##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K/A


Amendment No. 1


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(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, 2004                                                 
|          
|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





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)





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)





o þ


o


þ o














---



##### Table of Contents



INTRODUCTORY NOTE




Restatement of Consolidated Financial Statements














Passage of Title






---



##### Table of Contents





Probability of Collection




Undelivered Elements




Inventory Valuation






---



##### Table of Contents



Restatement Summary




|                                 |                           |              |        |     |              |   |         |        |  
|-------------------------------- | ------------------------- | ------------ | ------ | --- | ------------ | - | ------- | ------ | -
|                                 |                           | Year Ended   |        |     | Year Ended   |  
|                                 |                           | December 31, |        |     | December 31, |  
|                                 |                           | 2003         |        |     | 2004         |  
|                                 |                           |              |        |     |              |  
|Revenues, as previously reported |                           | $            | 62,556 |     |              | $ | 101,375 |       
|Restatement adjustments:         |                           |              |        |     |              |   |         |       
|                                 | Passage of title          |              |        | (84 | )            |   |         | (1,154 | )
|                                 | Probability of collection |              |        |    |              |   |         | (4,514 | )
|                                 | Undelivered elements      |              |        |    |              |   |         | (214   | )
|                                 |                           |              |        |     |              |  
|Total restatement adjustments    |                           |              | (84    | )   |              |   | (5,882  | )     
|                                 |                           |              |        |     |              |  
|Revenues, as restated            |                           | $            | 62,472 |     |              | $ | 95,493  |       
|                                 |                           |              |        |     |              |  

|                                   |                           |              |       |      |              |   |        |        |  
|---------------------------------- | ------------------------- | ------------ | ----- | ---- | ------------ | - | ------ | ------ | -
|                                   |                           | Year Ended   |       |      | Year Ended   |  
|                                   |                           | December 31, |       |      | December 31, |  
|                                   |                           | 2003         |       |      | 2004         |  
|                                   |                           |              |       |      |              |  
|Net income, as previously reported |                           | $            | 2,458 |      |              | $ | 899    |       
|Restatement adjustments:           |                           |              |       |      |              |   |        |       
|                                   | Passage of title          |              |       | (34  | )            |   |        | (459   | )
|                                   | Probability of collection |              |       |     |              |   |        | (2,170 | )
|                                   | Undelivered elements      |              |       |     |              |   |        | (230   | )
|                                   | Inventory valuation       |              |       | (912 | )            |   |        | 181    |  
|                                   |                           |              |       |      |              |  
|Total restatement adjustments      |                           |              | (946  | )    |              |   | (2,678 | )     
|                                   |                           |              |       |      |              |  
|Net income (loss), as restated     |                           | $            | 1,512 |      |              | $ | (1,779 | )     
|                                   |                           |              |       |      |              |  

|                                                            |                       |              |         |      |              |   |         |        |  
|----------------------------------------------------------- | --------------------- | ------------ | ------- | ---- | ------------ | - | ------- | ------ | -
|                                                            |                       | December 31, |         |      | December 31, |  
|                                                            |                       | 2003         |         |      | 2004         |  
|                                                            |                       |              |         |      |              |  
|Total assets, as previously reported                        |                       | $            | 107,542 |      |              | $ | 187,166 |       
|Restatement adjustments:                                    |                       |              |         |      |              |   |         |       
|                                                            | Accounts receivable   |              |         | (84  | )            |   |         | (5,752 | )
|                                                            | Inventory             |              |         | 50   |              |   |         | 3,089  |  
|                                                            | Inventory valuation   |              |         | (912 | )            |   |         | (731   | )
|                                                            | Deferred income taxes |              |         | 830  |              |   |         | 363    |  
|                                                            |                       |              |         |      |              |  
|Total adjustments                                           |                       |              | (116    | )    |              |   | (3,031  | )     
|                                                            |                       |              |         |      |              |  
|Total assets, as restated                                   |                       | $            | 107,426 |      |              | $ | 184,135 |       
|                                                            |                       |              |         |      |              |  
|Total liabilities, as previously reported                   |                       | $            | 18,148  |      |              | $ | 15,401  |       
|Restatement adjustments:                                    |                       |              |         |      |              |   |         |       
|                                                            | Deferred revenue      |              |         |     |              |   |         | 214    |  
|                                                            | Accrued liabilities   |              |         |     |              |   |         | 16     |  
|                                                            | Deferred income taxes |              |         | 830  |              |   |         | 363    |  
|                                                            |                       |              |         |      |              |  
|Total adjustments                                           |                       |              | 830     |      |              |   | 593     |       
|                                                            |                       |              |         |      |              |  
|Total liabilities, as restated                              |                       | $            | 18,978  |      |              | $ | 15,994  |       
|                                                            |                       |              |         |      |              |  
|Total stockholders equity, as restated                     |                       | $            | 88,448  |      |              | $ | 168,141 |       
|                                                            |                       |              |         |      |              |  
|Total liabilities and stockholders equity, as
    restated |                       | $            | 107,426 |      |              | $ | 184,135 |       
|                                                            |                       |              |         |      |              |  



---










CARRIER ACCESS CORPORATION


INDEX TO ANNUAL REPORT ON FORM 10-K/ A


For the Fiscal Year Ended December 31, 2004


|                                                    |  |                                                                                                                      |    |          |    | 
|--------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | -------- | -- | 
|                                                    |  |                                                                                                                      |    | Page No. |   
|                                                    |  |                                                                                                                      |    |          |   
|PART I                                             
|Item 1.                                             |  | Business                                                                                                             |    |          | 2  | 
|                                                    |  | Risk Factors                                                                                                         |    |          | 10 | 
|Item 2.                                             |  | Properties                                                                                                           |    |          | 23 | 
|Item 3.                                             |  | Legal Proceedings                                                                                                    |    |          | 23 | 
|Item 4.                                             |  | Submission of Matters to a Vote of Security
    Holders                                                              |    |          | 24 | 
|                                                    |  | Executive Officers of the Registrant                                                                                 |    |          | 24 | 
|PART II                                            
|Item 5.                                             |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |    |          | 25 | 
|Item 6.                                             |  | Selected Financial Data                                                                                              |    |          | 26 | 
|Item 7.                                             |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |    |          | 26 | 
|Item 7A.                                            |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                       |    |          | 37 | 
|Item 8.                                             |  | Consolidated Financial Statements and
    Supplementary Data                                                         |    |          | 38 | 
|Item 9.                                             |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |    |          | 65 | 
|Item 9A.                                            |  | Controls and Procedures                                                                                              |    |          | 65 | 
|Item 9B.                                            |  | Other Information                                                                                                    |    |          | 68 | 
|PART III                                           
|                                                   
|Item 10.                                            |  | Directors and Executive Officers of the
    Registrant                                                               |    |          | 69 | 
|Item 11.                                            |  | Executive Compensation                                                                                               |    |          | 71 | 
|Item 12.                                            |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |    |          | 73 | 
|Item 13.                                            |  | Certain Relationships and Related
    Transactions                                                                   |    |          | 74 | 
|Item 14.                                            |  | Principal Accounting Fees and Services                                                                               |    |          | 74 | 
|PART IV                                            
|                                                   
|Item 15.                                            |  | Exhibits and Financial Statement
    Schedules                                                                       |    |          | 75 | 
|Signatures                                          |  |                                                                                                                      | 76 |         
|Consent of KPMG LLP                                
|Certification of CEO Pursuant to Rule 13a-14(a)    
|Certification of CFO Pursuant to Rule 13a-14(a)    
|Certifications of CEO & CFO Pursuant to Section 906



1



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##### Table of Contents






PART I


NOTICE CONCERNING FORWARD-LOOKING STATEMENTS


This Annual Report on Form 10-K/A contains
forward-looking statements within the meaning of the
federal securities laws. 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 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 Annual Report on Form 10-K/A. All forward looking
statements and reasons why results may differ included in this
Annual Report on Form 10-K/A 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 Annual Report on Form 10-K/A.







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

General








Industry Overview






2



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Our Approach










Revenue From Existing and Next-generation Data Services.


Cost Effectiveness and Scalability.


Manageability and Flexibility.


3



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Our Strategy






Pursue High Growth Market Opportunities.


Continue to Pursue and Leverage Global Strategic
Relationships.


Leverage our Technology and Customer Base to Expand our
Product Portfolio.


Pursue Acquisitions.




4



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Principal Products




|                 |  |                     |  |                   
|---------------- |  | ------------------- |  | ------------------
|                 |  | Wireless and        |  | Converged Business
|Platform         |  | Satellite Equipment |  | Access Equipment  
|                 |  |                     |  |                   
|Axxius           |  | l                   |  |                   
|Adit             |  | l                   |  | l                 
|Wide Bank        |  | l                   |  | l                 
|Access Navigator |  | l                   |  | l                 
|Broadmore        |  | l                   |  |                   
|Exxtenz          |  |                     |  | l                 
|MASTERseries     |  | l                   |  |                   
|BROADway         |  | l                   |  |                   

Wireless and Satellite Products.


Converged Business Access.


Product Details




| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Adit 3000 Platform  integrated delivery
    terminal for voice and data services



5



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





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





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





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





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





| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | MASTERseries  access integration platform for
    wireless aggregation and consolidation.



6



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| |                                                                                      
| | -------------------------------------------------------------------------------------
| | BROADway  access integration platform for
    wireless aggregation and consolidation



Sales, Marketing and Customer Support




Sales to Distributors and OEMs.


Sales Directly to End-Users.


Sales Force.


Marketing.


7



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Customer Service and Support.


Competition






| |   |                                          
| | - | -----------------------------------------
| |  | 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.           







Manufacturing






8



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Research and Product Development




Intellectual Property






Employees






9



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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 Annual Report on Form 10-K/A,
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.


If we are not current in our SEC filings, we will face
several adverse consequences.




Our common stock may be delisted from the NASDAQ National
Market and transferred to the Over-the-Counter (OTC)
Bulletin Board, which may, among other things, reduce the
price of our common stock and the levels of liquidity available
to our stockholders.




We have been unable to predict accurately the costs
associated with evaluating our internal control over financial
reporting under Section 404 of the Sarbanes-Oxley Act of
2002 and may continue to be unable to do so in the future.




10



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If we fail to maintain an effective system of internal
control over financial reporting, we may not be able to
accurately report our financial results. As a result, our
business could be harmed and current and potential stockholders
could lose confidence in our financial reporting, which could
negatively impact the trading price of our stock.






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.










| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The loss of, or significant reduction in purchases by, any of
    our large customers, two of whom were each responsible for more
    than 10% of our net revenue in the year ended December 31,
    2004;               
|
| |  | Overall movement toward industry consolidation among both our
    competitors and our customers, both wireless and wireline;                                                                                             
|
| |  | 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;                                                
|
| |  | Costs related to acquisitions of technologies or businesses;                                                                                                                                                             
|
| |  | Fluctuations in demand for our products and services, especially
    with respect to Internet businesses and telecommunications
    carriers, in part due to the changing global economic and
    regulatory environment;
|
| |  | Changes in sales and implementation cycles for our products and
    reduced visibility into our customers spending plans and
    associated revenue;                                                                    
|
| |  | Price and product competition in the communications and
    networking industries, which can change rapidly due to
    technological innovation;                                                                         

11



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| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | The timing, size, and mix of orders from customers;                                                                   
|
| |  | The introduction and market acceptance of new technologies and
    products and our success in new markets;           
|
| |  | Variations in sales channels, product costs, or mix of products
    sold;                                             
|
| |  | The ability of our customers, channel partners, and suppliers to
    obtain financing or to fund capital expenditures;
|
| |  | Our ability to achieve targeted cost reductions and to execute
    on our strategy and operating plans; and           
|
| |  | Potential difficulties in completing projects associated with
    in-process research and development.                

The unpredictability of our quarterly results may adversely
affect the trading price of our common stock.






| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fluctuation in demand for our voice infrastructure products and
    the timing and size of customer orders;                                
|
| |  | The cancellation or deferral of existing customer orders or the
    renegotiation of existing contractual commitments;                     
|
| |  | The failure of certain of our customers to successfully and
    timely reorganize their operations, including emerging from
    bankruptcy;
|
| |  | The length and variability of the sales cycle for our
    products; and                                                                    
|
| |  | The timing of revenue recognition and amount of deferred
    revenues.                                                                     

Deterioration of the wireless infrastructure industry could
lead to reductions in capital spending budgets by wireless
operators and original equipment manufacturers, which could
adversely affect our revenues, gross margins and income.




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.




12



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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 deterioration in our
operating results.




Some of our distributors and OEMs have stock rotation,
limited return, on time delivery 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 do not have exclusive agreements with our distributors,
who 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.






13



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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.




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.








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.




14



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






| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | a distributors, OEMs or carriers budgetary
    constraints including the timing of expenditures;     
|
| |  | consolidation and merger discussions between wireless and
    wireline carriers;                        
|
| |  | outsourcing of inventory management by a distributor or OEM
    customer;                               
|
| |  | a distributors, OEMs or carriers internal
    acceptance reviews;                                    
|
| |  | a distributors, OEMs or carriers staffing levels and
    availability of lab time for product testing;
|
| |  | the success and continued internal support and development of a
    carriers product offerings;        
|
| |  | the possibility of cancellation or delay of projects by
    distributors, OEMs or carriers; and         
|
| |  | the possibility of a regulatory investigation of our
    distributors, OEMs or carriers.                





Communications carriers 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.




15



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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 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.




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.




16



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##### Table of Contents





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.




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.








17



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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.








Telecommunication industry carriers are currently
experiencing a period of consolidation that may impact the
timing of future capital expenditures, which could adversely
affect the demand for our products.




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.




18



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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.




19



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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 customers are subject to numerous and changing
regulations, interoperability requirements and industry
standards. If the products they purchase from us do not meet
these regulations or are not compatible with these standards or
interoperate with the equipment solution selected by our
customers, our ability to continue to sell our products could be
seriously harmed.






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.






| |   |                                                             
| | - | ------------------------------------------------------------
| |  | delays in or losses of market acceptance and sales;         
|
| |  | penalties for network outages in our installed network base;

20



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





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.




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.




21



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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.






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






| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | local economic and market conditions;                                                                                           
|
| |  | exposure to unknown customs and practices;                                                                                      
|
| |  | legal regulations and requirements in foreign countries;                                                                        
|
| |  | 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.



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




22



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
















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

Securities Action


Croker v. Carrier Access Corporation,
et al. Chisman v. Carrier Access Corporation, et al. Sved v. Carrier Access
Corporation, et al,


Kenney v. Koenig,
et al. Chaitman v. Koenig, et al. West Coast Management and
Capital, LLC v. Koening , et al.


23



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##### Table of Contents










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






EXECUTIVE OFFICERS OF THE REGISTRANT




|                |  |     |    |  |          |                                                                
|--------------- |  | --- | -- |  | -------- | ---------------------------------------------------------------
|Name            |  | Age |    |  | Position
|                |  |     |    |  |         
|Roger L. Koenig |  |     | 51 |  |          | President and Chief Executive Officer                          
|Nancy Pierce    |  |     | 47 |  |          | Corporate Development Officer and Secretary                    
|Gary Gatchell*  |  |     | 48 |  |          | Executive Vice President, Treasurer and Chief Financial Officer






|  |                                                                             
|- | ----------------------------------------------------------------------------
|* | Note: Mr. Gatchell was appointed as an executive officer in
    June of 2005

Roger L. Koenig.


Nancy Pierce.


Gary Gatchell.


