                                       |   |         |        |   |   |        
|Net deferred income tax assets |                                                 | $                                     |  |         |        | $ |  |        
|                               |                                                 |                                       |   |         |        |   |   |        

The components of deferred tax assets and
liabilities at December 31 are as follows:

|                                                  |  |                |        |      |  |   |        |  
|------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                  |  | 2002           |        | 2003
|                                                  |  |                |        |     
|                                                  |  |               
|                                                  |  | (In thousands)
|Current assets                                    |  | $              |       |      |  | $ |       |  
|Current liabilities                               |  |                |       |      |  |   |       |  
|                                                  |  |                |        |      |  |   |        |  
|Net current deferred tax assets (liabilities)     |  | $              |       |      |  | $ |       |  
|                                                  |  |                |        |      |  |   |        |  
|Non-current assets                                |  | $              | 1,793  |      |  | $ | 3,503  |  
|Non-current liabilities                           |  |                | (1,793 | )    |  |   | (3,503 | )
|                                                  |  |                |        |      |  |   |        |  
|Net non-current deferred tax assets (liabilities) |  | $              |       |      |  | $ |       |  
|                                                  |  |                |        |      |  |   |        |  

The Company acquired $6.3 million of net
deferred tax assets in connection with the acquisition of
Paragon including $9.1 million related to net operating
loss carryforwards and $3.0 million of deferred tax
liabilities associated with acquired intangible assets. Due to
the uncertainty regarding the realization of these net deferred
tax assets at the acquisition date, the Company recorded a
valuation allowance against the entire amount.

The Company incurred a $35.5 million net
operating loss for the period ending December 31, 2002. A
portion of this operating loss was carried back to obtain a
refund of prior tax paid. Accordingly, the Company received an
income tax refund of approximately $7.0 million in 2003.
The Company has approximately $38.3 million of remaining
net operating losses from the current and prior years for
Federal tax purposes. Of this, $24.1 million is from the
Paragon acquisition, and $14.2 million is related to
Carrier Access operations. With respect to the net operating
loss carryforwards from Paragon, $3.7 million may be used
to offset consolidated taxable income in 2004. The remaining
$20.4 million is restricted to $1.4 million per year
by section 382 of the Internal Revenue Code. The
$14.2 million of net operating loss carryforwards related
to Carrier Access operations has no limitations as to its annual
usage.

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Net operating loss carryforwards of approximately
$58.9 million for state tax purposes may be carried forward
to offset future taxable income depending on state legislative
restrictions. At December 31, 2003 the Company has a
research and experimentation credit carry forward of
approximately $4.3 million that will begin to expire in the
year 2021, if not utilized.

In 2002, the Company analyzed the sources and the
expected reversal periods of its deferred tax assets, and
determined that they did not meet the realization criteria under
generally accepted accounting principles. Accordingly, the
Company has established a valuation allowance of
$17.1 million and $23.5 million as of
December 31, 2002 and 2003 respectively. In the future,
should management conclude that these deferred tax assets are,
at least in part, realizable, the valuation allowance will be
reversed to the extent of such realization. In general the
reversal of the valuation allowance, if any, would be recognized
as a deferred income tax benefit in the statement of operations.
However, the valuation allowance at December 31, 2003
includes a reserve established at the time of the Paragon
acquisition related to net deferred tax assets acquired of
approximately $6.3 million. Should the Company reverse the
valuation allowance with respect to the acquired net deferred
tax assets, it will be reflected as a decrease in the carrying
amount of acquired goodwill.

The Company may realize tax deductions resulting
from certain exercises of employee stock options. The excess of
tax benefits realized from such exercises over the amount of
stock compensation expense recorded in the Companys
financial statements is generally reflected as an increase to
additional paid-in capital. The Company recorded $127,000 of
such tax benefit in 2001. In addition, a portion of the
Companys net operating loss carryforward relates to such
tax deductions in 2002 and 2003. Should the Company reverse the
$1.1 million valuation allowance related to these
stock-based compensation benefits, it will be reflected as an
increase to additional paid-in capital.

7.     Stock
Options

Pursuant to the Companys 1998 stock option
plan (the Plan), a committee appointed by the
Companys Board of Directors may grant incentive and
nonqualified options to employees, consultants and directors.
The Plan currently authorizes the grant of options to purchase
up to 8,092,514 shares of authorized common stock.
Incentive stock options have a ten-year term and non-qualified
stock options have a five-year term. A majority of the stock
options vest 25% on the first anniversary date of the grant and
6.25% each quarter thereafter, with the remaining stock options
vesting 100% four years from the grant date. As of
December 31, 2003, the Company had outstanding options to
purchase 3,799,623 shares of common stock, and had options
to purchase 1,884,820 shares of common stock available to
grant.