24



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##### Table of Contents






PART II







|        |                                                                                                                 
|------- | ----------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
    STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock.




|                              |  |      |        |  |     |   |       | 
|----------------------------- |  | ---- | ------ |  | --- | - | ----- | 
|                              |  | High |        |  | Low |  
|                              |  |      |        |  |     |  
|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 | 
|Year Ended December 31, 2004: |  |      |        |  |     |   |       | 
|First Quarter                 |  | $    | 16.780 |  |     | $ | 9.710 | 
|Second Quarter                |  |      | 13.790 |  |     |   | 8.930 | 
|Third Quarter                 |  |      | 14.380 |  |     |   | 5.830 | 
|Fourth Quarter                |  |      | 10.760 |  |     |   | 7.620 | 

Holders of Common Stock




Dividends




25



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



|                         |         |                         |         |      |      |   |         |       |   |   |               |       |   |               |         |      |  |   |         |       |  
|------------------------ | ------- | ----------------------- | ------- | ---- | ---- | - | ------- | ----- | - | - | ------------- | ----- | - | ------------- | ------- | ---- |  | - | ------- | ----- | -
|                         |         | Year Ended December 31, |        
|                         |         |                         |        
|                         |         |                         |         | 2003 |      |   | 2004    |      
|                         |         | 2000                    |         |      | 2001 |   |         | 2002  |   |   | (As restated) |       |   | (As restated) |        
|                         |         |                         |         |      |      |   |         |       |   |   |               |       |   |               |        
|                         |         | (Dollars thousands)     |        
|Revenues, net            |         | $                       | 148,050 |      |      | $ | 100,706 |       |   | $ | 50,247        |       |   | $             | 62,472  |      |  | $ | 95,493  |      
|Gross Profit             |         | $                       | 81,281  |      |      | $ | 46,616  |       |   | $ | 17,102        |       |   | $             | 26,386  |      |  | $ | 40,112  |      
|Operating income (loss)  |         | $                       | 23,269  |      |      | $ | (27,051 | )     |   | $ | (52,267       | )     |   | $             | 1,070   |      |  | $ | (4,578  | )    
|Net income(loss)         |         | $                       | 18,550  |      |      | $ | (14,855 | )     |   | $ | (52,655       | )     |   | $             | 1,512   |      |  | $ | (1,779  | )    
|Income (loss) per share: |         |                         |         |      |      |   |         |       |   |   |               |       |   |               |         |      |  |   |         |      
|                         | Basic   |                         | $       | 0.76 |      |   | $       | (0.60 | ) |   | $             | (2.13 | ) |               | $       | 0.06 |  |   | $       | (0.05 | )
|                         | Diluted |                         | $       | 0.74 |      |   | $       | (0.60 | ) |   | $             | (2.13 | ) |               | $       | 0.06 |  |   | $       | (0.05 | )
|Working Capital          |         | $                       | 99,851  |      |      | $ | 91,597  |       |   | $ | 56,324        |       |   | $             | 67,454  |      |  | $ | 142,047 |      
|Total Assets             |         | $                       | 154,999 |      |      | $ | 133,017 |       |   | $ | 76,437        |       |   | $             | 107,426 |      |  | $ | 184,135 |      
|Stockholders equity     |         | $                       | 132,797 |      |      | $ | 118,593 |       |   | $ | 66,114        |       |   | $             | 88,448  |      |  | $ | 168,141 |      






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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,
expectations regarding, customer revenue mix, sources of
revenue, gross margins, our tax liability, capital expenditures
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 Annual Report on Form 10-K/ A. All forward looking
statements and reasons why results may differ included in this
Annual Report on Form 10-K/ A 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 Annual Report on Form 10-K/
A.


Restatement of Consolidated Financial Statements




26



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Passage of Title




Probability of Collection




27



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Undelivered Elements




Inventory Valuation




Restatement Summary




|                                 |                           |              |        |     |              |   |         |        |  
|-------------------------------- | ------------------------- | ------------ | ------ | --- | ------------ | - | ------- | ------ | -
|                                 |                           | Year Ended   |        |     | Year Ended   |  
|                                 |                           | December 31, |        |     | December 31, |  
|                                 |                           | 2003         |        |     | 2004         |  
|                                 |                           |              |        |     |              |  
|Revenues, as previously reported |                           | $            | 62,556 |     |              | $ | 101,375 |       
|Restatement adjustments:         |                           |              |        |     |              |   |         |       
|                                 | Passage of title          |              |        | (84 | )            |   |         | (1,154 | )
|                                 | Probability of collection |              |        |    |              |   |         | (4,514 | )
|                                 | Undelivered elements      |              |        |    |              |   |         | (214   | )
|                                 |                           |              |        |     |              |  
|Total restatement adjustments    |                           |              | (84    | )   |              |   | (5,882  | )     
|                                 |                           |              |        |     |              |  
|Revenues, as restated            |                           | $            | 62,472 |     |              | $ | 95,493  |       
|                                 |                           |              |        |     |              |  

|                                   |                           |              |       |      |              |   |        |        |  
|---------------------------------- | ------------------------- | ------------ | ----- | ---- | ------------ | - | ------ | ------ | -
|                                   |                           | Year Ended   |       |      | Year Ended   |  
|                                   |                           | December 31, |       |      | December 31, |  
|                                   |                           | 2003         |       |      | 2004         |  
|                                   |                           |              |       |      |              |  
|Net income, as previously reported |                           | $            | 2,458 |      |              | $ | 899    |       
|Restatement adjustments:           |                           |              |       |      |              |   |        |       
|                                   | Passage of title          |              |       | (34  | )            |   |        | (459   | )
|                                   | Probability of collection |              |       |     |              |   |        | (2,170 | )
|                                   | Undelivered elements      |              |       |     |              |   |        | (230   | )
|                                   | Inventory valuation       |              |       | (912 | )            |   |        | 181    |  
|                                   |                           |              |       |      |              |  
|Total restatement adjustments      |                           |              | (946  | )    |              |   | (2,678 | )     
|                                   |                           |              |       |      |              |  
|Net income (loss), as restated     |                           | $            | 1,512 |      |              | $ | (1,779 | )     
|                                   |                           |              |       |      |              |  

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|                                                            |                       |              |         |      |              |   |         |        |  
|----------------------------------------------------------- | --------------------- | ------------ | ------- | ---- | ------------ | - | ------- | ------ | -
|                                                            |                       | December 31, |         |      | December 31, |  
|                                                            |                       | 2003         |         |      | 2004         |  
|                                                            |                       |              |         |      |              |  
|Total assets, as previously reported                        |                       | $            | 107,542 |      |              | $ | 187,166 |       
|Restatement adjustments:                                    |                       |              |         |      |              |   |         |       
|                                                            | Accounts receivable   |              |         | (84  | )            |   |         | (5,752 | )
|                                                            | Inventory             |              |         | 50   |              |   |         | 3,089  |  
|                                                            | Inventory valuation   |              |         | (912 | )            |   |         | (731   | )
|                                                            | Deferred income taxes |              |         | 830  |              |   |         | 363    |  
|                                                            |                       |              |         |      |              |  
|Total adjustments                                           |                       |              | (116    | )    |              |   | (3,031  | )     
|                                                            |                       |              |         |      |              |  
|Total assets, as restated                                   |                       | $            | 107,426 |      |              | $ | 184,135 |       
|                                                            |                       |              |         |      |              |  
|Total liabilities, as previously reported                   |                       | $            | 18,148  |      |              | $ | 15,401  |       
|Restatement adjustments:                                    |                       |              |         |      |              |   |         |       
|                                                            | Deferred revenue      |              |         |     |              |   |         | 214    |  
|                                                            | Accrued liabilities   |              |         |     |              |   |         | 16     |  
|                                                            | Deferred income taxes |              |         | 830  |              |   |         | 363    |  
|                                                            |                       |              |         |      |              |  
|Total adjustments                                           |                       |              | 830     |      |              |   | 593     |       
|                                                            |                       |              |         |      |              |  
|Total liabilities, as restated                              |                       | $            | 18,978  |      |              | $ | 15,994  |       
|                                                            |                       |              |         |      |              |  
|Total stockholders equity, as restated                     |                       | $            | 88,448  |      |              | $ | 168,141 |       
|                                                            |                       |              |         |      |              |  
|Total liabilities and stockholders equity, as
    restated |                       | $            | 107,426 |      |              | $ | 184,135 |       
|                                                            |                       |              |         |      |              |  



Overview








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Presentation




Results of Operations




| |                                             
| | --------------------------------------------
| | Years Ended December 31, 2002, 2003 and 2004

|                   |  |                                    |        |             |      |   |             |              |  |             |                 |  |             |               |        |             |                 |  |             |               |  |   |        |  |  |  |    |  
|------------------ |  | ---------------------------------- | ------ | ----------- | ---- | - | ----------- | ------------ |  | ----------- | --------------- |  | ----------- | ------------- | ------ | ----------- | --------------- |  | ----------- | ------------- |  | - | ------ |  |  |  | -- | -
|                   |  |                                    |        |             |      |   |             | 2002 to 2003 |  |             | 2002 to 2003    |  |             | 2003 to 2004  |        |             | 2003 to 2004    | 
|                   |  | 2002                               |        |             | 2003 |   |             | 2004         |  |             | Variance in $s |  |             | Variance in % |        |             | Variance in $s |  |             | Variance in % | 
|                   |  |                                    |        |             |      |   |             |              |  |             |                 |  |             |               |        |             |                 |  |             |               | 
|                   |  | (In thousands, except percentages) |       
|                   |  |                                    |        | As restated |      |   | As restated |              |  | As restated |                 |  | As restated |               |        | As restated |                 |  | As restated |              
|Net Revenue        |  | $                                  | 50,247 |             |      | $ | 62,472      |              |  | $           | 95,493          |  |             | $             | 12,225 |             |                 |  | 24          | %             |  | $ | 33,021 |  |  |  | 53 | %
|Cost of Goods Sold |  | $                                  | 33,145 |             |      | $ | 36,086      |              |  | $           | 55,381          |  |             | $             | 2,941  |             |                 |  | 9           | %             |  | $ | 19,295 |  |  |  | 53 | %



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|             |  |                                    |        |             |      |   |             |              |  |             |                 |  |             |               |       |             |                 |  |             |               |  |   |        |  |  |  |    |  
|------------ |  | ---------------------------------- | ------ | ----------- | ---- | - | ----------- | ------------ |  | ----------- | --------------- |  | ----------- | ------------- | ----- | ----------- | --------------- |  | ----------- | ------------- |  | - | ------ |  |  |  | -- | -
|             |  |                                    |        |             |      |   |             | 2002 to 2003 |  |             | 2002 to 2003    |  |             | 2003 to 2004  |       |             | 2003 to 2004    | 
|             |  | 2002                               |        |             | 2003 |   |             | 2004         |  |             | Variance in $s |  |             | Variance in % |       |             | Variance in $s |  |             | Variance in % | 
|             |  |                                    |        |             |      |   |             |              |  |             |                 |  |             |               |       |             |                 |  |             |               | 
|             |  | (In thousands, except percentages) |       
|             |  |                                    |        | As restated |      |   | As restated |              |  | As restated |                 |  | As restated |               |       | As restated |                 |  | As restated |              
|Gross Profit |  | $                                  | 17,102 |             |      | $ | 26,386      |              |  | $           | 40,112          |  |             | $             | 9,284 |             |                 |  | 54          | %             |  | $ | 13,726 |  |  |  | 52 | %
|Gross Margin |  |                                    | 34%    |             |      |   | 42%         |              |  |             | 42%             |  |             |               |       |             |                 |  | 8           | %             |  |   |        |  |  |  | 0  | %







|                         |  |                                    |        |  |      |   |        |              |  |   |                 |  |  |               |         |   |                 |  |    |               |  |   |       |  |  |  |    |  
|------------------------ |  | ---------------------------------- | ------ |  | ---- | - | ------ | ------------ |  | - | --------------- |  |  | ------------- | ------- | - | --------------- |  | -- | ------------- |  | - | ----- |  |  |  | -- | -
|                         |  |                                    |        |  |      |   |        | 2002 to 2003 |  |   | 2002 to 2003    |  |  | 2003 to 2004  |         |   | 2003 to 2004    | 
|                         |  | 2002                               |        |  | 2003 |   |        | 2004         |  |   | Variance in $s |  |  | Variance in % |         |   | Variance in $s |  |    | Variance in % | 
|                         |  |                                    |        |  |      |   |        |              |  |   |                 |  |  |               |         |   |                 |  |    |               | 
|                         |  | (In thousands, except percentages) |       
|Research and Development |  | $                                  | 23,728 |  |      | $ | 11,001 |              |  | $ | 18,194          |  |  | $             | (12,727 | ) |                 |  | 54 | %             |  | $ | 7,193 |  |  |  | 65 | %



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|                                           |  |                                    |        |             |      |   |             |              |  |             |                 |   |             |               |        |             |                 |  |             |               |  |   |       |  |  |  |     |  
|------------------------------------------ |  | ---------------------------------- | ------ | ----------- | ---- | - | ----------- | ------------ |  | ----------- | --------------- | - | ----------- | ------------- | ------ | ----------- | --------------- |  | ----------- | ------------- |  | - | ----- |  |  |  | --- | -
|                                           |  |                                    |        |             |      |   |             | 2002 to 2003 |  |             | 2002 to 2003    |   |             | 2003 to 2004  |        |             | 2003 to 2004    | 
|                                           |  | 2002                               |        |             | 2003 |   |             | 2004         |  |             | Variance in $s |   |             | Variance in % |        |             | Variance in $s |  |             | Variance in % | 
|                                           |  |                                    |        |             |      |   |             |              |  |             |                 |   |             |               |        |             |                 |  |             |               | 
|                                           |  | (In thousands, except percentages) |       
|                                           |  |                                    |        | As restated |      |   | As restated |              |  | As restated |                 |   | As restated |               |        | As restated |                 |  | As restated |              
|Sales and Marketing                        |  | $                                  | 18,259 |             |      | $ | 11,776      |              |  | $           | 15,963          |   |             | $             | (6,483 | )           |                 |  | (36         | )%            |  | $ | 4,187 |  |  |  | 36  | %
|General and Administrative                 |  |                                    | 9,823  |             |      |   | 5,362       |              |  |             | 7,198           |   |             |               | (4,461 | )           |                 |  | (45         | )%            |  |   | 1,836 |  |  |  | 34  | %
|Goodwill and intangible asset amortization |  |                                    | 216    |             |      |   | 262         |              |  |             | 1,268           |   |             |               | 46     |             |                 |  | 21          | %             |  |   | 1,006 |  |  |  | 384 | %
|Asset impairment charges                   |  |                                    | 9,795  |             |      |   |            |              |  |             |                |   |             |               | (9,795 | )           |                 |  | (100        | )%            |  |   |      |  |  |  | N/A |  
|Restructuring                              |  |                                    | 1,981  |             |      |   |            |              |  |             | 218             |   |             |               | (1,981 | )           |                 |  | (100        | )%            |  |   | 218   |  |  |  | N/A |  
|Settlement expenses                        |  |                                    |       |             |      |   |            |              |  |             | 2,138           |   |             |               |       |             |                 |  |            |               |  |   | 2,138 |  |  |  | N/A |  
|Bad debt expense (recovery)                |  |                                    | 5,567  |             |      |   | (3,085      | )            |  |             | (289            | ) |             |               | (8,652 | )           |                 |  | (155        | )%            |  |   | 2,796 |  |  |  | 91  | %











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|                               |  |                                    |       |  |      |   |     |              |  |   |                 |   |  |               |        |   |                 |  |      |               |  |   |       |  |  |  |     |  
|------------------------------ |  | ---------------------------------- | ----- |  | ---- | - | --- | ------------ |  | - | --------------- | - |  | ------------- | ------ | - | --------------- |  | ---- | ------------- |  | - | ----- |  |  |  | --- | -
|                               |  |                                    |       |  |      |   |     | 2002 to 2003 |  |   | 2002 to 2003    |   |  | 2003 to 2004  |        |   | 2003 to 2004    | 
|                               |  | 2002                               |       |  | 2003 |   |     | 2004         |  |   | Variance in $s |   |  | Variance in % |        |   | Variance in $s |  |      | Variance in % | 
|                               |  |                                    |       |  |      |   |     |              |  |   |                 |   |  |               |        |   |                 |  |      |               | 
|                               |  | (In thousands, except percentages) |      
|Interest and other income, net |  | $                                  | 714   |  |      | $ | 353 |              |  | $ | 2,787           |   |  | $             | (361   | ) |                 |  | 51   | %             |  | $ | 2,434 |  |  |  | 690 | %
|Income taxes (benefit)         |  | $                                  | 1,102 |  |      | $ | (89 | )            |  | $ | (12             | ) |  | $             | (1,191 | ) |                 |  | (108 | )%            |  | $ | 77    |  |  |  | 87  | %







Liquidity and Capital Resources


|                                                 |  |                                                |         |  |             |              |         |                 |              |   |               |  |  |  |     |  
|------------------------------------------------ |  | ---------------------------------------------- | ------- |  | ----------- | ------------ | ------- | --------------- | ------------ | - | ------------- |  |  |  | --- | -
|                                                 |  |                                                |         |  |             | 2003 to 2004 |         |                 | 2003 to 2004 |  
|                                                 |  | 2003                                           |         |  | 2004        |              |         | Variance in $s |              |   | Variance in % | 
|                                                 |  |                                                |         |  |             |              |         |                 |              |   |               | 
|                                                 |  | (In thousands, except percentages) As restated |        
|                                                 |  | As restated                                    |         |  | As restated |              |         | As restated     |              |   | As restated   | 
|Working Capital                                  |  | $                                              | 67,454  |  |             | $            | 142,047 |                 |              | $ | 74,593        |  |  |  | 111 | %
|Cash, cash equivalents and marketable securities |  | $                                              | 36,542  |  |             | $            | 108,683 |                 |              | $ | 72,141        |  |  |  | 197 | %
|Total assets                                     |  | $                                              | 107,426 |  |             | $            | 184,135 |                 |              | $ | 76,709        |  |  |  | 71  | %