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The following summarizes stock option activity
under the Plan:

|                                                     |                        |              |           |                |   |   |       |       | 
|---------------------------------------------------- | ---------------------- | ------------ | --------- | -------------- | - | - | ----- | ----- | 
|                                                     |                        |              |           | Weighted      
|                                                     |                        | Shares       |           | Average       
|                                                     |                        | Under Option |           | Exercise Price
|                                                     |                        |              |           |               
|Options outstanding at December 31, 2000             |                        |              | 2,724,444 |                |   | $ | 27.36 |      
|                                                     | Granted                |              |           | 2,603,250      |   |   |       | 5.76  | 
|                                                     | Exercised              |              |           | (66,955        | ) |   |       | 0.84  | 
|                                                     | Forfeited and canceled |              |           | (2,264,159     | ) |   |       | 27.50 | 
|                                                     |                        |              |           |                |   |   |       |      
|Options outstanding at December 31, 2001             |                        |              | 2,996,580 |                |   |   | 9.05  |      
|                                                     |                        |              |           |                |   |   |       |      
|                                                     | Granted                |              |           | 2,534,423      |   |   |       | 1.94  | 
|                                                     | Exercised              |              |           | (30,546        | ) |   |       | 0.46  | 
|                                                     | Forfeited              |              |           | (1,911,062     | ) |   |       | 6.69  | 
|                                                     |                        |              |           |                |   |   |       |      
|Options outstanding at December 31, 2002             |                        |              | 3,589,395 |                |   |   | 5.36  |      
|                                                     |                        |              |           |                |   |   |       |      
|                                                     | Granted                |              |           | 2,028,500      |   |   |       | 4.50  | 
|                                                     | Exercised              |              |           | (482,190       | ) |   |       | 3.32  | 
|                                                     | Forfeited and canceled |              |           | (1,336,082     | ) |   |       | 5.74  | 
|                                                     |                        |              |           |                |   |   |       |      
|Options outstanding at December 31, 2003             |                        |              | 3,799,623 |                |   |   | 5.03  |      
|                                                     |                        |              |           |                |   |   |       |      
|Options available for grant at December 31,
    2003 |                        |              | 1,884,820 |                |   |   |       |      
|Options exercisable at December 31, 2001             |                        |              | 365,739   |                |   |   | 14.69 |      
|                                                     |                        |              |           |                |   |   |       |      
|Options exercisable at December 31, 2002             |                        |              | 1,171,654 |                |   |   | 9.21  |      
|                                                     |                        |              |           |                |   |   |       |      
|Options exercisable at December 31, 2003             |                        |              | 1,197,602 |                |   | $ | 6.18  |      
|                                                     |                        |              |           |                |   |   |       |      

The following summarizes information about
outstanding options at December 31, 2003:

|                |                |                     |  |                     |           |                  |  |             |     |                  |  |   |       |  |  |  |           |  |  |   |       | 
|--------------- | -------------- | ------------------- |  | ------------------- | --------- | ---------------- |  | ----------- | --- | ---------------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |                |                     |  |                     |           |                 
|                |                | Options Outstanding |  |                    
|                |                |                     |  | Options Exercisable
|                |                |                     |  | Weighted-average    |           |                  |  |            
|                |                | Number of           |  | remaining           |           |                  |  | Number of   |     |                 
|Range of        |                | options             |  | contractual life    |           | Weighted-average |  | options     |     | Weighted-average
|exercise prices |                | outstanding         |  | (in years)          |           | Exercise price   |  | exercisable |     | exercise price  
|                |                |                     |  |                     |           |                  |  |             |     |                 
|                | $0.00  12.00  |                     |  |                     | 3,195,673 |                  |  |             | 3.5 |                  |  | $ | 2.60  |  |  |  | 1,082,934 |  |  | $ | 3.81  | 
|                | 12.00  24.00  |                     |  |                     | 533,000   |                  |  |             | 4.5 |                  |  |   | 14.44 |  |  |  | 52.936    |  |  |   | 12.07 | 
|                | 24.00  36.00  |                     |  |                     | 14,500    |                  |  |             | 1.1 |                  |  |   | 34.12 |  |  |  | 13,155    |  |  |   | 34.16 | 
|                | 36.00  48.00  |                     |  |                     | 22,500    |                  |  |             | 1.4 |                  |  |   | 37.52 |  |  |  | 22,218    |  |  |   | 37.40 | 
|                | $48.00  60.00 |                     |  |                     | 33,950    |                  |  |             | 1.1 |                  |  |   | 51.58 |  |  |  | 26,359    |  |  |   | 51.57 | 
|                |                |                     |  |                     |           |                  |  |             |     |                  |  |   |       |  |  |  |           |  |  |   |       | 
|                |                |                     |  |                     | 3,799,623 |                  |  |             | 3.6 |                  |  | $ | 5.03  |  |  |  | 1,197,602 |  |  | $ | 6.18  | 
|                |                |                     |  |                     |           |                  |  |             |     |                  |  |   |       |  |  |  |           |  |  |   |       | 

As discussed in Note 1, the Company applies
APB 25 and related interpretations in accounting for stock
options issued to employees and directors. As a result, for
options issued with exercise prices below the fair value on the
date of grant, the Company recorded deferred compensation
expense totaling approximately $1,227,000 for options granted
during the year ended December 31, 1997, and $1,921,000 for
options granted during the year ended December 31, 1998.
Such deferred compensation expense was amortized to operations
over the forty-eight month option vesting period. Amortization
expense totaled approximately $449,000, $199,000 and $53,000 for
the years ended December 31, 2001, 2002, and 2003
respectively. The Company reversed $510,000, $202,000 and $0 in
2001, 2002, and 2003 respectively, against additional paid-in
capital for forfeitures of deferred stock compensation related
to stock options issued at less than fair value.

Beginning August 20, 2001, the Company
offered eligible employees who held stock options with a price
greater than or equal to $10.00 per share under the Plan
the opportunity to exchange certain outstanding options

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to purchase shares of Carrier Access common stock
for new options granted on March 20, 2002. The options
issued on March 20, 2002 had strike prices equal to the
fair value of the underlying stock on that date. Eligible
employees who participated in the option exchange received a
number of shares subject to new options for every share subject
to the options tendered which varied according to the most
recent performance rating received by the employee under the
Companys performance rating system. Options to purchase a
total of 1,781,619 shares with an aggregate exercise price
of $4.6 million as of September 18, 2001 were
exchanged pursuant to the offer.


In addition to options issued to employees and
directors, the Company issued options to purchase
62,500 shares of common stock to consultants for services
during the year ended December 31, 2001. These options have
exercise prices from $2.80 to $6.50 per share, are
exercisable at the date of grant and expire at various dates
from January 2, 2006 to October 16, 2006. The fair
value of these options was determined to be $127,000 and was
recognized in general and administrative expense. The fair value
was calculated using the Black-Scholes option-pricing model with
the following assumptions: risk-free interest rate of 3.81%;
contractual life of five years; no dividend yield; and 102%
volatility. As of December 31, 2003 none of these options
have been exercised. There were no options issued to consultants
for services in 2002.

In 2003, the Company issued options to purchase
25,000 shares of common stock to consultants for services
during the year. These options had an exercise price of
$0.77 per share and were immediately exercisable. The fair
market value of these options was determined to be $24,000 and
was recognized in general and administrative expense. The fair
value was calculated using the Black-Scholes option pricing
model with the following assumptions: risk-free interest rate of
3.0% contractual lives of five years; no dividend yield; and
111% volatility. These options were exercised on April 11,
2003.

8.     Significant
Customers, Suppliers and Concentration of Credit Risk

Customers are primarily distributors and original
equipment manufacturers, who resell the Companys products
to end-users.

The Company recognized revenue from the following
significant customers and end-users for the years ended
December 31 (in thousands):

|        |  |      |        |      |  |      |       |  |  |   |        | 
|------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ------ | 
|Company |  | 2001 |        | 2002 |  | 2003
|        |  |      |        |      |  |     
|A       |  | $    | 95     |      |  | $    | 2,934 |  |  | $ | 10,633 | 
|B       |  |      | 23,716 |      |  |      | 6,766 |  |  |   | 7,665  | 
|C       |  |      | 23,476 |      |  |      | 8,212 |  |  |   | 6,970  | 
|D       |  |      | 0      |      |  |      | 977   |  |  |   | 6,925  | 
|E       |  |      | 12,405 |      |  |      | 2,888 |  |  |   | 283    | 

Although the Company generally uses standard
parts and components for its products, many key components are
purchased from sole or single source vendors for which
alternative sources may not currently be available. The
identification and utilization of new suppliers for such items
could adversely effect the Companys future operating
results.

The Company is exposed to potential
concentrations of credit risk from its accounts receivable with
its various customers and receivables are concentrated in
customers in the telecommunications industry. To reduce this
risk, the Company has a policy of assessing the creditworthiness
of its customers and monitors the aging of its accounts
receivable for potential uncollectible accounts. An allowance is
recorded for estimate losses from writeoffs of uncollectible
accounts. Bad debt expense went from a $5.6 million expense
in 2002 to a $3.1 million recovery in 2003. In 2002, a
number of our customers filed for bankruptcy and one of our
distributors was experiencing financial difficulties which
caused a significant amount of accounts receivables to become
delinquent. In 2003, we were able to recover some of the
delinquent receivables and part of the accounts receivable
related to the bankruptcy

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9.     Employee
Benefit Plan

The Company has a defined contribution employee
benefit plan (the 401(k) Plan) under
Section 401(k) of the Internal Revenue Code which is
available to all employees who meet the 401(k) Plans
eligibility requirements. Employees may contribute up to the
maximum limits allowed by the Internal Revenue Code. At the
beginning of 2001, the Company began matching 50% of the
employees pre-tax contributions, up to 6% of each
participating employees annual salary. Effective
January 1, 2003, this matching contribution was suspended.
Contributions to the 401(k) Plan by the Company totaled
$860,000, $650,000 and $0, respectively, for the years ended
December 31, 2001, 2002, and 2003.