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|                             |  |                                    |        |   |      |   |        |              |  |   |                 |   |  |               |        |   |                 |  |        |               |  |   |         |   |  |  |       |   
|---------------------------- |  | ---------------------------------- | ------ | - | ---- | - | ------ | ------------ |  | - | --------------- | - |  | ------------- | ------ | - | --------------- |  | ------ | ------------- |  | - | ------- | - |  |  | ----- | --
|                             |  |                                    |        |   |      |   |        | 2002 to 2003 |  |   | 2002 to 2003    |   |  | 2003 to 2004  |        |   | 2003 to 2004    | 
|                             |  | 2002                               |        |   | 2003 |   |        | 2004         |  |   | Variance in $s |   |  | Variance in % |        |   | Variance in $s |  |        | Variance in % | 
|                             |  |                                    |        |   |      |   |        |              |  |   |                 |   |  |               |        |   |                 |  |        |               | 
|                             |  | (In thousands, except percentages) |       
|Net cash provided (used) by: |  |                                    |        |   |      |   |        |              |  |   |                 |   |  |               |        |   |                 |  |        |               |  |   |         |   |  |  |       |   
|Operating activities         |  | $                                  | (9,211 | ) |      | $ | 9,638  |              |  | $ | (59             | ) |  | $             | 18,849 |   |                 |  | 205    | %             |  | $ | (9,697  | ) |  |  | (101  | )%
|Investing activities         |  | $                                  | (644   | ) |      | $ | (8,932 | )            |  |   | (27,810         | ) |  | $             | (8,288 | ) |                 |  | (1,287 | )%            |  | $ | (18,878 | ) |  |  | (211  | )%
|Financing activities         |  | $                                  | 14     |   |      | $ | 1,601  |              |  | $ | 81,590          |   |  | $             | 1,587  |   |                 |  | 11,336 | %             |  | $ | 79,989  |   |  |  | 4,996 | % 













Contractual Obligations




|                     |  |       |        |                        |        |  |        |           |      |  |           |  |  |         |   |  |  |  |   | 
|-------------------- |  | ----- | ------ | ---------------------- | ------ |  | ------ | --------- | ---- |  | --------- |  |  | ------- | - |  |  |  | - | 
|                     |  |       |        | Payments Due by Period |       
|                     |  |       |        |                        |       
|                     |  |       |        | Less                   |        |  |        |           | More | 
|                     |  |       |        | than                   |        |  |        |           | Than | 
|                     |  | Total |        |                        | 1 Year |  |        | 1-3 Years |      |  | 4-5 Years |  |  | 5 Years |  
|                     |  |       |        |                        |        |  |        |           |      |  |           |  |  |         |  
|Operating Leases     |  | $     | 1,685  |                        |        |  | 1,269  |           |      |  | 416       |  |  |         |  |  |  |  |  | 
|Purchase Obligations |  | $     | 11,657 |                        |        |  | 11,657 |           |      |  |          |  |  |         |  |  |  |  |  | 
|Total                |  | $     | 13,342 |                        |        |  | 12,926 |           |      |  | 416       |  |  |         |  |  |  |  |  | 



34



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Off-Balance Sheet Arrangements




Critical Accounting Policies




Revenue Recognition.






35



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Inventory Reserves.


Allowance for Doubtful Accounts.


Valuation of Intangible Assets.


Deferred Income Taxes.


Warranty Reserves.


36



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Loss Contingencies.


Leases.


Employee Stock Options.







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







37



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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 (As restated):                                                                                      |  |      |    | 
|                                                                                                                                     
|Report of Independent Registered Public
    Accounting Firm                                                                           |  |      | 39 | 
|                                                                                                                                     
|Consolidated Balance Sheets
    December 31, 2003 and 2004                                                                            |  |      | 40 | 
|                                                                                                                                     
|Consolidated Statements of Operations Years
    ended December 31, 2002, 2003, and 2004                                               |  |      | 41 | 
|                                                                                                                                     
|Consolidated Statements of
    Stockholders Equity and Comprehensive Income (Loss) Years
    ended December 31, 2002, 2003, and 2004 |  |      | 42 | 
|                                                                                                                                     
|Consolidated Statements of Cash Flows Years
    ended December 31, 2002, 2003 and 2004                                                |  |      | 43 | 
|                                                                                                                                     
|Notes to Consolidated Financial
    Statements                                                                                        |  |      | 44 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






















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CARRIER ACCESS CORPORATION





CONSOLIDATED BALANCE SHEETS


|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |             |  |        |         |         | 
|-------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------- | ----------- |  | ------ | ------- | ------- | 
|                                                                                                                                       |                                                                                                                                                                                     | December 31,                               |      
|                                                                                                                                       |                                                                                                                                                                                     |                                            |      
|                                                                                                                                       |                                                                                                                                                                                     | 2003                                       |       |         | 2004        | 
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |             | 
|                                                                                                                                       |                                                                                                                                                                                     | (In thousands)                             |      
|                                                                                                                                       |                                                                                                                                                                                     | As restated                                |       |         | As restated | 
|ASSETS                                                                                                                                
|Current assets:                                                                                                                        |                                                                                                                                                                                     |                                            |       |         |             |  |        |        
|                                                                                                                                       | Cash and cash equivalents                                                                                                                                                           |                                            | $     | 17,207  |             |  | $      | 70,928  |        
|                                                                                                                                       | Marketable securities available for sale                                                                                                                                            |                                            |       | 19,335  |             |  |        | 37,755  |        
|                                                                                                                                       | Accounts receivable, net of allowance for doubtful accounts and
    returns of $871 and $359 in 2003 and 2004, respectively                                                         |                                            |       | 18,249  |             |  |        | 11,949  |        
|                                                                                                                                       | Income tax receivable                                                                                                                                                               |                                            |       | 83      |             |  |        | 161     |        
|                                                                                                                                       | Deferred income taxes                                                                                                                                                               |                                            |       | 830     |             |  |        | 363     |        
|                                                                                                                                       | Inventory, net                                                                                                                                                                      |                                            |       | 25,273  |             |  |        | 32,009  |        
|                                                                                                                                       | Prepaid expenses and other                                                                                                                                                          |                                            |       | 4,625   |             |  |        | 4,513   |        
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |             | 
|                                                                                                                                       |                                                                                                                                                                                     | Total current assets                       |       |         | 85,602      |  |        |         | 157,678 | 
|Property and equipment, net of accumulated depreciation and
    amortization of $15,538 and $18,585 in 2003 and 2004,
    respectively |                                                                                                                                                                                     |                                            | 7,012 |         |             |  | 12,239 |        
|Goodwill                                                                                                                               |                                                                                                                                                                                     |                                            | 6,748 |         |             |  | 7,588  |        
|Intangibles, net of amortization of $262 and $1,580 in 2003 and
    2004, respectively                                                 |                                                                                                                                                                                     |                                            | 7,692 |         |             |  | 6,412  |        
|Other assets                                                                                                                           |                                                                                                                                                                                     |                                            | 372   |         |             |  | 218    |        
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |             | 
|                                                                                                                                       |                                                                                                                                                                                     | Total assets                               |       | $       | 107,426     |  |        | $       | 184,135 | 
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |             | 
|                                                                                                                                      
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                  
|Current liabilities:                                                                                                                   |                                                                                                                                                                                     |                                            |       |         |             |  |        |        
|                                                                                                                                       | Accounts payable                                                                                                                                                                    |                                            | $     | 12,862  |             |  | $      | 11,246  |        
|                                                                                                                                       | Accrued compensation payable                                                                                                                                                        |                                            |       | 2,905   |             |  |        | 2,917   |        
|                                                                                                                                       | Accrued restructuring                                                                                                                                                               |                                            |       | 536     |             |  |        | 260     |        
|                                                                                                                                       | Deferred rent                                                                                                                                                                       |                                            |       | 912     |             |  |        | 189     |        
|                                                                                                                                       | Other accrued liabilities                                                                                                                                                           |                                            |       | 933     |             |  |        | 1,019   |        
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |             | 
|                                                                                                                                       |                                                                                                                                                                                     | Total current liabilities                  |       |         | 18,148      |  |        |         | 15,631  | 
|Deferred income taxes                                                                                                                  |                                                                                                                                                                                     |                                            | 830   |         |             |  | 363    |        
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |             | 
|                                                                                                                                       |                                                                                                                                                                                     | Total liabilities                          |       |         | 18,978      |  |        |         | 15,994  | 
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |             | 
|Stockholders equity:                                                                                                                  |                                                                                                                                                                                     |                                            |       |         |             |  |        |        
|                                                                                                                                       | Preferred stock, $0.001 par value, 5,000 shares
    authorized and no shares issued or outstanding at
    December 31, 2003 and 2004                                                |                                            |       |        |             |  |        |        |        
|                                                                                                                                       | Common stock, $0.001 par value, 60,000 authorized,
    26,588 shares issued and outstanding at December 31,
    2003, 34,479 shares issued and outstanding at
    December 31, 2004 |                                            |       | 27      |             |  |        | 34      |        
|                                                                                                                                       | Additional paid-in capital                                                                                                                                                          |                                            |       | 106,571 |             |  |        | 188,147 |        
|                                                                                                                                       | Deferred stock compensation                                                                                                                                                         |                                            |       | (12     | )           |  |        |        |        
|                                                                                                                                       | Accumulated deficit                                                                                                                                                                 |                                            |       | (18,131 | )           |  |        | (19,910 | )      
|                                                                                                                                       | Accumulated other comprehensive income (loss)                                                                                                                                       |                                            |       | (7      | )           |  |        | (130    | )      
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |             | 
|                                                                                                                                       |                                                                                                                                                                                     | Total stockholders equity                 |       |         | 88,448      |  |        |         | 168,141 | 
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |             | 
|                                                                                                                                       | Commitments and contingencies (Note 12)                                                                                                                                             |                                            |       |         |             |  |        |         |        
|                                                                                                                                       |                                                                                                                                                                                     | Total liabilities and stockholders equity |       | $       | 107,426     |  |        | $       | 184,135 | 
|                                                                                                                                       |                                                                                                                                                                                     |                                            |       |         |             | 



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CARRIER ACCESS CORPORATION





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                             |                                            |                                       |        |             |         |   |             |        |       |   |        |        |        |  
|-------------------------------------------- | ------------------------------------------ | ------------------------------------- | ------ | ----------- | ------- | - | ----------- | ------ | ----- | - | ------ | ------ | ------ | -
|                                             |                                            | Year Ended December 31,               |       
|                                             |                                            |                                       |       
|                                             |                                            | 2002                                  |        |             | 2003    |   |             | 2004   |      
|                                             |                                            |                                       |        |             |         |   |             |        |      
|                                             |                                            | (In thousands, except per share data) |       
|                                             |                                            |                                       |        | As restated |         |   | As restated |       
|Revenue, net of allowances for sales returns |                                            | $                                     | 50,247 |             |         | $ | 62,472      |        |       | $ | 95,493 |       
|Cost of sales                                |                                            |                                       | 33,145 |             |         |   | 36,086      |        |       |   | 55,381 |       
|                                             |                                            |                                       |        |             |         |   |             |        |      
|                                             | Gross profit                               |                                       |        | 17,102      |         |   |             | 26,386 |       |   |        | 40,112 |       
|                                             |                                            |                                       |        |             |         |   |             |        |      
|Operating expenses:                          |                                            |                                       |        |             |         |   |             |        |       |   |        |       
|                                             | Sales and marketing                        |                                       |        | 18,259      |         |   |             | 11,776 |       |   |        | 15,963 |       
|                                             | Research and development                   |                                       |        | 23,728      |         |   |             | 11,001 |       |   |        | 18,194 |       
|                                             | General and administrative                 |                                       |        | 9,823       |         |   |             | 5,362  |       |   |        | 7,198  |       
|                                             | Goodwill and intangible asset amortization |                                       |        | 216         |         |   |             | 262    |       |   |        | 1,268  |       
|                                             | Asset impairment charges                   |                                       |        | 9,795       |         |   |             |       |       |   |        |       |       
|                                             | Restructuring charge                       |                                       |        | 1,981       |         |   |             |       |       |   |        | 218    |       
|                                             | Settlement expenses                        |                                       |        |            |         |   |             |       |       |   |        | 2,138  |       
|                                             | Bad debt expense (recovery)                |                                       |        | 5,567       |         |   |             | (3,085 | )     |   |        | (289   | )     
|                                             |                                            |                                       |        |             |         |   |             |        |      
|                                             | Total operating expenses                   |                                       |        | 69,369      |         |   |             | 25,316 |       |   |        | 44,690 |       
|                                             |                                            |                                       |        |             |         |   |             |        |      
|                                             |                                            | Income (loss) from operations         |        |             | (52,267 | ) |             |        | 1,070 |   |        |        | (4,578 | )
|Interest income                              |                                            |                                       | 715    |             |         |   | 353         |        |       |   | 1,652  |       
|Other income (expense), net                  |                                            |                                       | (1     | )           |         |   |            |        |       |   | 1,135  |       
|                                             |                                            |                                       |        |             |         |   |             |        |      
|                                             |                                            | Income (loss) before income taxes     |        |             | (51,553 | ) |             |        | 1,423 |   |        |        | (1,791 | )
|Income taxes (benefit)                       |                                            |                                       | 1,102  |             |         |   | (89         | )      |       |   | (12    | )     
|                                             |                                            |                                       |        |             |         |   |             |        |      
|                                             | Net income (loss)                          |                                       | $      | (52,655     | )       |   | $           | 1,512  |       |   | $      | (1,779 | )     
|                                             |                                            |                                       |        |             |         |   |             |        |      
|Income (loss) per share:                     |                                            |                                       |        |             |         |   |             |        |       |   |        |       
|                                             | Basic                                      |                                       | $      | (2.13       | )       |   | $           | 0.06   |       |   | $      | (0.05  | )     
|                                             | Diluted                                    |                                       | $      | (2.13       | )       |   | $           | 0.06   |       |   | $      | (0.05  | )     
|Weighted average common shares outstanding:  |                                            |                                       |        |             |         |   |             |        |       |   |        |       
|                                             | Basic                                      |                                       |        | 24,754      |         |   |             | 24,815 |       |   |        | 32,546 |       
|                                             | Diluted                                    |                                       |        | 24,754      |         |   |             | 26,545 |       |   |        | 32,546 |       



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CARRIER ACCESS CORPORATION





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND


COMPREHENSIVE INCOME (LOSS)


Years Ended December 31, 2002, 2003, and 2004


|                                                                             |                                                                     |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |   |   |      |      |   |   |         |         |         |  
|---------------------------------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------- | ------ | - | ---------- | - | -- | -------------- |  | -------- | ------------- | - | ----- | ------------- | ---- | ----- | ------------- | - | ------- | ------ | - | - | ---- | ---- | - | - | ------- | ------- | ------- | -
|                                                                             |                                                                     |                                          |        |   |            |   |    | Retained       |  |          | Accumulated   |   |       |              
|                                                                             |                                                                     | Common Stock                             |        |   | Additional |   |    |                |  | Earnings |               |   | Other |               |      | Total |              
|                                                                             |                                                                     |                                          |        |   | Paid-In    |   |    | Deferred Stock |  |          | (Accumulated) |   |       | Comprehensive |      |       | Stockholders |  
|                                                                             |                                                                     | Shares                                   |        |   | Amount     |   |    | Capital        |  |          | Compensation  |   |       | (Deficit)     |      |       | Income (Loss) |   |         | Equity |  
|                                                                             |                                                                     |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |  
|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 stock options                                                 |                                                                     |                                          |       |   |            |   |   |                |  |          | (202          | ) |       |               | 202  |       |               |   |        |        |   |   |     |      |   |   |        |        
|Comprehensive loss:                                                          |                                                                     |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |   |   |      |      |   |   |         |        
|                                                                             | Net change in unrealized gain (loss) on investments, net
    of tax |                                          |        |  |            |   |    |               |  |          |               |  |       |               |      |      |               |   |         |       |   |   |      | (37  | ) |   |         | (37     | )      
|                                                                             | Net loss                                                            |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |   |   |      |      |   |   |         | (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 Income:                                                        |                                                                     |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |   |   |      |      |   |   |        |        
|                                                                             | Net change in unrealized gain (loss) on investments, net
    of tax |                                          |        |  |            |   |    |               |  |          |               |  |       |               |      |      |               |   |         |       |   |   |      | (19  | ) |   |         | (19     | )      
|                                                                             | Net income (as restated)                                            |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         | 1,512  |   |   |      |      |   |   |         | 1,512   |        
|                                                                             |                                                                     |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |  
|                                                                             |                                                                     | Total comprehensive income (as restated) |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |   |   |      |      |   |   |         |         | 1,493   |  
|                                                                             |                                                                     |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |  
|BALANCES AT DECEMBER 31, 2003 (As restated)                                  |                                                                     |                                          | 26,588 |   |            |   | 27 |                |  |          | 106,571       |   |       |               | (12  | )     |               |   | (18,131 | )      |   |   | (7   | )    |   |   | 88,448  |        
|Exercise of stock options                                                    |                                                                     |                                          | 1,066  |   |            |   |   |                |  |          | 3,211         |   |       |               |     |       |               |   |        |        |   |   |     |      |   |   | 3,211   |        
|Sale of common stock in public offering, net of offering costs
    of $5,228 |                                                                     |                                          | 6,825  |   |            |   | 7  |                |  |          | 78,372        |   |       |               |     |       |               |   |        |        |   |   |     |      |   |   | 78,379  |        
|Amortization of deferred stock compensation                                  |                                                                     |                                          |       |   |            |   |   |                |  |          |              |   |       |               | 5    |       |               |   |        |        |   |   |     |      |   |   | 5       |        
|Forfeitures of stock options                                                 |                                                                     |                                          |       |   |            |   |   |                |  |          | (7            | ) |       |               | 7    |       |               |   |        |        |   |   |     |      |   |   |        |        
|Comprehensive Income:                                                        |                                                                     |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |   |   |      |      |   |   |         |        
|                                                                             | Net change in unrealized gain (loss) on investments, net
    of tax |                                          |        |   |            |   |    |               |  |          |               |  |       |               |      |      |               |   |         |       |   |   |      | (123 | ) |   |         | (123    | )      
|                                                                             | Net loss (as restated)                                              |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         | (1,779 | ) |   |      |      |   |   |         | (1,779  | )      
|                                                                             |                                                                     |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |  
|                                                                             |                                                                     | Total comprehensive loss (as restated)   |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |   |   |      |      |   |   |         |         | (1,902  | )
|                                                                             |                                                                     |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |  
|BALANCES AT DECEMBER 31, 2004 (As restated)                                  |                                                                     |                                          | 34,479 |   |            | $ | 34 |                |  | $        | 188,147       |   |       | $             |     |       |               | $ | (19,910 | )      |   | $ | (130 | )    |   | $ | 168,141 |        
|                                                                             |                                                                     |                                          |        |   |            |   |    |                |  |          |               |   |       |               |      |       |               |   |         |        |  