10.     Commitments
and Contingencies

The Company leases office space under various
noncancelable-operating leases that expire through 2009. The
Company also leases copiers under various capital leases which
expire in 2006. Future obligations under these leases are as
follows (in thousands):

|                         |  |   |       | 
|------------------------ |  | - | ----- | 
|Year ending December 31: |  |  
|                         |  |  
|2004                     |  | $ | 2,667 | 
|2005                     |  |   | 2,202 | 
|2006                     |  |   | 717   | 
|2007                     |  |   | 446   | 
|2008                     |  |   | 389   | 
|Thereafter               |  | $ | 98    | 
|                         |  |   |       | 

The Company records rent expense under
noncancelable operating leases using the straight-line method
after consideration of increases in rental payments over the
lease term, and records the difference between actual payments
and rent expense as deferred rent concessions.

The Company has placed non-cancellable certain
purchase orders for $12.7 million of inventory from certain
of its vendors for delivery in 2004. These orders are generally
placed up to 4 months in advance based on the lead time of
the inventory.

Rent expense for the years ended
December 31, 2001, 2002, and 2003 totaled
$1.5 million, and $1.9 million, and $1.6 million
respectively.

On December 28, 2001, SCI, Inc., a
contract manufacturer, filed a breach of contract claim for
$4.5 million against the Company in Alabama Circuit Court
based on an inventory-purchasing dispute. On September 18,
2002, this claim was settled and the Company entered into a
manufacturing arrangement for the Broadmore product.

On August 16, 2002, SMTC Manufacturing
Corporation of Colorado filed a breach of contract claim, and
other related claims, for a total of $13.4 million against
the Company in District Court, County of Adams, Colorado, based
on an inventory-purchasing dispute. On October 17, 2002,
the Company filed a breach of contract counterclaim, and other
related counterclaims, in District Court, County of Adams,
Colorado for $1.0 million. On December 5, 2002, the
Company amended its counterclaim to $27.0 million. The
Company currently has insufficient information to make an
estimate of the outcome of this litigation. As such, no
provision for any potential liability or asset that may result
has been made in the consolidated financial statements. The
Company intends to vigorously defend this lawsuit.

11.     Subsequent
Events

In February of 2004, the Company completed an
underwritten public offering of its common stock. The Company
sold a total of 6.9 million shares for $12.25 per
share. The Company received proceeds of $78.5 million, net
of underwriters commissions and other offering costs.

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12.     Quarterly
Financial Information (unaudited)

The following information summarizes selected
quarterly financial information for the two years ended
December 31, 2003 (in thousands, except per share data).

|                             |                                     |                                   |        |        |     |       |        |        |     |      |        |       |     |   |        |        |       |   |        |        |       | 
|---------------------------- | ----------------------------------- | --------------------------------- | ------ | ------ | --- | ----- | ------ | ------ | --- | ---- | ------ | ----- | --- | - | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                             |                                     |                                  
|                             |                                     | Quarter Ended December 31, 2003  
|                             |                                     |                                  
|                             |                                     | First                             |        | Second |     | Third |        | Fourth |     | Year
|                             |                                     |                                   |        |        |     |       |        |        |     |     
|Net revenue                  |                                     | $                                 | 11,203 |        |     | $     | 12,156 |        |     | $    | 15,927 |       |     | $ | 23,270 |        |       | $ | 62,556 |       
|Cost of sales                |                                     |                                   | 6,154  |        |     |       | 6,687  |        |     |      | 9,169  |       |     |   | 13,214 |        |       |   | 35,224 |       
|                             |                                     |                                   |        |        |     |       |        |        |     |      |        |       |     |   |        |        |       |   |        |       
|                             | Gross profit                        |                                   |        | 5,049  |     |       |        | 5,469  |     |      |        | 6,758 |     |   |        | 10,056 |       |   |        | 27,332 |      
|Operating expenses:          |                                     |                                   |        |        |     |       |        |        |     |      |        |       |     |   |        |        |       |   |        |       
|                             | Selling, general and administrative |                                   |        | 2,497  |     |       |        | 2,895  |     |      |        | 3,608 |     |   |        | 5,315  |       |   |        | 14,315 |      
|                             | Research and development            |                                   |        | 2,608  |     |       |        | 2,541  |     |      |        | 2,534 |     |   |        | 3,318  |       |   |        | 11,001 |      
|                             |                                     | Income (loss) from operations     |        |        | (56 | )     |        |        | 34  |      |        |       | 616 |   |        |        | 1,423 |   |        |        | 2,016 | 
|Other income, net            |                                     |                                   | 84     |        |     |       | 88     |        |     |      | 86     |       |     |   | 95     |        |       |   | 353    |       
|                             |                                     |                                   |        |        |     |       |        |        |     |      |        |       |     |   |        |        |       |   |        |       
|                             |                                     | Income (loss) before income taxes |        |        | 28  |       |        |        | 122 |      |        |       | 702 |   |        |        | 1,517 |   |        |        | 2,369 | 
|Income tax expense (benefit) |                                     |                                   | (89    | )      |     |       |       |        |     |      |       |       |     |   |       |        |       |   | (89    | )     
|                             |                                     |                                   |        |        |     |       |        |        |     |      |        |       |     |   |        |        |       |   |        |       
|                             | Net income (loss)                   |                                   | $      | 117    |     |       | $      | 122    |     |      | $      | 702   |     |   | $      | 1,517  |       |   | $      | 2,458  |      
|                             |                                     |                                   |        |        |     |       |        |        |     |      |        |       |     |   |        |        |       |   |        |       
|Income (loss) per share:     |                                     |                                   |        |        |     |       |        |        |     |      |        |       |     |   |        |        |       |   |        |       
|                             | Basic                               |                                   | $      | 0.00   |     |       | $      | 0.00   |     |      | $      | 0.03  |     |   | $      | 0.06   |       |   | $      | 0.10   |      
|                             | Diluted                             |                                   | $      | 0.00   |     |       | $      | 0.00   |     |      | $      | 0.03  |     |   | $      | 0.05   |       |   | $      | 0.09   |      

|                                  |                                     |                                 |         |         |        |       |         |         |       |      |         |         |        |   |        |        |     |   |         |         |       | 
|--------------------------------- | ----------------------------------- | ------------------------------- | ------- | ------- | ------ | ----- | ------- | ------- | ----- | ---- | ------- | ------- | ------ | - | ------ | ------ | --- | - | ------- | ------- | ----- | 
|                                  |                                     |                                
|                                  |                                     | Quarter Ended December 31, 2002
|                                  |                                     |                                
|                                  |                                     | First                           |         | Second  |        | Third |         | Fourth  |       | Year
|                                  |                                     |                                 |         |         |        |       |         |         |       |     
|Net revenue                       |                                     | $                               | 16,446  |         |        | $     | 11,806  |         |       | $    | 10,534  |         |        | $ | 11,461 |        |     | $ | 50,247  |        
|Cost of sales                     |                                     |                                 | 11,232  |         |        |       | 8,277   |         |       |      | 6,342   |         |        |   | 7,294  |        |     |   | 33,145  |        
|                                  |                                     |                                 |         |         |        |       |         |         |       |      |         |         |        |   |        |        |     |   |         |        
|                                  | Gross profit                        |                                 |         | 5,214   |        |       |         | 3,529   |       |      |         | 4,192   |        |   |        | 4,167  |     |   |         | 17,102  |      
|Operating expenses:               |                                     |                                 |         |         |        |       |         |         |       |      |         |         |        |   |        |        |     |   |         |        
|                                  | Selling, general and administrative |                                 |         | 10,520  |        |       |         | 11,522  |       |      |         | 14,906  |        |   |        | 8,693  |     |   |         | 45,641  |      
|                                  | Research and development            |                                 |         | 9,008   |        |       |         | 5,778   |       |      |         | 5,283   |        |   |        | 3,659  |     |   |         | 23,728  |      
|                                  | Income (loss) from operations       |                                 |         | (14,314 | )      |       |         | (13,771 | )     |      |         | (15,997 | )      |   |        | (8,185 | )   |   |         | (52,267 | )    
|                                  |                                     | Other income, net               |         |         | 242    |       |         |         | 223   |      |         |         | 128    |   |        |        | 121 |   |         |         | 714   | 
|                                  |                                     |                                 |         |         |        |       |         |         |       |      |         |         |        |   |        |        |     |   |         |        
|Income (loss) before income taxes |                                     |                                 | (14,072 | )       |        |       | (13,548 | )       |       |      | (15,869 | )       |        |   | (8,064 | )      |     |   | (51,553 | )      
|                                  |                                     | Income tax expense (benefit)    |         |         | (5,062 | )     |         |         | 7,221 |      |         |         | (1,016 | ) |        |        | (41 | ) |         |         | 1,102 | 
|                                  |                                     |                                 |         |         |        |       |         |         |       |      |         |         |        |   |        |        |     |   |         |        
|Net income (loss)                 |                                     | $                               | (9,010  | )       |        | $     | (20,769 | )       |       | $    | (14,853 | )       |        | $ | (8,023 | )      |     | $ | (52,655 | )      
|                                  |                                     |                                 |         |         |        |       |         |         |       |      |         |         |        |   |        |        |     |   |         |        
|Income (loss) per share:          |                                     |                                 |         |         |        |       |         |         |       |      |         |         |        |   |        |        |     |   |         |        
|                                  | Basic                               |                                 | $       | (0.37   | )      |       | $       | (0.84   | )     |      | $       | (0.60   | )      |   | $      | (0.32  | )   |   | $       | (2.13   | )    
|                                  | Diluted                             |                                 | $       | (0.37   | )      |       | $       | (0.84   | )     |      | $       | (0.60   | )      |   | $      | (0.32  | )   |   | $       | (2.13   | )    