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CARRIER ACCESS CORPORATION





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |        |        |   |         |       |        |  
|------------------------------------- | --------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ---------------------------- | ----------- | ----- | ------ | ----------- | ------- | ------ | ------ | - | ------- | ----- | ------ | -
|                                      |                                                                                                     | Year end December 31,                                 |                             
|                                      |                                                                                                     |                                                       |                             
|                                      |                                                                                                     | 2002                                                  |                              |             | 2003  |        |             | 2004    |       
|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |       
|                                      |                                                                                                     | (In thousands)                                        |                             
|                                      |                                                                                                     |                                                       |                              | As restated |       |        | As restated |        
|Cash flows from operating activities: |                                                                                                     |                                                       |                              |             |       |        |             |         |        |        |   |        
|                                      | Net income (loss)                                                                                   |                                                       | $                            | (52,655     | )     |        | $           | 1,512   |        |        | $ | (1,779  | )    
|                                      | Adjustments to reconcile net income (loss) to net cash provided
    (used) by operating activities: |                                                       |                              |             |       |        |             |         |        |        |   |         |      
|                                      |                                                                                                     | Depreciation and amortization expense                 |                              |             | 5,759 |        |             |         | 4,062  |        |   |         | 4,547 |       
|                                      |                                                                                                     | Provisions for (recoveries of) doubtful accounts      |                              |             | 5,567 |        |             |         | (3,085 | )      |   |         | (289  | )     
|                                      |                                                                                                     | Provisions for (recoveries of) inventory obsolescence |                              |             | 3,619 |        |             |         | 1,112  |        |   |         | 1,152 |       
|                                      |                                                                                                     | Asset impairment charges                              |                              |             | 9,795 |        |             |         |       |        |   |         |      |       
|                                      |                                                                                                     | Stock-based compensation                              |                              |             | 199   |        |             |         | 77     |        |   |         | 5     |       
|                                      |                                                                                                     | Deferred income tax expense (benefit)                 |                              |             | 7,319 |        |             |         |       |        |   |         |      |       
|                                      |                                                                                                     | Gain on sale of asset                                 |                              |             |       |        |             |         |        |        |   |         | (143  | )     
|                                      |                                                                                                     | Changes in operating assets and liabilities:          |                              |             |       |        |             |         |        |        |   |         |       |       
|                                      |                                                                                                     |                                                       | Accounts receivable          |             |       | 3,643  |             |         |        | (4,681 | ) |         |       | 6,589  |  
|                                      |                                                                                                     |                                                       | Income tax receivable        |             |       | 1,479  |             |         |        | 6,906  |   |         |       | (78    | )
|                                      |                                                                                                     |                                                       | Inventory                    |             |       | 8,747  |             |         |        | 1,500  |   |         |       | (7,888 | )
|                                      |                                                                                                     |                                                       | Prepaid expenses and other   |             |       | 1,418  |             |         |        | (3,370 | ) |         |       | 228    |  
|                                      |                                                                                                     |                                                       | Accounts payable             |             |       | (3,427 | )           |         |        | 5,540  |   |         |       | (1,772 | )
|                                      |                                                                                                     |                                                       | Accrued compensation payable |             |       | (2,024 | )           |         |        | 777    |   |         |       | (672   | )
|                                      |                                                                                                     |                                                       | Accrued restructuring        |             |       | 1,586  |             |         |        | (1,050 | ) |         |       | (276   | )
|                                      |                                                                                                     |                                                       | Other liabilities            |             |       | (236   | )           |         |        | 338    |   |         |       | 317    |  
|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |       
|                                      | Net cash provided (used) by operating activities                                                    |                                                       |                              | (9,211      | )     |        |             | 9,638   |        |        |   | (59     | )    
|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |       
|Cash flows from investing activities: |                                                                                                     |                                                       |                              |             |       |        |             |         |        |        |   |        
|                                      | Purchase of equipment and real property                                                             |                                                       |                              | (1,651      | )     |        |             | (770    | )      |        |   | (9,285  | )    
|                                      | Proceeds from the sale of property                                                                  |                                                       |                              |            |       |        |             |        |        |        |   | 368     |      
|                                      | Purchase of marketable securities                                                                   |                                                       |                              | (11,359     | )     |        |             | (18,617 | )      |        |   | (53,318 | )    
|                                      | Sales of marketable securities available for sale                                                   |                                                       |                              | 12,366      |       |        |             | 10,091  |        |        |   | 34,775  |      
|                                      | Net cash acquired (paid) in the purchase of Paragon                                                 |                                                       |                              |            |       |        |             | 364     |        |        |   | (350    | )    
|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |       
|                                      | Net cash used by investing activities                                                               |                                                       |                              | (644        | )     |        |             | (8,932  | )      |        |   | (27,810 | )    
|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |       
|Cash flows from financing activities: |                                                                                                     |                                                       |                              |             |       |        |             |         |        |        |   |        
|                                      | Proceeds from exercise of stock options                                                             |                                                       |                              | 14          |       |        |             | 1,601   |        |        |   | 3,211   |      
|                                      | Proceeds from stock offering                                                                        |                                                       |                              |            |       |        |             |        |        |        |   | 83,606  |      
|                                      | Stock issuance costs                                                                                |                                                       |                              |            |       |        |             |        |        |        |   | (5,227  | )    
|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |       
|                                      | Net cash provided by financing activities                                                           |                                                       |                              | 14          |       |        |             | 1,601   |        |        |   | 81,590  |      
|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |       
|                                      | Net increase (decrease) in cash and cash equivalents                                                |                                                       |                              | (9,841      | )     |        |             | 2,307   |        |        |   | 53,721  |      
|                                      | Cash and cash equivalents at beginning of year                                                      |                                                       |                              | 24,741      |       |        |             | 14,900  |        |        |   | 17,207  |      
|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |       
|                                      | Cash and cash equivalents at end of year                                                            |                                                       | $                            | 14,900      |       |        | $           | 17,207  |        |        | $ | 70,928  |      
|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |       
|                                      | Supplemental disclosure of cash flow information and investing
    and financing activities:        |                                                       |                              |             |       |        |             |         |        |        |   |         |      
|                                      | Common stock issued for acquisition                                                                 |                                                       | $                            |            |       |        | $           | 19,163  |        |        | $ |        |      
|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |       
|                                      | Accounts receivable in exchange for notes receivable                                                |                                                       | $                            | 775         |       |        | $           |        |        |        | $ |        |      
|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |       
|                                      | Cash paid (received) for income taxes                                                               |                                                       | $                            | (7,180      | )     |        | $           | (6,995  | )      |        | $ | 50      |      
|                                      |                                                                                                     |                                                       |                              |             |       |        |             |         |       



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CARRIER ACCESS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2002, 2003, and 2004


Restatement






|   |                                           
|-- | ------------------------------------------
|1. | Summary of Significant Accounting Policies

Business and Basis of Presentation.






Cash and Cash Equivalents and Marketable Securities
Available for Sale.




|                           |       |              |        |        |      |  |        |                |  |  |                 |  | 
|-------------------------- | ----- | ------------ | ------ | ------ | ---- |  | ------ | -------------- |  |  | --------------- |  | 
|                           |       | Market Value |        |        |     
|                           |       |              |        |        |     
|                           |       | 2003         |        |        | 2004 |  |        | Interest Rates | 
|                           |       |              |        |        |      |  |        |                | 
|Municipal Bonds            |       | $            | 4,048  |        |      |  |       |                |  |  | 2.75% to 5.875% | 
|Municipal Short Term Notes |       |              | 15,265 |        |      |  | 37,755 |                |  |  | 1.1% to 3.76%   | 
|Other                      |       |              | 22     |        |      |  |       |                |  |  | 1.2% to 2.125%  | 
|                           |       |              |        |        |      |  |        |                | 
|                           | Total |              | $      | 19,335 |      |  | $      | 37,755         |  |  |                 |  | 
|                           |       |              |        |        |      |  |        |                | 



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Accounts receivable.


Other receivables.


Fair Value of Financial Instruments.


Inventory.


Property and Equipment.


Goodwill and Other Intangibles. Goodwill and
Other Intangibles.


Long-Lived Assets.




Revenue Recognition.


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Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities,


Research and Development Costs.


Income Taxes. Accounting for Income Taxes.


Earnings Per Share.


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|                                              |                                             |                         |                                                              |                                   |      |        |             |        |  |        |      |        |   |        |       |  
|--------------------------------------------- | ------------------------------------------- | ----------------------- | ------------------------------------------------------------ | --------------------------------- | ---- | ------ | ----------- | ------ |  | ------ | ---- | ------ | - | ------ | ----- | -
|                                              |                                             | 2002                    |                                                              |                                   | 2003 |        |             | 2004   | 
|                                              |                                             |                         |                                                              |                                   |      |        |             |        | 
|                                              |                                             | (In thousands, except   |                                                             
|                                              |                                             | per share amounts)      |                                                             
|                                              |                                             |                         |                                                              | As Restated                       |      |        | As Restated |       
|Basic earnings (loss) per share computation   |                                             |                         |                                                              |                                   |      |        |             |        |  |        |      |       
|                                              | Net income (loss)                           |                         | $                                                            | (52,655                           | )    |        | $           | 1,512  |  |        | $    | (1,779 | )
|                                              |                                             |                         |                                                              |                                   |      |        |             |        | 
|                                              | Weighted average shares outstanding  basic |                         |                                                              | 24,754                            |      |        |             | 24,815 |  |        |      | 32,546 |  
|                                              |                                             |                         |                                                              |                                   |      |        |             |        | 
|                                              |                                             |                         |                                                              | Basic earnings (loss) per share   |      | $      | (2.13       | )      |  | $      | 0.06 |        |   | $      | (0.05 | )
|                                              |                                             |                         |                                                              |                                   |      |        |             |        | 
|Diluted earnings (loss) per share computation |                                             |                         |                                                              |                                   |      |        |             |        |  |        |      |       
|                                              | Net income (loss)                           |                         | $                                                            | (52,655                           | )    |        | $           | 1,512  |  |        | $    | (1,779 | )
|                                              |                                             |                         |                                                              |                                   |      |        |             |        | 
|                                              |                                             | Weighted-average shares |                                                              |                                   |      |        |             |        |  |        |      |        |   |       
|                                              |                                             |                         | Average shares outstanding-basic                             |                                   |      | 24,754 |             |        |  | 24,815 |      |        |   | 32,546 |      
|                                              |                                             |                         | Net shares assumed issued through exercises of stock options |                                   |      |       |             |        |  | 1,730  |      |        |   |       |      
|                                              |                                             |                         |                                                              |                                   |      |        |             |        | 
|                                              |                                             |                         | Average shares outstanding-diluted                           |                                   |      | 24,754 |             |        |  | 26,545 |      |        |   | 32,546 |      
|                                              |                                             |                         |                                                              |                                   |      |        |             |        | 
|                                              |                                             |                         |                                                              | Diluted earnings (loss) per share |      | $      | (2.13       | )      |  | $      | 0.06 |        |   | $      | (0.05 | )
|                                              |                                             |                         |                                                              |                                   |      |        |             |        | 



Stock-Based Compensation. Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB Statement No. 123.


Accounting for Stock Based Compensation


|                                                                                                         |  |                         |         |             |      |   |             |      |  |   |        |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ----------- | ---- | - | ----------- | ---- |  | - | ------ | -
|                                                                                                         |  | Year Ended December 31, |        
|                                                                                                         |  |                         |        
|                                                                                                         |  | 2002                    |         |             | 2003 |   |             | 2004 | 
|                                                                                                         |  |                         |         |             |      |   |             |      | 
|                                                                                                         |  |                         |         | As Restated |      |   | As Restated |     
|                                                                                                         |  | (In thousands)          |        
|Net income (loss)                                                                                        |  | $                       | (52,655 | )           |      | $ | 1,512       |      |  | $ | (1,779 | )
|Add back: Stock-based employee compensation expense, as reported                                         |  |                         | 199     |             |      |   | 53          |      |  |   | 5      |  
|Deduct: Stock-based employee compensation expense, determined
    under fair value method for all awards |  |                         | (1,644  | )           |      |   | (1,259      | )    |  |   | (4,169 | )
|                                                                                                         |  |                         |         |             |      |   |             |      | 
|Net income (loss)                                                                                        |  | $                       | (54,100 | )           |      | $ | 306         |      |  | $ | (5,943 | )
|                                                                                                         |  |                         |         |             |      |   |             |      | 
|Income (loss) per share  basic, as reported                                                             |  | $                       | (2.13   | )           |      | $ | 0.06        |      |  | $ | (0.05  | )
|Income (loss) per share  diluted, as reported                                                           |  | $                       | (2.13   | )           |      | $ | 0.06        |      |  | $ | (0.05  | )
|Income (loss) per share  basic and diluted, as
    adjusted                                             |  | $                       | (2.19   | )           |      | $ | 0.01        |      |  | $ | (0.18  | )

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Warranty Costs.


|                                             |  |                         |      |   |      |   |      |      |  |   |        |  
|-------------------------------------------- |  | ----------------------- | ---- | - | ---- | - | ---- | ---- |  | - | ------ | -
|                                             |  | Year Ended December 31, |     
|                                             |  |                         |     
|                                             |  | 2002                    |      |   | 2003 |   |      | 2004 | 
|                                             |  |                         |      |   |      |   |      |      | 
|                                             |  | (In thousands)          |     
|Warranty Liability                           |  |                         |      |   |      |   |      |      |  |   |        |  
|Product warranty liability beginning balance |  | $                       | 599  |   |      | $ | 244  |      |  | $ | 410    |  
|Add: Current year accruals                   |  |                         | 535  |   |      |   | 995  |      |  |   | 1,361  |  
|Deduct: Current year charges                 |  |                         | (890 | ) |      |   | (829 | )    |  |   | (1,137 | )
|                                             |  |                         |      |   |      |   |      |      | 
|Product warranty liability ending balance    |  | $                       | 244  |   |      | $ | 410  |      |  | $ | 634    |  
|                                             |  |                         |      |   |      |   |      |      | 

Comprehensive Income (Loss).


Reclassifications.


Exit and Disposal Activities. Accounting for Costs
Associated with Exit or Disposal Activities.




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|     |  |                   |       |  |               |   |       |          |  |                |         |   |  |   |       | 
|---- |  | ----------------- | ----- |  | ------------- | - | ----- | -------- |  | -------------- | ------- | - |  | - | ----- | 
|     |  | Beginning Reserve |       |  | Restructuring |   |       |          |  | Ending Reserve |        
|     |  | Balance           |       |  | Charges       |   |       | Payments |  |                | Balance |  
|     |  |                   |       |  |               |   |       |          |  |                |         |  
|2002 |  |                   |      |  |               | $ | 1,986 |          |  | $              | (400    | ) |  | $ | 1,586 | 
|2003 |  | $                 | 1,586 |  |               |   |      |          |  | $              | (1,050  | ) |  | $ | 536   | 
|2004 |  | $                 | 536   |  |               | $ | 218   |          |  | $              | (494    | ) |  | $ | 260   | 



|   |                                          
|-- | -----------------------------------------
|2. | Recently Issued Accounting Pronouncements













| |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. A modified prospective method in which the
    compensation cost is recognized beginning with the effective
    date (a) based on the requirements of
    SFAS No. 123(R) for all share based payments granted
    after the effective date and (b) based on the requirements
    of SFAS No. 123 for all awards granted to employees
    prior to the effective date of SFAS No. 123(R) that
    remain unvested on the effective date.
|
| | 2. A modified retrospective method which
    includes the requirements of the modified prospective method,
    but also permits entities to restate based on the amounts
    previously recognized under SFAS 123 for                                                                                                                                                                                                                      

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| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | purposes of pro forma disclosures for either: (a) all prior
    periods presented or (b) prior interim periods of the year
    of adoption.











|   |            
|-- | -----------
|3. | Restatement



Passage of Title




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Probability of Collection




Undelivered Elements




Inventory Valuation




Summary




|                                 |                           |              |        |     |              |   |         |        |  
|-------------------------------- | ------------------------- | ------------ | ------ | --- | ------------ | - | ------- | ------ | -
|                                 |                           | Year Ended   |        |     | Year Ended   |  
|                                 |                           | December 31, |        |     | December 31, |  
|                                 |                           | 2003         |        |     | 2004         |  
|                                 |                           |              |        |     |              |  
|Revenues, as previously reported |                           | $            | 62,556 |     |              | $ | 101,375 |       
|Restatement adjustments:         |                           |              |        |     |              |   |         |       
|                                 | Passage of title          |              |        | (84 | )            |   |         | (1,154 | )
|                                 | Probability of collection |              |        |    |              |   |         | (4,514 | )
|                                 | Undelivered elements      |              |        |    |              |   |         | (214   | )
|                                 |                           |              |        |     |              |  
|Total restatement adjustments    |                           |              | (84    | )   |              |   | (5,882  | )     
|                                 |                           |              |        |     |              |  
|Revenues, as restated            |                           | $            | 62,472 |     |              | $ | 95,493  |       
|                                 |                           |              |        |     |              |  

|                                   |                           |              |       |      |              |   |        |        |  
|---------------------------------- | ------------------------- | ------------ | ----- | ---- | ------------ | - | ------ | ------ | -
|                                   |                           | Year Ended   |       |      | Year Ended   |  
|                                   |                           | December 31, |       |      | December 31, |  
|                                   |                           | 2003         |       |      | 2004         |  
|                                   |                           |              |       |      |              |  
|Net income, as previously reported |                           | $            | 2,458 |      |              | $ | 899    |       
|Restatement adjustments:           |                           |              |       |      |              |   |        |       
|                                   | Passage of title          |              |       | (34  | )            |   |        | (459   | )
|                                   | Probability of collection |              |       |     |              |   |        | (2,170 | )
|                                   | Undelivered elements      |              |       |     |              |   |        | (230   | )
|                                   | Inventory valuation       |              |       | (912 | )            |   |        | 181    |  
|                                   |                           |              |       |      |              |  
|Total restatement adjustments      |                           |              | (946  | )    |              |   | (2,678 | )     
|                                   |                           |              |       |      |              |  
|Net income (loss), as restated     |                           | $            | 1,512 |      |              | $ | (1,779 | )     
|                                   |                           |              |       |      |              |  

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|                              |  |                   |        |  |                   |   |        |          |  |   |          |   |  |   |        |  
|----------------------------- |  | ----------------- | ------ |  | ----------------- | - | ------ | -------- |  | - | -------- | - |  | - | ------ | -
|                              |  | Year Ended        |        |  | Year Ended        |  
|                              |  | December 31, 2003 |        |  | December 31, 2004 |  
|                              |  |                   |        |  |                   |  
|                              |  | As                |        |  | As                |   |        | As       |  |   | As       |  
|                              |  | reported          |        |  | restated          |   |        | reported |  |   | restated |  
|                              |  |                   |        |  |                   |   |        |          |  |   |          |  
|Statement of Operations       |  |                   |        |  |                   |   |        |          |  |   |          |   |  |   |        |  
|Revenue                       |  | $                 | 62,556 |  |                   | $ | 62,472 |          |  | $ | 101,375  |   |  | $ | 95,493 |  
|Cost of sales                 |  |                   | 35,224 |  |                   |   | 36,086 |          |  |   | 58,601   |   |  |   | 55,381 |  
|Gross profit                  |  |                   | 27,332 |  |                   |   | 26,386 |          |  |   | 42,774   |   |  |   | 40,112 |  
|Sales and marketing           |  |                   | 11,776 |  |                   |   | 11,776 |          |  |   | 15,947   |   |  |   | 15,963 |  
|Total operating expenses      |  |                   | 25,316 |  |                   |   | 25,316 |          |  |   | 44,674   |   |  |   | 44,690 |  
|Income (loss) from operations |  |                   | 2,016  |  |                   |   | 1,070  |          |  |   | (1,900   | ) |  |   | (4,578 | )
|Income (loss) before taxes    |  |                   | 2,369  |  |                   |   | 1,423  |          |  |   | 887      |   |  |   | (1,791 | )
|Net income (loss)             |  |                   | 2,458  |  |                   |   | 1,512  |          |  |   | 899      |   |  |   | (1,779 | )
|Comprehensive income (loss)   |  |                   | 2,439  |  |                   |   | 1,493  |          |  |   | 776      |   |  |   | (1,902 | )
|Per-share amounts:            |  |                   |        |  |                   |   |        |          |  |   |          |   |  |   |        |  
|Basic earnings per share      |  | $                 | 0.10   |  |                   | $ | 0.06   |          |  | $ | 0.03     |   |  | $ | (0.05  | )
|Diluted earnings per share    |  | $                 | 0.09   |  |                   | $ | 0.06   |          |  | $ | 0.03     |   |  | $ | (0.05  | )

|                                                            |                       |              |         |      |              |   |         |        |  
|----------------------------------------------------------- | --------------------- | ------------ | ------- | ---- | ------------ | - | ------- | ------ | -
|                                                            |                       | Year Ended   |         |      | Year Ended   |  
|                                                            |                       | December 31, |         |      | December 31, |  
|                                                            |                       | 2003         |         |      | 2004         |  
|                                                            |                       |              |         |      |              |  
|Total assets, as previously reported                        |                       | $            | 107,542 |      |              | $ | 187,166 |       
|Restatement adjustments:                                    |                       |              |         |      |              |   |         |       
|                                                            | Accounts receivable   |              |         | (84  | )            |   |         | (5,752 | )
|                                                            | Inventory             |              |         | 50   |              |   |         | 3,089  |  
|                                                            | Inventory valuation   |              |         | (912 | )            |   |         | (731   | )
|                                                            | Deferred income taxes |              |         | 830  |              |   |         | 363    |  
|                                                            |                       |              |         |      |              |  
|Total adjustments                                           |                       |              | (116    | )    |              |   | (3,031  | )     
|                                                            |                       |              |         |      |              |  
|Total assets, as restated                                   |                       | $            | 107,426 |      |              | $ | 184,135 |       
|                                                            |                       |              |         |      |              |  
|Total liabilities, as previously reported                   |                       | $            | 18,148  |      |              | $ | 15,401  |       
|Restatement adjustments:                                    |                       |              |         |      |              |   |         |       
|                                                            | Deferred revenue      |              |         |     |              |   |         | 214    |  
|                                                            | Accrued liabilities   |              |         |     |              |   |         | 16     |  
|                                                            | Deferred income taxes |              |         | 830  |              |   |         | 363    |  
|                                                            |                       |              |         |      |              |  
|Total adjustments                                           |                       |              | 830     |      |              |   | 593     |       
|                                                            |                       |              |         |      |              |  
|Total liabilities, as restated                              |                       | $            | 18,978  |      |              | $ | 15,994  |       
|                                                            |                       |              |         |      |              |  
|Total stockholders equity, as restated                     |                       | $            | 88,448  |      |              | $ | 168,141 |       
|                                                            |                       |              |         |      |              |  
|Total liabilities and stockholders equity, as
    restated |                       | $            | 107,426 |      |              | $ | 184,135 |       
|                                                            |                       |              |         |      |              |  

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|                                                      |  |          |         |   |          |   |         |          |  |   |          |   |  |   |         |  
|----------------------------------------------------- |  | -------- | ------- | - | -------- | - | ------- | -------- |  | - | -------- | - |  | - | ------- | -
|                                                      |  | 2003     |         |   | 2004     |  
|                                                      |  |          |         |   |          |  
|                                                      |  | As       |         |   | As       |   |         | As       |  |   | As       |  
|                                                      |  | reported |         |   | restated |   |         | reported |  |   | restated |  
|                                                      |  |          |         |   |          |   |         |          |  |   |          |  
|Balance Sheet                                         |  |          |         |   |          |   |         |          |  |   |          |   |  |   |         |  
|Accounts receivable                                   |  | $        | 18,333  |   |          | $ | 18,249  |          |  | $ | 17,700   |   |  | $ | 11,949  |  
|Inventory                                             |  |          | 26,135  |   |          |   | 25,273  |          |  |   | 29,652   |   |  |   | 32,009  |  
|Deferred income taxes                                 |  |          |        |   |          |   | 830     |          |  |   |         |   |  |   | 363     |  
|Total current assets                                  |  |          | 85,718  |   |          |   | 85,602  |          |  |   | 160,709  |   |  |   | 157,678 |  
|Total assets                                          |  |          | 107,542 |   |          |   | 107,426 |          |  |   | 187,166  |   |  |   | 184,135 |  
|Other accrued liabilities, including deferred revenue |  |          | 933     |   |          |   | 933     |          |  |   | 789      |   |  |   | 1,019   |  
|Total current liabilities                             |  |          | 18,148  |   |          |   | 18,148  |          |  |   | 15,401   |   |  |   | 15,631  |  
|Long term liabilities  deferred income taxes         |  |          |        |   |          |   | 830     |          |  |   |         |   |  |   | 363     |  
|Total liabilities                                     |  |          |        |   |          |   | 18,978  |          |  |   |         |   |  |   | 15,994  |  
|Accumulated deficit                                   |  |          | (17,185 | ) |          |   | (18,131 | )        |  |   | (16,286  | ) |  |   | (19,910 | )
|Total stockholders equity                            |  |          | 89,394  |   |          |   | 88,448  |          |  |   | 171,765  |   |  |   | 168,141 |  
|Total liabilities and stockholders equity            |  |          | 107,542 |   |          |   | 107,426 |          |  |   | 187,166  |   |  |   | 184,135 |  

|                                                                                                    |                                                       |          |       |        |          |   |       |          |   |   |          |        |   |   |        |        |  
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | -------- | ----- | ------ | -------- | - | ----- | -------- | - | - | -------- | ------ | - | - | ------ | ------ | -
|                                                                                                    |                                                       | 2003     |       |        | 2004     |  
|                                                                                                    |                                                       |          |       |        |          |  
|                                                                                                    |                                                       | As       |       |        | As       |   |       | As       |   |   | As       |       
|                                                                                                    |                                                       | reported |       |        | restated |   |       | reported |   |   | restated |       
|                                                                                                    |                                                       |          |       |        |          |   |       |          |   |   |          |       
|Statement of Cash Flows                                                                             |                                                       |          |       |        |          |   |       |          |   |   |          |        |   |   |        |       
|Net income (loss)                                                                                   |                                                       | $        | 2,458 |        |          | $ | 1,512 |          |   | $ | 899      |        |   | $ | (1,779 | )     
|Adjustments to reconcile net income (loss) to net cash provided
    (used) by operating activities: |                                                       |          |       |        |          |   |       |          |   |   |          |        |   |   |        |       
|                                                                                                    | Provisions for (recoveries of) inventory obsolescence |          |       | 200    |          |   |       | 1,112    |   |   |          | 1,333  |   |   |        | 1,152  |  
|Changes in operating assets and liabilities:                                                        |                                                       |          |       |        |          |   |       |          |   |   |          |        |   |   |        |       
|                                                                                                    | Accounts receivable                                   |          |       | (4,765 | )        |   |       | (4,681   | ) |   |          | 922    |   |   |        | 6,590  |  
|                                                                                                    | Inventory                                             |          |       | 1,550  |          |   |       | 1,500    |   |   |          | (4,850 | ) |   |        | (7,889 | )
|                                                                                                    | Other liabilities                                     |          |       | 338    |          |   |       | 338      |   |   |          | 87     |   |   |        | 317    |  



|   |                      
|-- | ---------------------
|4. | Business Combinations





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

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|                                      |  |                   |        |  
|------------------------------------- |  | ----------------- | ------ | -
|                                      |  | November 25, 2003 |       
|                                      |  |                   |       
|                                      |  | (In thousands)    |       
|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 |  
|                                      |  |                   |       









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

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Unaudited Pro Forma Condensed Combined Statement of
Operations


|                                            |  |                           |         |             |      |   |        |  
|------------------------------------------- |  | ------------------------- | ------- | ----------- | ---- | - | ------ | -
|                                            |  | For the Twelve Months     |        
|                                            |  | Ended December 31,        |        
|                                            |  |                           |        
|                                            |  | 2002                      |         |             | 2003 |  
|                                            |  |                           |         |             |      |  
|                                            |  | (In thousands, except per |        
|                                            |  | share data)               |        
|                                            |  |                           |         | As restated |     
|Net revenue                                 |  | $                         | 63,231  |             |      | $ | 76,283 |  
|Cost of goods sold                          |  |                           | 40,872  |             |      |   | 43,084 |  
|                                            |  |                           |         |             |      |  
|Gross profit                                |  |                           | 22,359  |             |      |   | 33,199 |  
|                                            |  |                           |         |             |      |  
|Net income (loss)                           |  |                           | (60,239 | )           |      |   | (81    | )
|                                            |  |                           |         |             |      |  
|Income (loss) per share                     |  |                           |         |             |      |   |        |  
|Basic                                       |  | $                         | (2.31   | )           |      | $ | .00    |  
|                                            |  |                           |         |             |      |  
|Diluted                                     |  | $                         | (2.31   | )           |      | $ | .00    |  
|                                            |  |                           |         |             |      |  
|Weighted average common shares outstanding: |  |                           |         |             |      |   |        |  
|Basic                                       |  |                           | 26,089  |             |      |   | 26,150 |  
|                                            |  |                           |         |             |      |  
|Diluted                                     |  |                           | 26,089  |             |      |   | 27,880 |  
|                                            |  |                           |         |             |      |  

Preacquisition Contingencies.




|   |          
|-- | ---------
|5. | Inventory



|                         |  |             |        |   |             |   |        |  
|------------------------ |  | ----------- | ------ | - | ----------- | - | ------ | -
|                         |  | 2003        |        |   | 2004        |  
|                         |  |             |        |   |             |  
|                         |  | As Restated |        |   | As Restated |  
|Raw materials            |  | $           | 26,916 |   |             | $ | 31,276 |  
|Work-in-process          |  |             | 11     |   |             |   | 16     |  
|Finished goods           |  |             | 5,059  |   |             |   | 7,269  |  
|Reserve for obsolescence |  |             | (6,713 | ) |             |   | (6,552 | )
|                         |  |             |        |   |             |  
|                         |  | $           | 25,273 |   |             | $ | 32,009 |  
|                         |  |             |        |   |             |  

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|   |                       
|-- | ----------------------
|6. | Property and Equipment





|                                                             |  |      |         |   |      |   |         |  
|------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                                             |  | 2003 |         |   | 2004 |  
|                                                             |  |      |         |   |      |  
|Machinery and software (5 and 3 years respectively)          |  | $    | 19,206  |   |      | $ | 21,316  |  
|Real property (30 years)                                     |  |      | 265     |   |      |   | 7,701   |  
|Furniture, fixtures and other (7 years)                      |  |      | 823     |   |      |   | 821     |  
|Leasehold improvements (shorter of 7 years or life of lease) |  |      | 2,256   |   |      |   | 986     |  
|                                                             |  |      |         |   |      |  
|                                                             |  |      | 22,550  |   |      |   | 30,824  |  
|Less accumulated depreciation and amortization               |  |      | (15,538 | ) |      |   | (18,585 | )
|                                                             |  |      |         |   |      |  
|                                                             |  | $    | 7,012   |   |      | $ | 12,239  |  
|                                                             |  |      |         |   |      |  



|   |                               
|-- | ------------------------------
|7. | Goodwill and Other Intangibles





|                             |  |        |  |        |  |        |  |     
|---------------------------- |  | ------ |  | ------ |  | ------ |  | ----
|For Years Ended December 31,
|                            
|2005                         |  | 2006   |  | 2007   |  | 2008   |  | 2009
|                             |  |        |  |        |  |        |  |     
|(In thousands)              
|$1,229                       |  | $1,229 |  | $1,229 |  | $1,187 |  | $729



|                                 |  |      |       |   |      |   |        |  
|-------------------------------- |  | ---- | ----- | - | ---- | - | ------ | -
|                                 |  | 2003 |       |   | 2004 |  
|                                 |  |      |       |   |      |  
|Developed Technology (5 years)   |  | $    | 2,500 |   |      | $ | 2,500  |  
|Customer Relationships (7 years) |  |      | 5,100 |   |      |   | 5,100  |  
|Customer Backlog (3 months)      |  |      | 200   |   |      |   | 200    |  
|Trademarks & Patents (17 years)  |  |      | 154   |   |      |   | 192    |  
|                                 |  |      |       |   |      |  
|                                 |  |      | 7,954 |   |      |   | 7,992  |  
|Less accumulated amortization    |  |      | (262  | ) |      |   | (1,580 | )
|                                 |  |      |       |   |      |  
|                                 |  | $    | 7,692 |   |      | $ | 6,412  |  
|                                 |  |      |       |   |      |  