54



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##### Table of Contents



13.     Valuation and
qualifying accounts

|                                             |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |   |        | 
|-------------------------------------------- | ----------- | ------------------ |  | ------------ | ------ | ------------ |  | ---------- | ------ | - |  |  | ------ | - |  | - | ------ | 
|                                             |             |                    |  | Additions    |        |              |  |           
|                                             |             | Balance at         |  | (Reductions) |        |              |  | Balance at
|                                             |             | Beginning          |  | Charged to   |        | Recoveries   |  | End of    
|                                             |             | of Period          |  | Operations   |        | (Write-offs) |  | Period    
|                                             |             |                    |  |              |        |              |  |           
|Allowance for doubtful accounts:             |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |  
|                                             | Year Ended: |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |   |       
|                                             |             | December 31, 2001* |  | $            | 653    |              |  |            | 679    |   |  |  |       |   |  | $ | 1,332  | 
|                                             |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |  
|                                             |             | December 31, 2002* |  | $            | 1,332  |              |  |            | 5,557  |   |  |  | (3,818 | ) |  | $ | 3,071  | 
|                                             |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |  
|                                             |             | December 31, 2003* |  | $            | 3,071  |              |  |            | (2,199 | ) |  |  | (1     | ) |  | $ | 871    | 
|                                             |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |  
|Inventory obsolescence reserve:              |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |  
|                                             | Year Ended: |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |   |       
|                                             |             | December 31, 2001  |  | $            | 569    |              |  |            | 5,662  |   |  |  | (3,115 | ) |  | $ | 3,116  | 
|                                             |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |  
|                                             |             | December 31, 2002  |  | $            | 3,116  |              |  |            | 3,619  |   |  |  | (570   | ) |  | $ | 6,165  | 
|                                             |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |  
|                                             |             | December 31, 2003  |  | $            | 6,165  |              |  |            | 200    |   |  |  | (564   | ) |  | $ | 5,801  | 
|                                             |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |  
|Valuation Allowance for deferred tax assets: |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |  
|                                             | Year Ended: |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |   |       
|                                             |             | December 31, 2001  |  | $            |       |              |  |            |       |   |  |  |       |   |  |   |       | 
|                                             |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |  
|                                             |             | December 31, 2002  |  | $            |       |              |  |            | 17,109 |   |  |  |       |   |  | $ | 17,109 | 
|                                             |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |  
|                                             |             | December 31, 2003  |  | $            | 17,109 |              |  |            | (1,083 | ) |  |  | 7,434  |   |  | $ | 23,460 | 
|                                             |             |                    |  |              |        |              |  |            |        |   |  |  |        |   |  |  



---



|   |                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------
|*  | 2001 and 2002 writeoffs include a $18,000 and
    10,000 respectively which were taken directly to the expense
    account.
|  
|** | 2003 recoveries of bad debts of $3,085 include
    $886K related to amounts previously written off.                        






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
    ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.






|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Evaluation of disclosure controls and
procedures.Our management evaluated,
with the participation of our Chief Executive Officer and our
Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by
this Annual Report on Form 10-K. Based on this evaluation,
our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in Securities and Exchange
Commission rules and forms.

Changes in internal control over financial
reporting.There was no change in our
internal control over financial reporting that occurred during
our fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.

55



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##### Table of Contents






PART III





|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT

The information required by this item regarding
our directors and executive officers and our code of ethics is
incorporated by reference to the information set forth in
(i) the sections entitled Proposal One 
Election of Directors and Section 16(a)
Beneficial Ownership Reporting Compliance in our Proxy
Statement for the 2004 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following the end
of our fiscal year ended December 31, 2003 (the 2004
Proxy Statement), and (ii) the section entitled
Executive Officers of the Registrant at the end of
Part I of this Annual Report on Form 10-K.






|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

The information required by this item regarding
executive compensation is incorporated by reference to the
information set forth in the sections entitled Proposal
One  Election of Directors  Director
Compensation, and Executive Officer
Compensation in our 2003 Proxy Statement.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT

The information required by this item regarding
security ownership of certain beneficial owners and management
and related stockholder matters is incorporated by reference to
the information set forth in the section entitled Security
Ownership of Certain Beneficial Owners and Management in
our 2003 Proxy Statement.