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|   |             
|-- | ------------
|8. | Income Taxes



|           |                                   |      |        |       |      |   |     |      |   |   |     |     |  
|---------- | --------------------------------- | ---- | ------ | ----- | ---- | - | --- | ---- | - | - | --- | --- | -
|U.S. Taxes |                                   | 2002 |        |       | 2003 |   |     | 2004 |  
|           |                                   |      |        |       |      |   |     |      |  
|Current    |                                   | $    | (6,217 | )     |      | $ | (89 | )    |   | $ | (46 | )  
|Deferred   |                                   |      | 7,319  |       |      |   |    |      |   |   |    |    
|           |                                   |      |        |       |      |   |     |      |  
|           | U.S. Income tax expense (benefit) |      | $      | 1,102 |      |   | $   | (89  | ) |   | $   | (46 | )
|           |                                   |      |        |       |      |   |     |      |  

|              |                                      |      |   |       |      |   |   |      |   |   |    |     |  
|------------- | ------------------------------------ | ---- | - | ----- | ---- | - | - | ---- | - | - | -- | --- | -
|Foreign Taxes |                                      | 2002 |   |       | 2003 |   |   | 2004 |  
|              |                                      |      |   |       |      |   |   |      |  
|Current       |                                      | $    |  |       |      | $ |  |      |   | $ | 34 |    
|Deferred      |                                      |      |  |       |      |   |  |      |   |   |   |    
|              |                                      |      |   |       |      |   |   |      |  
|              | Foreign Income tax expense (benefit) |      | $ |      |      |   | $ |     |   |   | $  | 34  |  
|              |                                      |      |   |       |      |   |   |      |  
|              | Total Income tax expense (benefit)   |      | $ | 1,102 |      |   | $ | (89  | ) |   | $  | (12 | )
|              |                                      |      |   |       |      |   |   |      |  



|                                             |                                     |      |         |             |      |   |             |      |   |   |        |     |  
|-------------------------------------------- | ----------------------------------- | ---- | ------- | ----------- | ---- | - | ----------- | ---- | - | - | ------ | --- | -
|                                             |                                     | 2002 |         |             | 2003 |   |             | 2004 |  
|                                             |                                     |      |         |             |      |   |             |      |  
|                                             |                                     |      |         | As restated |      |   | As restated |     
|Expected income tax expense (benefit)        |                                     | $    | (18,044 | )           |      | $ | 498         |      |   | $ | (627   | )  
|State income taxes, net of federal taxes     |                                     |      | (1,195  | )           |      |   | 40          |      |   |   | (26    | )  
|Change in valuation allowance                |                                     |      | 17,109  |             |      |   | 298         |      |   |   | 2,335  |    
|Non-deductible goodwill                      |                                     |      | 2,497   |             |      |   |            |      |   |   |       |    
|Exercise of non-qualified stock options      |                                     |      | (24     | )           |      |   | (1,153      | )    |   |   | (2,965 | )  
|Change in estimated effective state tax rate |                                     |      |        |             |      |   |            |      |   |   | 586    |    
|Other, net                                   |                                     |      | 759     |             |      |   | 228         |      |   |   | 685    |    
|                                             |                                     |      |         |             |      |   |             |      |  
|                                             | Actual income tax expense (benefit) |      | $       | 1,102       |      |   | $           | (89  | ) |   | $      | (12 | )
|                                             |                                     |      |         |             |      |   |             |      |  

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|                               |                                             |                                       |   |         |             |   |   |         |        |  
|------------------------------ | ------------------------------------------- | ------------------------------------- | - | ------- | ----------- | - | - | ------- | ------ | -
|                               |                                             | 2003                                  |   |         | 2004        |  
|                               |                                             |                                       |   |         |             |  
|                               |                                             | As restated                           |   |         | As restated |  
|Deferred tax assets:           |                                             |                                       |   |         |             |   |   |        
|                               | Allowance for doubtful accounts and returns |                                       | $ | 332     |             |   | $ | 94      |       
|                               | Inventory reserves                          |                                       |   | 3,865   |             |   |   | 2,547   |       
|                               | Restructuring reserve                       |                                       |   | 202     |             |   |   | 95      |       
|                               | Compensation accruals                       |                                       |   | 1,480   |             |   |   | 438     |       
|                               | Goodwill                                    |                                       |   | 2,352   |             |   |   | 2,086   |       
|                               | Net operating loss carryforwards            |                                       |   | 14,187  |             |   |   | 16,549  |       
|                               | Research and experimentation credit         |                                       |   | 4,306   |             |   |   | 5,129   |       
|                               | Property and Equipment                      |                                       |   |        |             |   |   | 224     |       
|                               | Other                                       |                                       |   | 595     |             |   |   | 609     |       
|                               | Unearned Income                             |                                       |   |        |             |   |   | 795     |       
|                               |                                             |                                       |   |         |             |  
|                               | Gross deferred tax assets                   |                                       |   | 27,319  |             |   |   | 28,566  |       
|                               | Less: Valuation allowance                   |                                       |   | (23,817 | )           |   |   | (26,152 | )     
|                               |                                             |                                       |   |         |             |  
|                               |                                             | Total deferred income tax assets      |   | $       | 3,502       |   |   | $       | 2,414  |  
|                               |                                             |                                       |   |         |             |  
|Deferred tax liabilities:      |                                             |                                       |   |         |             |   |   |        
|                               | Property and equipment                      |                                       |   | (167    | )           |   |   |        |       
|                               | Paragon identifiable intangibles            |                                       |   | (3,204  | )           |   |   | (2,296  | )     
|                               | Other                                       |                                       |   | (131    | )           |   |   | (118    | )     
|                               |                                             |                                       |   |         |             |  
|                               |                                             | Total deferred income tax liabilities |   | $       | (3,502      | ) |   | $       | (2,414 | )
|                               |                                             |                                       |   |         |             |  
|Net deferred income tax assets |                                             | $                                     |  |         |             | $ |  |        
|                               |                                             |                                       |   |         |             |  



|                                                  |  |             |        |   |             |   |        |  
|------------------------------------------------- |  | ----------- | ------ | - | ----------- | - | ------ | -
|                                                  |  | 2003        |        |   | 2004        |  
|                                                  |  |             |        |   |             |  
|                                                  |  | As restated |        |   | As restated |  
|Current assets                                    |  | $           | 830    |   |             | $ | 363    |  
|Current liabilities                               |  |             |       |   |             |   |       |  
|                                                  |  |             |        |   |             |  
|Net current deferred tax assets (liabilities)     |  | $           | 830    |   |             | $ | 363    |  
|                                                  |  |             |        |   |             |  
|Non-current assets                                |  | $           | 2,672  |   |             | $ | 2,051  |  
|Non-current liabilities                           |  |             | (3,502 | ) |             |   | (2,414 | )
|                                                  |  |             |        |   |             |  
|Net non-current deferred tax assets (liabilities) |  | $           | (830   | ) |             | $ | (363   | )
|                                                  |  |             |        |   |             |  



58



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|   |              
|-- | -------------
|9. | Stock Options



59



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|                                                 |                        |              |           |            |                |   |      |       | 
|------------------------------------------------ | ---------------------- | ------------ | --------- | ---------- | -------------- | - | ---- | ----- | 
|                                                 |                        |              |           | Weighted   |               
|                                                 |                        | Shares       |           |            | Average        |  
|                                                 |                        | Under Option |           |            | Exercise Price |  
|                                                 |                        |              |           |            |                |  
|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 |      
|                                                 |                        |              |           |            |                |  
|                                                 | Granted                |              |           | 1,254,700  |                |   |      | 10.26 | 
|                                                 | Exercised              |              |           | (1,065,884 | )              |   |      | 3.01  | 
|                                                 | Forfeited and canceled |              |           | (1,207,280 | )              |   |      | 9.34  | 
|                                                 |                        |              |           |            |                |  
|Options outstanding at December 31, 2004         |                        |              | 2,781,159 |            |                |   | 6.29 |      
|                                                 |                        |              |           |            |                |  
|Options available for grant at December 31, 2004 |                        |              | 1,837,400 |            |                |   |      |      
|                                                 |                        |              |           |            |                |  
|Options exercisable at December 31, 2002         |                        |              | 1,171,654 |            |                |   | 9.21 |      
|                                                 |                        |              |           |            |                |  
|Options exercisable at December 31, 2003         |                        |              | 1,197,602 |            |                |   | 6.18 |      
|                                                 |                        |              |           |            |                |  
|Options exercisable at December 31, 2004         |                        |              | 918,045   |            |                | $ | 5.59 |      
|                                                 |                        |              |           |            |                |  



|                |                |                     |             |                  |                     |                  |  |  |                  |           |  |             |       |  |                  |  |         |  |  |   |       | 
|--------------- | -------------- | ------------------- | ----------- | ---------------- | ------------------- | ---------------- |  |  | ---------------- | --------- |  | ----------- | ----- |  | ---------------- |  | ------- |  |  | - | ----- | 
|                |                | 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  |                     |             |                  | 2,357,307           |                  |  |  | 3.1              |           |  | $           | 4.73  |  |                  |  | 791,406 |  |  | $ | 3.72  | 
|                | 12.00  24.00  |                     |             |                  | 403,902             |                  |  |  | 3.5              |           |  |             | 13.79 |  |                  |  | 106,689 |  |  |   | 13.12 | 
|                | 24.00  36.00  |                     |             |                  | 4,500               |                  |  |  | .37              |           |  |             | 33.77 |  |                  |  | 4,500   |  |  |   | 33.77 | 
|                | 36.00  48.00  |                     |             |                  | 12,000              |                  |  |  | 1.3              |           |  |             | 37.97 |  |                  |  | 12,000  |  |  |   | 37.97 | 
|                | $48.00  60.00 |                     |             |                  | 3,450               |                  |  |  | .05              |           |  |             | 51.63 |  |                  |  | 3,450   |  |  |   | 51.63 | 
|                |                |                     |             |                  |                     |                  |  |  |                  |           |  |             |       |  |                  | 
|                |                |                     |             |                  | 2,781,159           |                  |  |  | 3.1              |           |  |             | 6.29  |  |                  |  | 918,045 |  |  |   | 5.59  | 
|                |                |                     |             |                  |                     |                  |  |  |                  |           |  |             |       |  |                  | 





60



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|    |                                                                      
|--- | ---------------------------------------------------------------------
|10. | Significant Customers, Suppliers and Concentration of Credit
    Risk



|        |  |      |       |             |      |   |             |      |  |   |        | 
|------- |  | ---- | ----- | ----------- | ---- | - | ----------- | ---- |  | - | ------ | 
|Company |  | 2002 |       |             | 2003 |   |             | 2004 | 
|        |  |      |       |             |      |   |             |      | 
|        |  |      |       | As restated |      |   | As restated |     
|A       |  | $    | 2,934 |             |      | $ | 10,549      |      |  | $ | 9,578  | 
|B       |  |      | 6,766 |             |      |   | 7,665       |      |  |   | 6,698  | 
|C       |  |      | 8,212 |             |      |   | 6,970       |      |  |   | 6,435  | 
|D       |  |      | 977   |             |      |   | 6,925       |      |  |   | 6,253  | 
|E       |  |      | 0     |             |      |   | 1,109       |      |  |   | 19,028 | 







|    |                      
|--- | ---------------------
|11. | Employee Benefit Plan



61



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|    |                              
|--- | -----------------------------
|12. | Commitments and Contingencies



|                         |       |   |       |       | 
|------------------------ | ----- | - | ----- | ----- | 
|Year ending December 31: |       |  
|                         |       |  
|2005                     |       | $ | 1,269 |      
|2006                     |       |   | 215   |      
|2007                     |       |   | 201   |      
|Thereafter               |       |   |      |      
|                         |       |   |      
|                         | Total |   | $     | 1,685 | 
|                         |       |   |      













Croker v. Carrier Access Corporation,
et al. Chisman v. Carrier Access Corporation, et al. Sved v. Carrier Access
Corporation, et al,


62



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##### Table of Contents











|    |                                            
|--- | -------------------------------------------
|13. | Quarterly Financial Information (unaudited)





|                             |                                               |                                   |        |        |               |   |        |                    |       |   |                   |        |       |             |        |        |             |   |        |             |        |   |             |        |        |   |        |        |        |   |        |        |        |  
|---------------------------- | --------------------------------------------- | --------------------------------- | ------ | ------ | ------------- | - | ------ | ------------------ | ----- | - | ----------------- | ------ | ----- | ----------- | ------ | ------ | ----------- | - | ------ | ----------- | ------ | - | ----------- | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                             |                                               | March 31, 2004                    |        |        | June 30, 2004 |   |        | September 30, 2004 |       |   | December 31, 2004 |       
|                             |                                               |                                   |        |        |               |   |        |                    |       |   |                   |       
|                             |                                               | As reported                       |        |        | As restated   |   |        | As reported        |       |   | As restated       |        |       | As reported |        |        | As restated |   |        | As reported |        |   | As restated |       
|                             |                                               |                                   |        |        |               |   |        |                    |       |   |                   |        |       |             |        |        |             |   |        |             |        |   |             |       
|Net revenue                  |                                               | $                                 | 28,546 |        |               | $ | 28,538 |                    |       | $ | 30,845            |        |       | $           | 29,549 |        |             | $ | 21,561 |             |        | $ | 21,284      |        |        | $ | 20,423 |        |        | $ | 16,122 |       
|Cost of sales                |                                               |                                   | 15,612 |        |               |   | 15,448 |                    |       |   | 16,894            |        |       |             | 16,274 |        |             |   | 13,024 |             |        |   | 12,625      |        |        |   | 13,071 |        |        |   | 11,034 |       
|                             |                                               |                                   |        |        |               |   |        |                    |       |   |                   |        |       |             |        |        |             |   |        |             |        |   |             |       
|                             | Gross profit                                  |                                   |        | 12,934 |               |   |        | 13,090             |       |   |                   | 13,951 |       |             |        | 13,275 |             |   |        | 8,537       |        |   |             | 8,659  |        |   |        | 7,352  |        |   |        | 5,088  |       
|Operating expenses:          |                                               |                                   |        |        |               |   |        |                    |       |   |                   |        |       |             |        |        |             |   |        |             |        |   |             |        |        |   |        |        |        |   |        |       
|                             | Selling, general and administrative and other |                                   |        | 6,464  |               |   |        | 6,467              |       |   |                   | 6,142  |       |             |        | 6,148  |             |   |        | 7,755       |        |   |             | 7,760  |        |   |        | 6,119  |        |   |        | 6,121  |       
|                             | Research and development                      |                                   |        | 3,970  |               |   |        | 3,970              |       |   |                   | 4,692  |       |             |        | 4,692  |             |   |        | 5,230       |        |   |             | 5,230  |        |   |        | 4,302  |        |   |        | 4,302  |       
|                             |                                               |                                   |        |        |               |   |        |                    |       |   |                   |        |       |             |        |        |             |   |        |             |        |   |             |       
|                             |                                               | Income (loss) from operations     |        |        | 2,500         |   |        |                    | 2,653 |   |                   |        | 3,117 |             |        |        | 2,435       |   |        |             | (4,448 | ) |             |        | (4,331 | ) |        |        | (3,069 | ) |        |        | (5,335 | )
|Other income, net            |                                               |                                   | 219    |        |               |   | 219    |                    |       |   | 491               |        |       |             | 491    |        |             |   | 621    |             |        |   | 621         |        |        |   | 1,456  |        |        |   | 1,456  |       
|                             |                                               |                                   |        |        |               |   |        |                    |       |   |                   |        |       |             |        |        |             |   |        |             |        |   |             |       
|                             |                                               | Income (loss) before income taxes |        |        | 2,719         |   |        |                    | 2,872 |   |                   |        | 3,608 |             |        |        | 2,926       |   |        |             | (3,827 | ) |             |        | (3,710 | ) |        |        | (1,613 | ) |        |        | (3,879 | )
|Income tax expense (benefit) |                                               |                                   | 15     |        |               |   | 15     |                    |       |   | 52                |        |       |             | 52     |        |             |   |       |             |        |   |            |        |        |   | (79    | )      |        |   | (79    | )     
|                             |                                               |                                   |        |        |               |   |        |                    |       |   |                   |        |       |             |        |        |             |   |        |             |        |   |             |       
|                             | Net income (loss)                             |                                   | $      | 2,704  |               |   | $      | 2,857              |       |   | $                 | 3,556  |       |             | $      | 2,874  |             |   | $      | (3,827      | )      |   | $           | (3,710 | )      |   | $      | (1,534 | )      |   | $      | (3,800 | )     
|                             |                                               |                                   |        |        |               |   |        |                    |       |   |                   |        |       |             |        |        |             |   |        |             |        |   |             |       
|Income (loss) per share:     |                                               |                                   |        |        |               |   |        |                    |       |   |                   |        |       |             |        |        |             |   |        |             |        |   |             |        |        |   |        |        |        |   |        |       
|                             | Basic                                         |                                   | $      | 0.09   |               |   | $      | 0.10               |       |   | $                 | 0.11   |       |             | $      | 0.09   |             |   | $      | (0.11       | )      |   | $           | (0.11  | )      |   | $      | (0.04  | )      |   | $      | (0.11  | )     
|                             | Diluted                                       |                                   | $      | 0.09   |               |   | $      | 0.09               |       |   | $                 | 0.10   |       |             | $      | 0.08   |             |   | $      | (0.11       | )      |   | $           | (0.11  | )      |   | $      | (0.04  | )      |   | $      | (0.11  | )     