Equity Compensation Plan Information

|                                                               |       |                      |           |                  |  |                       |      |      |  |  |           |           | 
|-------------------------------------------------------------- | ----- | -------------------- | --------- | ---------------- |  | --------------------- | ---- | ---- |  |  | --------- | --------- | 
|                                                               |       |                      |           |                  |  | Number of securities 
|                                                               |       |                      |           | Weighted-        |  | remaining available  
|                                                               |       | Number of securities |           | average exercise |  | for future issuances 
|                                                               |       | to be issued upon    |           | price of         |  | under equity         
|                                                               |       | exercise of          |           | outstanding      |  | compensation plans   
|                                                               |       | outstanding options, |           | options,         |  | (excluding securities
|                                                               |       | warrants and rights  |           | warrants and     |  | reflected in column  
|Plan Category                                                  |       | (a)                  |           | rights (b)       |  | (a)) (c)             
|                                                               |       |                      |           |                  |  |                      
|Equity compensation plans approved by security
    holders(1)  |       |                      | 3,799,623 |                  |  | $                     | 6.18 |      |  |  | 1,884,820 |          
|Equity compensation plans not approved by
    security holders |       |                      | N/A       |                  |  |                       | N/A  |      |  |  | N/A       |          
|                                                               | Total |                      |           | 3,799,623        |  |                       | $    | 6.18 |  |  |           | 1,884,820 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The number of shares available under our 1998
    Stock Incentive Plan automatically increases on the first
    trading day of each calendar year by an amount equal to the
    lesser of 21/2% of the shares of outstanding common stock on the
    last trading day of the immediately preceding calendar year or
    562,500 shares. The numbers listed here are as of
    January 1, 2004 and include the annual increase of
    562,500 shares for 2004.






|         |                                                   
|-------- | --------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS

The information required by this item regarding
certain relationships and related transactions is incorporated
by reference to the information set forth in the section
entitled Transactions with Management in our 2004
Proxy Statement.






|         |                                           
|-------- | ------------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND
    SERVICES

The information required by this item regarding
principal accounting fees and services is incorporated by
reference to the information set forth under the caption
Proposal Two  Ratification of Independent
Auditors in the 2004 Proxy Statement.

56



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##### Table of Contents






PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
    REPORTS ON FORM 8-K

(a) The following documents are filed as
part of this Report on Form 10-K:



| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Consolidated Financial Statements.
    The following consolidated financial statements of the Company
    and the Independent Auditors Report are filed as part of
    this Form 10-K:

|                                                                                                          |  |      |    | 
|--------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                          |  | Page
|                                                                                                          |  |     
|Independent Auditors Report                                                                              |  |      | 36 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2003                                          |  |      | 37 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2001, 2002, and 2003           |  |      | 38 | 
|Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2001, 2002, and 2003 |  |      | 39 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2001, 2002, and 2003           |  |      | 40 | 
|Notes to Consolidated Financial Statements                                                                |  |      | 41 | 



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. Consolidated Financial Statement
    Schedule. Schedules have been omitted as the required
    information is either not required, not applicable, or otherwise
    included in the Consolidated Financial Statements and notes
    thereto in Item 8 above.
|
| | 3. Exhibits. The exhibits listed on
    the accompanying index to exhibits immediately following the
    signature page are filed as part of, or incorporated by
    reference into, this Form 10-K.                                                           

(b) Reports on Form 8-K.

On October 21, 2003, we filed a Report on
Form 8-K, dated October 21, 2003, pursuant to
Item 12 furnishing our press release reporting the results
of our third fiscal quarter ended September 30, 2003.

On December 5, 2003 we filed Report on
Form 8-K, dated November 25, 2003, pursuant to
Items 2 and 7 reporting our acquisition of Paragon Networks
International, Inc. and related financial information. On
December 24, 2003, we amended this Form 8-K to include
related financial statements.

57



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
City of Boulder, State of Colorado, on this 29th day of
March, 2004.



| |                           
| | --------------------------
| | CARRIER ACCESS CORPORATION



| |     |                        
| | --- | -----------------------
| | By: | /s/ TIMOTHY R. ANDERSON

| |                                               
| | ----------------------------------------------
| |                                               
| | Timothy R. Anderson                           
| | Chief Financial Officer, Vice President
    of
| | Finance and Administration,
    Treasurer     

POWER OF ATTORNEY

Know all men by these presents, that each person
whose signature appears below constitutes and appoints Timothy
R. Anderson as his or her attorney-in-fact, with power of
substitution in any and all capacities, to sign any amendments
to this Annual Report on Form 10-K, and to file the same
with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that the attorney-in-fact or his or
her substitute or substitutes may do or cause to be done by
virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by the persons
whose signatures appear below, which persons have signed such
Report on Form 10-K on this 29th day of March, 2004 in
the capacities indicated:

|                                               |  |                                                                                                                                                        |  | 
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------ |  | 
|                                               |  |                                                                                                                                                       
|Signature                                      |  | Title                                                                                                                                                 
|                                               |  |                                                                                                                                                       
|                                              
|/s/ ROGER L. KOENIG(Roger L. Koenig)           |  | President, Chief Executive Officer and Chairman
    of the Board of Directors (Principal Executive Officer)                                           
|                                              
|/s/ TIMOTHY R. ANDERSON(Timothy R. Anderson)   |  | Chief Financial Officer, Vice President of
    Finance and
    Chairman and Administration, Treasurer
    (Principal Financial and Accounting Officer)
|                                              
|/s/ NANCY PIERCE(Nancy Pierce)                 |  | Corporate Development Officer, Director, Secretary                                                                                                    
|                                              
|/s/ JOHN W. BARNETT, JR.(John W. Barnett, Jr.) |  | Director                                                                                                                                              
|                                              
|/s/ DAVID R. LAUBE(David R. Laube)             |  | Director                                                                                                                                              
|                                              
|/s/ MARK A. FLOYD(Mark A. Floyd)               |  | Director                                                                                                                                              