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|                             |                                               |                                   |        |       |               |   |        |                    |      |   |                   |       |     |             |        |       |             |   |        |             |     |   |             |       |     |   |        |        |       |   |        |        |       | 
|---------------------------- | --------------------------------------------- | --------------------------------- | ------ | ----- | ------------- | - | ------ | ------------------ | ---- | - | ----------------- | ----- | --- | ----------- | ------ | ----- | ----------- | - | ------ | ----------- | --- | - | ----------- | ----- | --- | - | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                             |                                               | March 31, 2003                    |        |       | June 30, 2003 |   |        | September 30, 2003 |      |   | December 31, 2003 |      
|                             |                                               |                                   |        |       |               |   |        |                    |      |   |                   |      
|                             |                                               | As reported                       |        |       | As restated   |   |        | As reported        |      |   | As restated       |       |     | As reported |        |       | As restated |   |        | As reported |     |   | As restated |      
|                             |                                               |                                   |        |       |               |   |        |                    |      |   |                   |       |     |             |        |       |             |   |        |             |     |   |             |      
|Net revenue                  |                                               | $                                 | 11,203 |       |               | $ | 11,173 |                    |      | $ | 12,156            |       |     | $           | 12,057 |       |             | $ | 15,927 |             |     | $ | 14,685      |       |     | $ | 23,270 |        |       | $ | 24,557 |       
|Cost of sales                |                                               |                                   | 6,154  |       |               |   | 6,448  |                    |      |   | 6,687             |       |     |             | 7,279  |       |             |   | 9,169  |             |     |   | 8,156       |       |     |   | 13,214 |        |       |   | 14,203 |       
|                             |                                               |                                   |        |       |               |   |        |                    |      |   |                   |       |     |             |        |       |             |   |        |             |     |   |             |      
|                             | Gross profit                                  |                                   |        | 5,049 |               |   |        | 4,725              |      |   |                   | 5,469 |     |             |        | 4,778 |             |   |        | 6,758       |     |   |             | 6,529 |     |   |        | 10,056 |       |   |        | 10,354 |      
|Operating expenses:          |                                               |                                   |        |       |               |   |        |                    |      |   |                   |       |     |             |        |       |             |   |        |             |     |   |             |       |     |   |        |        |       |   |        |       
|                             | Selling, general and administrative and other |                                   |        | 2,497 |               |   |        | 2,497              |      |   |                   | 2,895 |     |             |        | 2,895 |             |   |        | 3,608       |     |   |             | 3,608 |     |   |        | 5,315  |       |   |        | 5,315  |      
|                             | Research and development                      |                                   |        | 2,608 |               |   |        | 2,608              |      |   |                   | 2,541 |     |             |        | 2,541 |             |   |        | 2,534       |     |   |             | 2,534 |     |   |        | 3,318  |       |   |        | 3,318  |      
|                             |                                               |                                   |        |       |               |   |        |                    |      |   |                   |       |     |             |        |       |             |   |        |             |     |   |             |      
|                             |                                               | Income (loss) from operations     |        |       | (56           | ) |        |                    | (380 | ) |                   |       | 34  |             |        |       | (658        | ) |        |             | 616 |   |             |       | 387 |   |        |        | 1,423 |   |        |        | 1,721 | 
|Other income, net            |                                               |                                   | 84     |       |               |   | 84     |                    |      |   | 88                |       |     |             | 88     |       |             |   | 86     |             |     |   | 86          |       |     |   | 95     |        |       |   | 95     |       
|                             |                                               |                                   |        |       |               |   |        |                    |      |   |                   |       |     |             |        |       |             |   |        |             |     |   |             |      
|                             |                                               | Income (loss) before income taxes |        |       | 28            |   |        |                    | (296 | ) |                   |       | 122 |             |        |       | (570        | ) |        |             | 702 |   |             |       | 473 |   |        |        | 1,517 |   |        |        | 1,816 | 
|Income tax expense (benefit) |                                               |                                   | (89    | )     |               |   | (89    | )                  |      |   |                  |       |     |             |       |       |             |   |       |             |     |   |            |       |     |   |       |        |       |   |       |       
|                             |                                               |                                   |        |       |               |   |        |                    |      |   |                   |       |     |             |        |       |             |   |        |             |     |   |             |      
|                             | Net income (loss)                             |                                   | $      | 117   |               |   | $      | (207               | )    |   | $                 | 122   |     |             | $      | (570  | )           |   | $      | 702         |     |   | $           | 473   |     |   | $      | 1,517  |       |   | $      | 1,816  |      
|                             |                                               |                                   |        |       |               |   |        |                    |      |   |                   |       |     |             |        |       |             |   |        |             |     |   |             |      
|Income (loss) per share:     |                                               |                                   |        |       |               |   |        |                    |      |   |                   |       |     |             |        |       |             |   |        |             |     |   |             |       |     |   |        |        |       |   |        |       
|                             | Basic                                         |                                   | $      | 0.00  |               |   | $      | (0.01              | )    |   | $                 | 0.00  |     |             | $      | (0.02 | )           |   | $      | 0.03        |     |   | $           | 0.02  |     |   | $      | 0.06   |       |   | $      | 0.07   |      
|                             | Diluted                                       |                                   | $      | 0.00  |               |   | $      | (0.01              | )    |   | $                 | 0.00  |     |             | $      | (0.02 | )           |   | $      | 0.03        |     |   | $           | 0.02  |     |   | $      | 0.05   |       |   | $      | 0.07   |      



|    |                                                 
|--- | ------------------------------------------------
|14. | Valuation and qualifying accounts (in thousands)

|                                             |             |                   |  |           |              |  |  |              |        |            |        |  |        |   |  |   |        | 
|-------------------------------------------- | ----------- | ----------------- |  | --------- | ------------ |  |  | ------------ | ------ | ---------- | ------ |  | ------ | - |  | - | ------ | 
|                                             |             |                   |  | Additions |              |  |  |              |       
|                                             |             | Balance at        |  |           | (Reductions) |  |  |              |        | Balance at |       
|                                             |             | Beginning         |  |           | Charged to   |  |  | Recoveries   |        |            | End of | 
|As Restated                                  |             | of Period         |  |           | Operations   |  |  | (Write-offs) |        |            | Period | 
|                                             |             |                   |  |           |              |  |  |              |        |            |        | 
|Allowance for doubtful accounts and returns: |             |                   |  |           |              |  |  |              |        |            |        |  |        |   |  |  
|                                             | Year Ended: |                   |  |           |              |  |  |              |        |            |        |  |        |   |  |   |       
|                                             |             | December 31, 2002 |  | $         | 1,332        |  |  |              | 5,557  |            |        |  | (3,818 | ) |  | $ | 3,071  | 
|                                             |             |                   |  |           |              |  |  |              |        |            |        | 
|                                             |             | December 31, 2003 |  | $         | 3,071        |  |  |              | (2,199 | )          |        |  | (1     | ) |  | $ | 871    | 
|                                             |             |                   |  |           |              |  |  |              |        |            |        | 
|                                             |             | December 31, 2004 |  | $         | 871          |  |  |              | (289   | )          |        |  | (223   | ) |  | $ | 359    | 
|                                             |             |                   |  |           |              |  |  |              |        |            |        | 
|Inventory obsolescence reserve:              |             |                   |  |           |              |  |  |              |        |            |        |  |        |   |  |  
|                                             | Year Ended: |                   |  |           |              |  |  |              |        |            |        |  |        |   |  |   |       
|                                             |             | December 31, 2002 |  | $         | 3,116        |  |  |              | 3,619  |            |        |  | (570   | ) |  | $ | 6,165  | 
|                                             |             |                   |  |           |              |  |  |              |        |            |        | 
|                                             |             | December 31, 2003 |  | $         | 6,165        |  |  |              | 1,112  |            |        |  | (564   | ) |  | $ | 6,713  | 
|                                             |             |                   |  |           |              |  |  |              |        |            |        | 
|                                             |             | December 31, 2004 |  | $         | 6,713        |  |  |              | 1,152  |            |        |  | (1,313 | ) |  | $ | 6,552  | 
|                                             |             |                   |  |           |              |  |  |              |        |            |        | 
|Valuation Allowance for deferred tax assets: |             |                   |  |           |              |  |  |              |        |            |        |  |        |   |  |  
|                                             | Year Ended: |                   |  |           |              |  |  |              |        |            |        |  |        |   |  |   |       
|                                             |             | December 31, 2002 |  | $         |             |  |  |              | 17,109 |            |        |  |       |   |  | $ | 17,109 | 
|                                             |             |                   |  |           |              |  |  |              |        |            |        | 
|                                             |             | December 31, 2003 |  | $         | 17,109       |  |  |              | (726   | )          |        |  | 7,434  |   |  | $ | 23,817 | 
|                                             |             |                   |  |           |              |  |  |              |        |            |        | 
|                                             |             | December 31, 2004 |  | $         | 23,817       |  |  |              | 2,335  |            |        |  |       |   |  | $ | 26,152 | 
|                                             |             |                   |  |           |              |  |  |              |        |            |        | 






|  |                                                                                                   
|- | --------------------------------------------------------------------------------------------------
|* | 2002 write-offs include $10,000 that was taken directly to the
    expense account.               
| 
|* | 2003 recoveries of bad debts of $3,085 include $886 related to
    amounts previously written off.

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








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

Evaluation of disclosure controls and
procedures.


Managements annual report on internal control
over financial reporting.




Internal Control  Integrated
Framework




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management did not comply with our established policies and
    procedures requiring a review of our consolidated statement of
    cash flows. This failure to comply with established policies and
    procedures resulted in material misstatements in our
    December 31, 2004 consolidated statement of cash flows.
    Specifically, there were material misstatements in cash flows
    from operating activities and cash flows from investing
    activities. These misstatements were corrected prior to our
    original filing of our 2004 Annual Report on Form 10-K.                                                                                                                                                                                
| 
| | We did not have effective policies and procedures to evaluate
    customer arrangements for the appropriate application of revenue
    recognition criteria as contemplated by generally accepted
    accounting principles in the U.S. This deficiency resulted
    in material misstatements to our financial statements,
    specifically the overstatement of revenue, costs of sales, and
    accounts receivable, and the understatement of inventory in our
    previously filed consolidated financial statements as of and for
    the years ended December 31, 2003 and 2004, and for the
    interim periods contained therein. Accordingly, we have restated
    such consolidated financial statements to reflect the correction
    of these errors.

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We did not have effective policies and procedures over
    accounting for our inventory reserves to prevent the write up of
    inventory once it had been written down in a previous fiscal
    accounting period. This deficiency resulted in material
    misstatements of inventory and cost of sales in our previously
    filed consolidated financial statements as of and for the years
    ended December 31, 2003 and 2004, and for the interim
    periods contained therein. Accordingly, we have restated such
    consolidated financial statements to reflect the correction of
    these errors.
| 
| | We lacked the depth of personnel with sufficient technical
    accounting expertise to identify and account for complex
    transactions in accordance with generally accepted accounting
    principles in the U.S. This deficiency contributed to the
    aforementioned misstatements and resulted in there being more
    than a remote likelihood that a material misstatement of the
    annual or interim financial statements would not be prevented or
    detected.                                                                                                                                   



Changes in internal control over financial
reporting.


Remediation of weaknesses in internal control over
financial reporting.












Report of Independent Registered Public Accounting
Firm


Report of Independent Registered Public Accounting Firm







66



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Management did not comply with established Company policies and
    procedures requiring a review of the Companys consolidated
    statement of cash flows. This failure to comply with established
    policies and procedures resulted in material misstatements in
    the Companys December 31, 2004 consolidated statement
    of cash flows. Specifically, there were material misstatements
    in cash flows from operating activities and cash flows from
    investing activities.                                                                                                                                                                                                                                                                                                             
|
| |  | The Company did not have effective policies and procedures to
    evaluate customer arrangements for the appropriate application
    of revenue recognition criteria as contemplated by generally
    accepted accounting principles in the U.S. This deficiency
    resulted in material misstatements to the Companys
    financial statements, specifically the overstatement of revenue,
    costs of sales, and accounts receivable, and the understatement
    of inventory in the Companys previously filed consolidated
    financial statements as of and for the years ended
    December 31, 2003 and 2004, and for the interim periods
    contained therein. Accordingly, the Company has restated such
    consolidated financial statements to reflect the correction of
    these errors.
|
| |  | The Company did not have effective policies and procedures over
    accounting for its inventory reserves to prevent the write up of
    inventory once it had been written down in a previous fiscal
    accounting period. This deficiency resulted in material
    misstatements of inventory and cost of sales in the
    Companys previously filed consolidated financial
    statements as of and for the years ended December 31, 2003
    and 2004, and for the interim periods contained therein.
    Accordingly, the Company has restated such consolidated
    financial statements to reflect the correction of these errors.                                                                                                                                                                
|
| |  | The Company lacked the depth of personnel with sufficient
    technical accounting expertise to identify and account for
    complex transactions in accordance with generally accepted
    accounting principles in the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |  |                                                                                                                                                                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | U.S. This deficiency contributed to the aforementioned
    misstatements and resulted in there being more than a remote
    likelihood that a material misstatement of the annual or interim
    financial statements would not be prevented or detected.
















|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION



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PART III







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



|                     |  |     |    |  |                      |                                                                                
|-------------------- |  | --- | -- |  | -------------------- | -------------------------------------------------------------------------------
|Name                 |  | Age |    |  | Principal Occupation
|                     |  |     |    |  |                     
|Roger L. Koenig      |  |     | 51 |  |                      | President, Chief Executive Officer and Chairman of the Board                   
|Nancy Pierce         |  |     | 47 |  |                      | Corporate Development Officer, Former Chief Financial Officer
    and Secretary
|John W. Barnett, Jr. |  |     | 64 |  |                      | Director                                                                       
|David R. Laube       |  |     | 57 |  |                      | Director                                                                       
|Mark A. Floyd        |  |     | 49 |  |                      | Director                                                                       
|Thomas C. Lamming    |  |     | 51 |  |                      | Director                                                                       

Mr. Koenig


Ms. Pierce


Mr. Barnett


Mr. Laube


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Mr. Floyd


Mr. Lamming






Audit Committee and Audit Committee Financial Expert


Audit Committee.


Code of Ethics and Business Conduct Policy




Section 16(a) Beneficial Ownership Reporting
Compliance






70



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##### Table of Contents










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



|                            |                                  |                     |      |      |                  |  |         |          |  |  |                    |        |  |  |         |         | 
|--------------------------- | -------------------------------- | ------------------- | ---- | ---- | ---------------- |  | ------- | -------- |  |  | ------------------ | ------ |  |  | ------- | ------- | 
|                            |                                  | Annual Compensation |      |      |                 
|                            |                                  |                     |      |      | Number of Shares | 
|Name and Principal Position |                                  | Year                |      |      | Salary($)        |  |         | Bonus($) |  |  | Underlying Options |       
|                            |                                  |                     |      |      |                  |  |         |          |  |  |                    |       
|Roger L. Koenig             |                                  |                     | 2004 |      |                  |  | 277,885 |          |  |  | 140,623            |        |  |  |        |        
|                            | President, Chief Executive       |                     |      | 2003 |                  |  |         | 170,462  |  |  |                    | 51,658 |  |  |         |        | 
|                            | Officer and Chairman of the      |                     |      | 2002 |                  |  |         | 175,000  |  |  |                    |       |  |  |         |        | 
|                            | Board of Directors               |                     |      |      |                  |  |         |          |  |  |                    |        |  |  |         |         | 
|Nancy Pierce                |                                  |                     | 2004 |      |                  |  | 201,827 |          |  |  | 102,485            |        |  |  |        |        
|                            | Interim Chief Financial Officer, |                     |      | 2003 |                  |  |         | 146,599  |  |  |                    | 47,817 |  |  |         |        | 
|                            | Corporate Development Officer    |                     |      | 2002 |                  |  |         | 151,560  |  |  |                    |       |  |  |         |        | 
|                            | Director, and Secretary(1)       |                     |      |      |                  |  |         |          |  |  |                    |        |  |  |         |         | 
|Timothy R. Anderson(2)      |                                  |                     | 2004 |      |                  |  | 224,032 |          |  |  | 82,485             |        |  |  | 125,000 |        
|                            | Former Chief Financial Officer   |                     |      | 2003 |                  |  |         | 170,962  |  |  |                    | 48,393 |  |  |         | 100,000 | 
|                            |                                  |                     | 2002 |      |                  |  | 158,396 |          |  |  |                   |        |  |  | 75,000  |        






|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(1) | Ms. Pierce served as Interim Chief Financial Officer from
    November 2004 to June 2005.
|   
|(2) | Mr. Anderson resigned as our Chief Financial Officer on
    November 18, 2004.           

Option Grants in Last Fiscal Year




|                    |  |                    |         |                      |                  |  |      |           |             |                  |               |  |                |    |         |     |  |   |   |  |  |   |   | 
|------------------- |  | ------------------ | ------- | -------------------- | ---------------- |  | ---- | --------- | ----------- | ---------------- | ------------- |  | -------------- | -- | ------- | --- |  | - | - |  |  | - | - | 
|                    |  |                    |         | Potential Realizable
|                    |  | Individual Grants  |         |                      | Value at Assumed
|                    |  |                    |         |                      | Annual Rates of 
|                    |  |                    |         | Percent of           |                  |  |      |           | Stock Price
|                    |  | Number of          |         |                      | Total Options    |  |      |           |             | Appreciation for
|                    |  | Securities         |         |                      | Granted to       |  |      | Exercise  |             |                  |               |  | Option Term(4)
|                    |  | Underlying Options |         |                      | Employees in     |  |      | Price Per |             |                  | Date of       |  |                |   
|Name                |  | Granted(1)         |         |                      | Fiscal Year(2)   |  |      | Share     |             |                  | Expiration(3) |  |                | 5% |         | 10%
|                    |  |                    |         |                      |                  |  |      |           |             |                  |               |  |                |    |         |    
|Roger L. Koenig     |  |                    |        |                      |                  |  |     |           |             |                  |              |  |                |    |        |     |  | $ |  |  |  | $ |  | 
|Nancy Pierce        |  |                    |        |                      |                  |  |     |           |             |                  |              |  |                |    |        |     |  | $ |  |  |  | $ |  | 
|Timothy R. Anderson |  |                    | 125,000 | (5)                  |                  |  | 10.0 | %         |             | $                | 10.35         |  |                |    | 2/12/09 |     |  | $ |  |  |  | $ |  | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The options in this table are non-statutory stock options
    granted under the 1998 Stock Incentive Plan and have exercise
    prices equal to the fair market value on the date of grant.
    These options have five-year terms and vest over a period of
    48 months at a rate of 25% on the first anniversary date
    from the date of grant and a rate of 6.25% per quarter
    thereafter until fully vested.                                         
|   
|(2) | We granted options to purchase 1,254,700 shares of
    Common Stock to employees in fiscal year 2004.                                                                                                                                                                                                                                                                                                                                                           
|   
|(3) | The options in this table may terminate before their expiration
    upon the termination of optionees status as an employee or
    consultant or upon the optionees disability or death.                                                                                                                                                                                                                                                                      
|   
|(4) | Under rules promulgated by the SEC, the amounts in these two
    columns represent the hypothetical gain or option
    spread that would exist for the options in this table
    based on assumed stock price appreciation from the date of grant
    until the end of such options five-year term at assumed
    annual rates of 5% and 10%. The 5% and 10% assumed annual rates
    of appreciation are specified in SEC rules and do not represent
    our

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|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|    | estimate or projection of future stock price growth. We do not
    necessarily agree that this method can properly determine the
    value of an option.
|   
|(5) | Mr. Anderson resigned as our Chief Financial Officer on
    November 18, 2004, and his unexercised stock options were
    cancelled on December 8, 2004.

Option Exercises and Holdings




|                       |  |             |   |  |                 |                        |                            |             |                         |                    |               |  |  |             |   |  |               |  |   |  |  |  |   | 
|---------------------- |  | ----------- | - |  | --------------- | ---------------------- | -------------------------- | ----------- | ----------------------- | ------------------ | ------------- |  |  | ----------- | - |  | ------------- |  | - |  |  |  | - | 
|                       |  |             |   |  |                 | Number of Securities   |                            |             | Value of Unexercised    |                   
|                       |  |             |   |  |                 | Underlying Unexercised |                            |             | In-the-Money Options at |                   
|                       |  | Shares      |   |  |                 |                        | Options at Fiscal Year End |             |                         | Fiscal Year End(1) |              
|                       |  | Acquired    |   |  | Value           |                        |                            |             |                         |                    |               | 
|Name                   |  | on Exercise |   |  | Realized ($)(1) |                        |                            | Exercisable |                         |                    | Unexercisable |  |  | Exercisable |   |  | Unexercisable | 
|                       |  |             |   |  |                 |                        |                            |             |                         |                    |               |  |  |             |   |  |               | 
|Roger L. Koenig        |  |             |  |  |                 |                        |                           |             |                         |                    | 8,000         |  |  |             |  |  |               |  |  |  |  |  |  | 
|Nancy Pierce           |  |             |  |  |                 |                        |                           |             |                         |                    | 8,000         |  |  |             |  |  |               |  |  |  |  |  |  | 
|Timothy R. Anderson(2) |  |             |  |  |                 |                        |                           |             |                         |                    |              |  |  |             |  |  |               |  |  |  |  |  |  | 






|    |                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Market value of underlying securities based on the closing price
    of our Common Stock on December 31, 2004 (the last trading
    day of fiscal 2004) on the Nasdaq National Market of
    $10.68 per share minus the exercise price. Only exercisable
    options are calculated in making the determination of the value
    realized.
|   
|(2) | Mr. Anderson resigned as our Chief Financial Officer on
    November 18, 2004, and his unexercised stock options were
    cancelled December 8, 2004.                                                                                                                                                                                     

Director Compensation








Compensation Committee Interlocks and Insider
Participation




72



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##### Table of Contents








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



|                                                                    |  |                       |            |  |                     |  |       |  
|------------------------------------------------------------------- |  | --------------------- | ---------- |  | ------------------- |  | ----- | -
|                                                                    |  | Number of Shares      |            |  |                    
|Name and Address of Beneficial Owner (1)                            |  | Beneficially Owned(2) |            |  | Percentage of Class | 
|                                                                    |  |                       |            |  |                     | 
|Roger L. Koenig(3)                                                  |  |                       | 13,072,616 |  |                     |  | 37.73 | %
|Nancy Pierce(3)                                                     |  |                       | 13,072,616 |  |                     |  | 37.73 | %
|KELD, LLC(4)                                                        |  |                       | 9,704,500  |  |                     |  | 28.01 | %
|Timothy R. Anderson(5)                                              |  |                       |           |  |                     |  | *     |  
|John W. Barnett, Jr.(6)                                             |  |                       | 86,750     |  |                     |  | *     |  
|David R. Laube(7)                                                   |  |                       | 151,450    |  |                     |  | *     |  
|Mark A. Floyd(8)                                                    |  |                       | 99,262     |  |                     |  | *     |  
|Thomas C. Lamming(9)                                                |  |                       | 50,000     |  |                     |  | *     |  
|All directors and executive officers as a group
    (6 persons)(10) |  |                       | 13,460,078 |  |                     |  | 38.85 | %




| |   |             
| | - | ------------
| | * | Less than 1%



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The address of each person listed on the table is
    c/o Carrier Access Corporation, 5395 Pearl Parkway,
    Boulder, Colorado 80301.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (2) | Beneficial ownership is determined in accordance with the rules
    of the Securities and Exchange Commission and generally includes
    voting or investment power with respect to securities. Shares of
    common stock subject to options currently exercisable or
    exercisable within 60 days of March 14, 2005 are
    deemed to be outstanding and to be beneficially owned by the
    person holding such options for the purpose of computing the
    number of shares beneficially owned and the percentage of such
    person or entity holding such securities but are not outstanding
    for the purpose of computing the percentage of any other person
    or entity. Except as indicated by footnotes to the table, and
    subject to the applicable community property laws, based on
    information provided by the persons shown in the table, such
    persons have sole voting and investment power with respect to
    all shares of Common Stock shown as beneficially owned by them.
    Percentage of shares beneficially owned is based on
    35,648,427 shares outstanding as of March 14, 2005.
|
| | (3) | Represents 1,170,558 shares held by Mr. Koenig,
    1,181,558 shares held by Ms. Pierce, 1,000,000 held
    jointly by Mr. Koenig and Ms. Pierce,
    9,704,500 shares held by KELD, LLC, 8,000 shares of
    common stock subject to options exercisable within 60 days
    of March 14, 2005 owned by Mr. Koenig, and
    8,000 shares of common stock subject to options exercisable
    within 60 days of March 14, 2005 owned by
    Ms. Pierce. Mr. Koenig and Ms. Pierce are
    managing members of KELD, LLC and have shared voting and
    investment power over the shares held by KELD, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (4) | Mr. Koenig and Ms. Pierce are managing members of
    KELD, LLC and have shared voting and investment power over the
    shares held by KELD, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (5) | Mr. Anderson resigned as our Chief Financial Officer on
    November 18, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (6) | Consists of 86,750 shares of common stock subject to
    options exercisable within 60 days of March 14, 2005,
    40,500 of which would be subject to our right of repurchase if
    exercised.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (7) | Consists 101,450 shares of common stock subject to options
    exercisable within 60 days of March 14, 2005, 30,000
    of which would be subject to our right of repurchase if
    exercised.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (8) | Consists 99,262 shares of common stock subject to options
    exercisable within 60 days of March 14, 2005, 35,200
    of which would be subject to our right of repurchase if
    exercised.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (9) | Consists of 50,000 shares of common stock subject to
    options exercisable within 60 days of March 14, 2005,
    50,000 all of which would be subject to our right of repurchase
    if exercised.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



|     |                                                                                                                                                                                                
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 353,462 shares of common stock subject to options
    exercisable within 60 days of March 14, 2005, 155,700
    of which would be subject to our right of repurchase if
    exercised.

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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         |                      |                     | reflected in column   | 
|Plan Category                                              |       | (a)                  |           |           | and rights (b)   |                      |                     | (a))(c)               | 
|                                                           |       |                      |           |           |                  |                      |                     |                       | 
|Equity compensation plans approved by security holders(1)  |       |                      | 2,781,159 |           |                  | $                    | 6.29                |                       |  |  | 1,837,400 |          
|Equity compensation plans not approved by security holders |       |                      | N/A       |           |                  |                      | N/A                 |                       |  |  | N/A       |          
|                                                           | Total |                      |           | 2,781,159 |                  |                      | $                   | 6.29                  |  |  |           | 1,837,400 | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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, 2005 and
    include the annual increase of 562,500 shares for 2005.






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








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

Accounting Fees




|                      |       |             |         |         |      |   |         |         | 
|--------------------- | ----- | ----------- | ------- | ------- | ---- | - | ------- | ------- | 
|                      |       | Fiscal Year |        
|                      |       |             |        
|                      |       | 2003        |         |         | 2004 |  
|                      |       |             |         |         |      |  
|Audit Fees(1)         |       | $           | 186,000 |         |      | $ | 373,000 |        
|Audit-Related Fees(2) |       |             | 13,500  |         |      |   | 90,000  |        
|Tax Fees(3)           |       |             | 92,360  |         |      |   | 138,142 |        
|All Other Fees        |       |             |        |         |      |   |        |        
|                      |       |             |         |         |      |  
|                      | Total |             | $       | 291,860 |      |   | $       | 601,142 | 
|                      |       |             |         |         |      |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Annual audit fees include fees for professional services
    rendered for the audit of our consolidated financial statements,
    the internal controls review as required by Sarbanes Oxley
    Section 404, review of interim financial statements, and
    other services that are normally provided by independent
    accountants in connection with statutory and regulatory filings
    or engagements.
|   
|(2) | Audit-related fees include fees for assurance and related
    services that are reasonably related to the performance of the
    audit or review of our consolidated financial statements and are
    not reported under Audit Fees. These fees for 2003
    and 2004 include fees for the audits of our employee benefit
    plan as well as fees related to SEC registration statements.                  
|   
|(3) | Tax fees include fees for tax preparation, compliance and
    related services in connection with our federal, state and local
    filings each year, and related services reasonably related to
    such matters.                                                                                                                                                                                            

Pre-Approval of Fees by Audit Committee




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##### Table of Contents






PART IV







|         |                                            
|-------- | -------------------------------------------
|ITEM 15. | EXHIBITS, And FINANCIAL STATEMENT SCHEDULES





| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Consolidated Financial Statements. The following
    consolidated financial statements of Carrier Access and the
    Report of Independent Registered Public Accounting Firm are
    filed as part of this Form 10-K/A:

|                                                                                                                                              |  |      |    | 
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                              |  | Page |   
|                                                                                                                                              |  |      |   
|Report of Independent Registered Public
    Accounting Firm                                                                                   |  |      | 39 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2004                                                                              |  |      | 40 | 
|Consolidated Statements of Operations for
    the years ended December 31, 2002, 2003, and 2004                                               |  |      | 41 | 
|Consolidated Statements of
    Stockholders Equity and Comprehensive Income (Loss) for
    the years ended December 31, 2002, 2003, and 2004 |  |      | 42 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2002, 2003, and 2004                                               |  |      | 43 | 
|Notes to Consolidated Financial
    Statements                                                                                                |  |      | 44 | 



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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/A.                                                         
|
| | (b) Exhibits. See Item 15(a)(3) above.                                                                                                                                                                                                                         
|
| | (c) Financial Statement Schedules. See
    Item 15(a)(2) above.                                                                                                                                                                                                

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##### Table of Contents






SIGNATURES






| |                               
| | ------------------------------
| | Carrier Access
    Corporation



| |     |                  
| | --- | -----------------
| | By: | /s/ Gary Gatchell

| |                             
| | ----------------------------
| |                             
| | Gary Gatchell               
| | Executive Vice President and
| | Chief Financial Officer     



|                                 |  |                                                                                                             |  | 
|-------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | 
|Signature                        |  | Title                                                                                                      
|                                 |  |                                                                                                            
|                                
|*(Roger L. Koenig)               |  | President, Chief Executive Officer and Chairman of the Board of
    Directors (Principal Executive Officer)
|                                
|/s/ Gary Gatchell(Gary Gatchell) |  | Executive Vice President, Chief Financial Officer, (Principal
    Financial and Accounting Officer)        
|                                
|/s/ Nancy Pierce(Nancy Pierce)   |  | Corporate Development Officer, Director, Secretary                                                         
|                                
|*(John W. Barnett, Jr.)          |  | Director                                                                                                   
|                                
|*(David R. Laube)                |  | Director                                                                                                   
|                                
|*(Mark A. Floyd)                 |  | Director                                                                                                   
|                                
|*(Thomas C. Lamming)             |  | Director                                                                                                   



|    |  |                                                     |  | 
|--- |  | --------------------------------------------------- |  | 
|By: |  | /s/ Nancy Pierce(Nancy Pierce)
    Attorney-in-Fact |  | 

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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                      |  | Contract to Buy and Sell Real Estate (Commercial) between
    Registrant and Cottonwood Land and Farms Ltd. Executed as of
    September 15, 2004 (incorporated herein by reference to
    Exhibit 10.1 to the Registrants quarterly report on
    Form 8-K filed November 12, 2004).                                                                                                                                    
|               | 10 | .2                     |  | Registrants 1995 Stock Option Plan (incorporated herein by
    reference to Exhibit 10.6 to the Registrants 1998
    S-1).                                                                                                                                                                                                                                                                                              
|               | 10 | .3                     |  | Registrants 1998 Stock Incentive Plan (incorporated herein
    by reference to Exhibit 10.7 to the Registrants 1998
    S-1).                                                                                                                                                                                                                                                                                           
|               | 10 | .4**                    |  | Form of Directors and Officers Indemnification
    Agreement.                                                                                                                                                                                                                                                                                                                                                           
|               | 21 | .1**                    |  | Subsidiaries of Registrant                                                                                                                                                                                                                                                                                                                                                                                                
|               | 23 | .1*                     |  | Consent of KPMG LLP, Independent Registered Public Accounting
    Firm                                                                                                                                                                                                                                                                                                                                                    
|               | 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.



|   |                  
|-- | -----------------
|** | Previously filed.



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

77