58



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##### Table of Contents



EXHIBIT INDEX

|               |    |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------------- | -- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |    | Description of Document
|               |    |                        
|               | 2  | .1                      |  | Agreement and Plan of Merger dated
    November 13, 2003 by and among Carrier Access Corporation a
    Delaware Corporation, Ping Acquisition Corporation, a Delaware
    Corporation, Paragon Networks International, Inc., a
    Delaware corporation and Granite Ventures L.L.C. as stockholder
    representative (incorporated herein by reference to
    Exhibit 2.1 to the Registrants 8-K filed
    December 5, 2003
|               | 3  | .1                      |  | Registrants Amended and Restated
    Certificate of Incorporation (incorporated herein by reference
    to Exhibit 3.1 to the Registrants Registration
    Statement on Form S-1, Reg. No. 333-53947
    (Registrants 1998 S-1))                                                                                                                                                                                        
|               | 3  | .2                      |  | Registrants Bylaws (incorporated herein by
    reference to Exhibit 3.2 to the Registrants 1998 S-1)                                                                                                                                                                                                                                                                                                                       
|               | 4  | .1                      |  | Form of Registrants Specimen Common Stock
    Certificate (incorporated herein by reference to
    Exhibit 4.1 to the Registrants 1998 S-1)                                                                                                                                                                                                                                                                                
|               | 10 | .1                      |  | Lease Agreement between Carrier Access
    Corporation and Cottonwood Land and Farms Ltd. for facilities at
    5395 Pearl Parkway, Boulder, Colorado, dated June 1, 1995
    (incorporated herein by reference to Exhibit 10.4 to the
    Registrants 1998 S-1)                                                                                                                                                            
|               | 10 | .2                      |  | Amendment to Lease Agreement between Carrier
    Access Corporation and Cottonwood Land and Farms Ltd. Dated
    September 20, 1995 (incorporated herein by reference to
    Exhibit 10.5 to the Registrants 1998 S-1)                                                                                                                                                                                                      
|               | 10 | .3                     |  | Registrants 1995 Stock Option Plan
    (incorporated herein by reference to Exhibit 10.6 to the
    Registrants 1998 S-1)                                                                                                                                                                                                                                                                                                  
|               | 10 | .4                     |  | Registrants herein by reference to
    Exhibit 10.7 to the Registrants 1998 S-1)                                                                                                                                                                                                                                                                                                                                           
|               | 10 | .5                      |  | Amendment to Lease Agreement between Carrier
    Access Corporation and Cottonwood Land and Farms Ltd. Dated
    October 25, 1998 (incorporated herein by reference to
    Exhibit 10.8 to the Registrants 1998 S-1)                                                                                                                                                                                                        
|               | 10 | .6                     |  | Form of Directors and Officers
    Indemnification Agreement (which is incorporated herein by
    reference to Exhibit 10.9 to the Registrants 1998 S-1)                                                                                                                                                                                                                                                                  
|               | 10 | .7                      |  | Lease Agreement between Carrier Access
    Corporation and TC Boulder Warehouse, LP, a Delaware limited
    partnership for facilities at 6837 Winchester Circle, Boulder,
    Colorado, dated November 13, 1998 (incorporated herein by
    reference to Exhibit 10.10 to the Registrants 1998
    S-1)                                                                                                                    
|               | 21 | .1*                     |  | Subsidiaries of Registrant                                                                                                                                                                                                                                                                                                                                                                                                   
|               | 23 | .1*                     |  | Consent of KPMG LLP, Independent Certified
    Public Accountants                                                                                                                                                                                                                                                                                                                                                            
|               | 24 | .1*                     |  | Power of Attorney (Reference is made to the
    preceding Signature Page)                                                                                                                                                                                                                                                                                                                                                    
|               | 31 | .1*                     |  | Certification of Chief Executive Officer pursuant
    to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange
    Act of 1934, as amended                                                                                                                                                                                                                                                                                 
|               | 31 | .2*                     |  | Certification of Chief Financial Officer pursuant
    to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange
    Act of 1934, as amended                                                                                                                                                                                                                                                                                 
|               | 32 | .1*                     |  | Certifications of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350 as Adopted Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                    



---



|  |                
|- | ---------------
|* | Filed herewith.



|  |                                                                       
|- | ----------------------------------------------------------------------
| | Indicates management contract or compensatory
    plan or arrangement.